Friday, March 2, 2018

The Wisdom of the Talking Head

When I read the comments made to anyone's website articles, I can only conclude that the commenters believe the quoted pundit to be either completely ignorant or really evil. I know from personal experience that I substitute financial Ouija board wisdom for useful analysis.

That's why I stopped reading comments on free mass market websites altogether. If I want to learn about how dumb and out of touch I am I can just ring up my kids. That's too bad, because the 95% of the comments calling me an idiot swamp the 5% of commenters with legitimate questions or constructive disagreements.

Let's break down what a TV (or substitute your favorite media) talking head is really doing. First, I truly believe that most of them are just working stiffs trying to further their careers by donating their analysis for free on a news program. They think that they need to be right in their calls. Well, at least mostly right. If they blow it all the time then they will not be asked back again.

Don't gloss over that word "free."  They are not paid for their appearances and at most get a free limo ride from their office to the studio. The real value is more intangible - exposure. The more times you see a so-called expert the more you come to trust him/her. They hope that translates into book sales, newsletter subscriptions and new clients for their firms.

Let's say Talking Head X says the stock market is going to go up and banks will lead the way. You make a mental note and go about your business.

Within a week, the stock market goes down and the news of the day sends bank stocks reeling. Was the pundit a moron? Or did they want you to buy so they could sell into the bump?

Either way, you wonder how they still get the big bucks, let alone still have a job after such a boneheaded call.

But what was the pundit's responsibility to you? He/she was just interviewed for their opinion. You did not pay for it. And even more important, you were not privy to when he/she put out an alert to clients saying that things changed and they should not buy bank stocks, or at least get out immediately.

You judged Talking Head X on one moment in time that was, admittedly, incorrect, but not necessarily a money loser. Remember, none of us are in this business to be correct. We are here to make money. Similar to baseball, if you get one third of your calls right and use proper money management (cut losers and ride winners) then you get very rich.

Here is my favorite quote in the comments sections - "If this analysis had any value he/she would be trading it and not talking about it." Therefore, this pundit is a huckster.

Do you think the same thing when you see an advertisement for an engineering training course or a set of ratchet wrenches? After all, if you can train people to engineer something then you should already be applying it to build a driverless car that runs on bitcoin.

Just because you learned to swing a hammer does not make you a master carpenter. Therefore, just because you learn to read a chart or a balance sheet does not make you Warren Buffet (and I mean that to emphasize the "oracle" part of his nickname).

You can learn plenty from TV talking heads but don't take what they say as fiduciary trading advice tailored to your unique situation. If you do, it is you, not the pundit, who is the fool.

Wednesday, January 31, 2018

Unmasking the VooDoo - Michael's Rules

This post is a little different than the others where I usually take a deep dive into one bit of technical analysis or another to expose what's really going on beneath the hood. In this post, I'll simply list my rules for dealing with the analysis in the real world and not in some idealized trading lab.

Sorry AI. This is your daddy, RI (real intelligence). This is what you are trying to be when you grow up.

Follow these rules. You may not make big bucks trading but you will up your win rate. Plus you will definitely avoid misinterpreting the market's message and taking bonehead trades.

I've got some comments below the list, as well.

Michael’s Rules

  1. If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none
  2. If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.
  3. You can torture a chart to say anything you want. Don’t do it.
  4. Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader)
  5. Look at both bars (or candles) and close-only line charts to see if they agree.
  6. Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern.
  7. Patterns should have symmetry. A triangle should look like a triangle and not a mile high and an inch wide (or vice versa). A head and shoulders should look like a central peak with two smaller but equal peaks around it.
  8. Price rules but it is better when volume, momentum and structure (patterns) agree. Sentiment is a luxury.
  9. Always confirm one type of analysis with another type. For example, confirm RSI not with MACD but with on-balance volume or relative performance.
  10. Don’t get hung up if all your indicators do not agree. They never will all agree and you will end up missing every opportunity. Therefore, pretend you are a trial lawyer gathering a preponderance of evidence, not guilt beyond a shadow of a doubt.

Comments:

on point 5 - In other words, get different charting points of view. They don't have to be in lock step but they cannot tell you radically different things. If they do, find another thing to trade.
on point 6 - This is a pet peeve. You cannot count the trend as part of the pattern. The pattern must be a separate chart entity.  Also, cup-with-handle patterns are continuations, bottoming reversals. Call the latter something else, please!
on point 9 - RSI and MACD are essentially the same thing. Look at something that covers volume. Look at something that has some sort of sentiment component. Look at something with a time component.