The Lawrence Chan Blog

As of this time on Friday, S&P500 has repaired all its losses after Brexit. Yet, British Pound is trading near the post Brexit low which is some 12% lower while Euro has repaired half of its losses. The volatility index (VIX) has its steepest decline within a week over the past 20 years. What is the world telling us?

The New Norm

First thing we should understand and accept completely is that such wild market environment is the new norm.

When trillions of dollars are on the line every second, central banks, large institutions and many other parties affected by major geopolitical events are all using derivatives and bots to manage their positions in real-time. When everyone reacts in a similar way, volatility spikes up quickly. This means a corrective move that used to take 3 months back in 1980s to complete will take only an hour as we have witnessed from what happened to Emini S&P.

Second, central banks play a far more active role than most people think.

As many smaller central banks are actively investing in non-traditional “safe” financial assets like stock markets around the world, their actions control the short term direction of the stock markets much more than most people realize. Similar to what happen back in the 1980s and 1990s for which the major investment banks move the markets the way they like to, even though they never admitted to that. The ability to absorb all the liquidity at critical price levels in various financial markets can generate a lot of profit. Be ready for more and more of these central banks will try to make money this way.

Unintended Consequences

Third, the unintended consequences are unpredictable.

Those people put in charge of these central bank trading groups are no genius. They just have access to more information but that does not translate into making sound decisions, especially in the long run. The more speculative these central banks become, the messier the financial markets will become. It is exactly the type of environment we do not want to see again from the 1980s where greed dominated the Wall Street and yet, we are dealing with the same all over again.

Hence, there is no point to guess what will happen in 6 months or a year. This is the fatal mistake that the major hedge funds are suffering at this point. With their out-dated paradigm, the net effects of certain development in politics, economies and fundamentals within companies can be predicted. But the problem is that when the speed of information has approached instantaneous access to almost all market participants and normal people, such net effects no longer unfold in synchronization.

For example, even if we know that Brexit is going to cause economic slow down in Britain and that the longer term effect is going to be good for Britain relatively to European Union, the expected outcomes no longer unfold together slowly. The markets now discount the British Pound first, instantly reduced the valuation of the UK companies which in turn making those who like to position themselves to short the UK companies for the expected economic weaknesses facing a huge currency risk.

Where are the Trading Opportunities

Does this imply it is no longer possible to trade profitably in this environment? Of course not.

The best trading opportunities now are the moves generated by the mistakes of these biggest hedge funds. As they continue to use their old paradigm to make their trading decisions, they will continue to create pockets of price discrepancies that can be exploited effectively with short term trading. My Special Theory on Price Discovery (STOPD) outshines everything out there including techniques like market profiles or other more esoteric concepts in the current volatile trading environment, proving that there is a beautiful structure behind this seemingly chaotic world.

Enough bragging.

Happy Canada Day!

No comment yet

So much buzz on Brexit yet majority of people are not even aware of what it is. Seriously, many people I talked to this week do not even know about it. Maybe it is due to lack of interest of current events (i.e. record low viewership on news programs). Maybe normal people are just not willing to learn more about the world as they find it too intimidating or too complex to understand.

We’ve seen the immediate impact of Brexit already – 5% limit down on Dow and S&P overnight with European stock markets all dropping more than that. Since then the damage is controlled as we see many European stock markets are recovering from the initial losses slowly all day. The truth, however, is not reflected because we have government intervention all day so far to contain this Brexit aftermath.

Can the governments around the world keep disrupting the financial markets like today?

No, because that will discourage investors from investing in these major financial markets.

And no again because the central banks are very poor these days. They do not have enough ammunitions to last more than 3 days of heavy selling if government bonds, stock markets and currencies all going south at the same time.

Hence the talking heads and so-called financial analysts will talk trash this weekend based on the outcome of today’s closing prices of the financial markets. Whatever they say means nothing as that is not real analysis of the impacts of Brexit. No one knows what the real impacts are as we cannot tell if Brexit is contagious or not.

One thing we can tell is that volatility induces more volatility most of the time. So volatility will likely stay high for at least several weeks. Volatility favours bearish actions in stock market, so stock market will have a tough time going higher these two months. Uncertainties is also something always affecting stock markets negatively. Until the roadmap of Brexit is hammered out clearly by the government officials, stock markets will have a hard time holding up.

My premium members already know what I think of Brexit from my newsletter earlier this month. Now that Brexit is in place, major moves in currencies and the stock markets will be unfolded in the expected direction.  This will be a great time for traders.

No comment yet

I received quite a number of emails lately from young adults, who are aspiring in becoming professional traders, seeking for advice. Most of them are looking for pointers on what books to read, what courses to take and what trading related knowledge they have to acquire. I asked quite a number of questions about themselves and interestingly, what they need is not knowledge building, at least not yet. What they need is changing their worldview first.

If there were one common element among all the successful traders, it is their resiliency that carry them through tough times. This mental toughness is a requirement for pretty much all kinds of success in many careers, not just professional trading. Since most of us are not prepared correctly by the regular education system, and that majority of us coming from various backgrounds are not born with strong resiliency personality trait, it is not a surprise that many people fail to realize their potential in building any kind of success in the field they have chosen.

The lack of resiliency in a person can be changed through training. There are many books and classes out there teaching techniques and practices to improve our resiliency. I can write about that all day but the most important thing is to realize that building our character first is more efficient than focusing on knowledge acquisition. At one extreme, as an example, with a twisted mindset, the worldview can be so problematic that all the domain specific knowledge acquired will be hardwired the wrong way and not functional when needed.

As I wrote before specifically for traders, we are the most important component in our trading business. It is not an edge for a specific market that matters in the long run. It is our ability to adapt and survive the changes that matters most. And that requires strong resiliency.

Some related articles and videos for those interested in trading and improving your mental strength:

Tai Chi Traders in a World of Chaos

Why Traders Fail To Follow Profitable Mechanical Systems

Angela Lee Duckworth: What Is Grit

Videos for Traders on Psychology

No comment yet

Mid-year is often the time of the year that I slow down my pace with work. It makes sense for me because trading volume is greatly reduced during the summer months. My trading strategies work best when the trading environment has more types of participants in the game. Hence, I know I have to be more selective with my trading setups during summer. On the other hand, Canada is such a cold place that many Canadians like me prefer enjoying the sunlight and outdoor activities whenever possible during the short summer here. Given the more relaxed pace, early summer is the time I do a lot of planning and reflections on what I do and how to improve them.

Shuffling among multiple projects right now, with unexpected hurdles threw at me quite a number of times already this year, gets me thinks about the importance of prioritizing them. As a minimum I like to get things done more effectively. I don’t like things being left half done yet I have a pile of articles written in exactly that state. Other projects also progressing slowly much less than where I wanted them to be.

The feeling of stuck in quicksand probably describe my situation perfectly.

And this is pretty much what my friends successful investor friends told me. If I were running my site as a startup, they said no one will want to invest in my project as I do not really focus on delivering results. it may sound like a joke but it is not. They are very serious about their observations.

What they like to see is that I focus on the one thing I am best at, or, the one thing to deliver, so that my site is more focus and provide better value to my premium members. I know that what they told me is true because if I continue to spread my resources thin among way too many things at the same time, I will be stuck in this condition forever.

My trouble though is that I do not really know what I am best at. Never have the need to explore on that. In trading, I eliminate my bad habits and avoid trading setups that trigger my emotional weaknesses to improve my performance. It works so well I do not really pay much attention on my strength. Now that it seems like there is no way to avoid this path to complete the self discovery process.

Maybe I will find the answers I need during this summer season, finally.

4 comments

Those whose career is stuck in their field, including many beginner traders, often seek for help with a narrow focus on acquiring specific skills to advance their careers. Yet, what I learn from helping many others is that skills and knowledge in specific domain can only carry a person a bit further. The better solution is to improve the person from within in terms of physical and mental health such that the person becomes more capable in all aspect in life which, of course, including career development.

Physical Health is the Foundation to Better Mental Health

Many young adults I trained for trading firms lack the physical health to put the hours they need to learn new things. Their employers would not wait for them to improve themselves. If there were two new recruits, the one who can dash to the minimum requirement first gets the job. It means being able to learn many new things quickly. Scientifically, it is known that those people who exercise regularly and rigorously can learn faster and better. The irony, however, is that people who desperately want to improve their financial situation and develop their careers are often those who do not take care of their physical health.

It does not take extreme measures to improve physical fitness to acceptable level. What it takes is making physical activities and exercises a routine in your daily lives. Just 15 minutes cardio exercise a day will go a long way. Many people have the wrong idea about doing exercise in the first place. The whole meme of going to a gym being the equivalent of doing exercise is so wrong. In case you wonder, yes, exercise for fitness can be done pretty much anywhere.

A related issue happens among the adults over the age of 30. Human bodies are not built to last beyond 50 to 60 years. Regular rigorous exercise is one of the key factors between a healthy life or one crumbling slowly over time. This problem is even worse than the one with young adults because older people must exercise to slow down the aging effects. Many older people understand that they need to exercise but they fail to do it regularly. There is really no excuse for them to not taking care of themselves. All it takes is set aside a little bit of time daily so that you can take care of yourself. It is not too much to ask for, isn’t it?

Instead of Eating Healthy Try Eating Healthier

When we talk about physical health, a discussion about diet cannot be avoided. First, eating more health is a relative term. Avoiding junk food does not mean that you have to go all organic or avoiding all fatty stuff. Eating just a bit healthier with more vegetables and less junk food is already a good start.

Second, avoiding soft drinks and sweets for two weeks you will no longer crave for sugary stuff. Drinking enough water daily by itself is already a healthy habit.

Third, eating frozen vegetables may not be as healthy as eating the fresh ones but it is better than eating fries or heavily processed carbohydrates.

In short, to improve your diet, work with things you have access to and be creative. There is no need of a straight meal plan. What is needed is using your brain to make smart choices when it comes to eating healthy.

Mental Strength Can Be Trained

The shrinking of overall attention span and patience are the two biggest problems I have seen among young traders and pretty much majority of the young male adults. Their inability to focus combined with the lack of patience makes them not able to acquire any advanced skills or crafts. This becomes obvious when something of interest caught their attention, they would be able to work on it fiercely but the passion disappears quickly. The usual choice these young adults made is to move onto the next thing that interest them. At the end, they develop no expertise in anything yet they think they know everything.

Meditation are known to develop our ability to focus. It takes time though to improve someone with very little attention span to start with. In order to get anything of importance being done, be that analyzing something complex or learning something difficult, the ability to focus our minds on the matter for at least half an hour is a necessity. in other words, we are talking about training from one minute attention span to full concentration for at least 30 minutes. This can take months to happen as rewiring of the brain is a physical process much like training our bodies to lift heavier things.

Patience can be managed and eventually developed when one has stronger ability to focus. Hence it is not a consequence of having stronger attention span. Better ability to focus is often a pre-requisite for the development of patience but there are exceptions.

Patience can be developed through many means. Learn to accept the world being out of our control through reflection of everything we do and everything happening around us is one way. Practice to suppress the urge to speak by listening carefully to every word another person is saying and then thinking through what you want to say before you deliver your words is another effective way.

Opening Up Your Mind

When we are doing better physically and mentally, we are capable in understanding things better and more quickly. It also helps us to cooperate with others better thanks to our more positive attitude. With an open mind towards what is possible in the future, you open the door to possibilities that would otherwise pass by you. Some people call this luck. Maybe part of it is luck but your effort in creating the condition to allow you to perform better at anything contributes significantly in making things happen too.

Be mindful of your own physical and mental wellness. Then take the time and effort to nurture them from within. You will profit from the benefits for years to come.

No comment yet