iCharts Discussions

[ajayhkaul]

As the markets continue to defy gravity , it is good to re-visit TRADING WISDOM that we tend to forget as we battle with pivots and averages,oscillators etc:

Trading Wisdom : Traders EGO/Predictive bias

Trading is NOT about being "right."

The one characteristic that causes most would-be traders to fail is the need to be right!! Most of us equate a losing trade with being wrong, and our egos won't let us accept being wrong. Possibly we 'predicted' publicly and now we think we have to eat 'crow'.

Instead of exiting a trade/market that is moving against us, we hold on in the hope that the trade will turn around and prove us "right." Invariably the trade keeps moving against us and what would have been a small loss turns into a catastrophe.

We all do this. After years of trading, one still has to fight the urge to "hold on just a little bit longer." Sometimes the urge wins out and we pay the price.

How many investors saw their accounts virtually disappear during the recent economic melt-down because they didn't want to "take a loss?"

Understand this:
When a trade goes against you, the loss is already there. You don't have the option of deciding to "take a loss." The only option you have is "admitting" to the loss.

Here is the truth, Repeat it over and over again. Make it your mantra.
Say it every time you are tempted not to stick with your trading plan and hold that trade "just a little while longer:"
Real trading is not about being "right." It is about being on the "right side of the market."
[b]This often involves repositioning yourself and taking a small loss to be in a position to take advantage of the next big move and reap big rewards.


If you are counting winners and losers, say 3 losing trades and one winning trade. It doesn't sound too good if you don't know what you are talking about.

Professional traders don't count wins, we count money, and we make more money on the one winning trade than we lost on the three losing trades combined.

Let me repeat it one more time:
"Real trading is not about being "right." It is about being on the "right side of the market."

Understanding this puts you ahead of 95% of all traders already.

[vinay28]

no RBA rate cut. AUD spikes. may be good for markets?

[rk_a2003]

Ajay

I don’t think that anyone with a reasonable experience in the Market will be not aware of the rationale behind cutting losses. However the difficulty arises in practice out of the factors fit for Psycho analysis.

In your write up your attempt to address the issue convincingly keeping an eye for psycho analytical factors is impressive.

All market wisdom words are known to majority of the players excluding new ones. The point is how convincingly they were delivered? How successful they are in motivating them to put in practice? I can say you are really successful in that.

[rk_a2003]

[ajayhkaul]

[vinay28]

ajay, try this too

[REMOVED BY ADMIN]

[kamal.icharts]

Dear Vinay,

Commercial websites are not allowed. Please ensure you take a note of it before posting any links.

Regards

Kamal

[vinay28]

but kamal, these are for astrology and do not have any wasted interest for anyone? Nor is it against the interest of icharts? Also, this thread was created for the sole purpose of having a holistic view of market.

Please reconsider your decision!

[kamal.icharts]

Dear Member,

The link posted had commercial contnet, irrespective of the subject or the interest of the site.

Post your views but not links

Regards,

Kamal

[vinay28]

oops, did not realise it. in my rush to inform ajay, did not see it in detail. thanks

in the process, "dear vinay" got demoted "dear member"!

[ajayhkaul]

K- CYCLES .......understanding the BIGGER PICTURE :

Ok , first K- does not stand for Kaul

His name was Nikolai Dmitrievich Kondratiev.... the man who knew too much. He was born on March 4, 1892, in the province of Kostroma, Russia, to a peasant family.

In 1924, Kondratiev published his first book, On the Notion of Economic Statics, Dynamics and Fluctuations. It was the first time he publicly introduced his research into capitalism. However, there was one concept in particular, which he called "long wave cycles," that eventually got him killed.

On Sept. 17, 1938, a middle-aged man, weak with health problems from serving an eight-year-long prison sentence, Kondratiev stood in a courtyard in a small town outside of Moscow. He was probably blindfolded, but no one knows for sure.

What we do know is that on that fateful day, he was shot to death by a firing squad. He was just 46 years old. He was survived by his wife and a young daughter he adored.

Capitalism Trumps Communism

Why was Kondratiev, one of the most influential men in Russia, executed? Because he predicted the one thing Joseph Stalin, the undisputed leader of communism, didn't want to hear: that capitalism would trump communism.

You see, Stalin was desperate for the West to stumble. He believed that capitalism was doomed to failure. When Kondratiev presented his research that showed the U.S. would suffer through a prolonged and terrible depression, Stalin couldn't be happier.

The idea that capitalism was flawed and that Western economies would be devastated by "super bubbles," as Kondratiev called them, intrigued and excited Stalin. For him it meant that as the U.S. fell into despair, Russia would rise to become the world's biggest economic superpower.

But there was one problem with Kondratiev's research. He also showed that when these huge super-bubbles burst, the global "reserve of major material values" gets replenished.

In other words, capitalism doesn't die... it simply gets reborn, and new and bigger cycles of prosperity follow. Therefore, capitalism offers mankind the best hope for economic betterment.

As you can imagine, this infuriated Stalin. So much so that Kondratiev's research was now considered against the Socialist Party. Kondratiev was removed from all his government positions. In July 1930, Stalin had Kondratiev arrested and imprisoned on charges of belonging to an illegal anti-Socialist party.
He was sentenced to serve eight years in a special, isolated prison camp. His health quickly deteriorated and he was practically blind, but he kept up with his research and managed to write letters to his daughter regularly.

When Kondratiev's initial prison term was up, Stalin had new charges brought against him. Kondratiev was sentenced to another 10 years. But he never served them. On the same day that he was convicted, Stalin ordered him executed by firing squad.

Although he died 73 years ago, Kondratiev's economic research lives on. After his death, his economic research papers were translated from Russian and published abroad in several different languages. His name was submitted to be included on the inaugural list of the Fellows of the Econometric Society.


Super-Cycles Cause Boom and Busts

What he called "long wave cycles" were highly accurate in his predictions of how capitalism moves in and out of super-cycles and the impact those cycles have on major economies.

Kondratiev explained that there were six super-cycles and that each cycle works the same way. First, liquidity (credit) expands in the initial phase of the cycle, which forces commodity prices to rise, reflecting increasing business activity and inflation.

As business activity moves forward and inflation begins to grow, speculators bid up commodity prices due to their fear that inflation will continue to accelerate. Kondratiev called this the "acceleration premium."

After the rate of inflation peaks and starts to fall, the acceleration premium declines. This causes inflation to slow, but it also means commodity prices begin falling. This is called "disinflation."

At the same time this is happening, a change in investor psychology takes place. People move away from fear and begin to experience feelings of hope and relief. They then channel those good feelings into buying stocks, which forces share prices to move upward.

However, because inflation is still present, the wholesale prices that manufacturers charge for finished products, the retail prices that stores charge for goods and the levels of wages that employers pay for labor all continue to rise, but at a continuously lesser rate.

Near the end of the cycle, the rates of change in business activity and inflation flip to zero. When they fall below zero, deflation is in force. As credit (or liquidity) contracts, commodity prices fall much more rapidly, and in turn, prices for stocks, wages and wholesale and retail goods decline. When deflation ends and prices reach bottom, the cycle begins again.

Now here's one other important point about Kondratiev's super-cycles that is worth noting: Each cycle is triggered by some type of landmark innovation.

The first cycle, called the "steam engine cycle," was sparked by the invention of the steam engine and its use, especially in the textiles industry. The second cycle, known as the "railway wave," was the age of steel.

The third, the "electricity and chemical wave," was the product of the electrical engineering and chemicals industries. It was the first long-term cycle to profit from the practical application of scientific insights.

The innovations that triggered the fourth Kondratiev cycle were petrochemicals and automotives. These brought mass traffic onto roads and into the air and also marked the culmination of the industrial society.

The Fifth Super-Cycle

So where are we in Kondratiev's pattern of super-cycles? The answer is since the 1950s, the world economy has been in the fifth Kondratiev cycle, "information and technology," which is driven by the development and exploitation of information technology.

To get a better understanding of Kondratiev's cycles (also known as K-cycles), take a look at the chart below:

Each one of the down waves in the cycles represents a time of great despair. For example, in 1807, the U.S. experienced its first depression, and this had a huge impact on shipping-related industries, which corresponds to Kondratiev's steam engine cycle.

That was followed by the Panic of 1837, the Panic of 1857, the Panic of 1873, the Panic of 1893 and the Panic of 1903. Of course, we are all familiar with the Great Depression of 1929.

If you take a closer look at the chart, you'll see that the rising phase of the fifth cycle started in the early 1980s and continued through 2007. This is a spot-on match for the beginning of the housing bubble collapse. This proves, once again, that Kondratiev's cycle predictions were extremely accurate.

Here's something else about Kondratiev's super-cycles: Once they start, they cannot be altered or changed in any significant way.

In other words, once the cycle begins, it cannot be stopped. As entire economies become entrenched in these cycles, interventions by government leaders cannot stop their inevitable outcomes.

As we know from experience, no matter how much money governments throw at the problem, they only end up making matters worse -- creating micro-bubbles that will add to the pain.

Consider the 2000-2001 technology crash. The markets tanked. Investors got crushed. The economy tottered on the brink of total collapse. And what happened?

In rushed the government with low interest rates... pumping money into the economy and fueling an unprecedented -- and unsustainable -- real estate boom.

Of course, the real estate bubble burst... resulting in the credit crisis and sparking the global financial meltdown of 2008-2009.

The stock market plunged by 50%. Investors lost $3.2 trillion or more. Long-standing financial pillars like Lehman Brothers and Bear Stearns vanished from the face of the Earth. For a while, it looked as if the whole system would collapse. Freddie Mac and Fannie Mae had to be bailed out. Hundreds of U.S. banks went under.

But again, governments rushed in and flooded the world with money...

At least 43 countries from every corner of the globe pumped massive amounts of money into the global economy. Here are a few of the stimulus plans:

As you can see, governments are powerless to stop the cycles. But the good news is that according to Kondratiev's theory, the bottom of each super-cycle is only temporary.

While that doesn't mean the bottom won't be painless (the Great Depression is a prime example of just how painful things can get), it does mean a huge, long upswing will create millionaires out of a few savvy investors.

I could go on, but I think you get the picture.

[vinay28]

Super

But where/when is the next (7th) cycle, the Nuclear cycle which will remove all dependance on scarce natural fuel and will provide unprecented and so far unimagined boost to world economy? After which the world will come to an end!

[nsinojia]

[aahoo]

[rk_a2003]

Hi All

K-cycles explained expansion and contraction cycles that are inevitable in capitalist societies. What is the root cause that is causing expansion and contraction? Kondratieff explained about it enough which went unnoticed by many economists intentionally or un intentionally.

In lay man terms it can be explained in a simple manner. In the Market economy everything is being decided by demand and supply any industry be it Manufacturing,IT ,FMCG,Power,Defence,Services…what ever…. fore see demand and produce as per forecast( in general optimistic) different players in the industry try to appropriate the demand ( again optimistically) and produce/supply more than the demand and ultimately fails to find the takers.

Therefore they reduce production and cut down the workforce in the process. The workforce so retrenched become income less and forced to consume less thus causing further slump in the demand the slump in the demand causes further cut down of the workforce which leads to further slump…and the vicious circle begins….. that is contraction.

It finds it natural bottom at some point and starts reviving helped by technological developments( may be this time Nuclear cycle as Vinay said) then the expansion begins by increasing the production again…….. to find another contraction….the cycle continues.

If we can not understand this basic issue it remains a puzzle for us and we remain wondering how and why these cycles appear again and again..

The bottom line is these cycles are inevitable outcome of this production system. Unless otherwise humankind find out and resort to more rational production system that can operate not on demand and supply this will continue and people like us will try to understand this and try to find out the ways to take advantage out of it. And as a whole human kind suffer and some people perish out of this turbulence.