Master Traders E-Book

Fari Hamzei

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 477

Veröffentlichungsjahr: 2010

Beschreibung

Master Traders introduces you to an outstanding group of financial experts--from seasoned hedge fund managers to top technical analysts--who discuss the methods they use to tame today's highly volatile and unpredictable markets. Composed of chapters contributed by leading financial professionals, Master Traders contains a variety of proven strategies and techniques that will give you an edge in the world of stocks, options, and futures.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Preface

Acknowledgments

Introduction

SELF-AWARENESS

HUMILITY

STRATEGY AND FOCUS

CONSISTENCY

RISK MANAGEMENT

PERSISTENCE

EXPERIENCE AND INSTINCT

A FINAL NOTE

PART I - Technical Analysis

CHAPTER 1 - Playing with Fear and Arrogance

THE INVESTMENT PROCESS

KNOW THYSELF

WHAT DO WE KNOW?

AN ABUNDANCE OF KNOWLEDGE IS DANGEROUS

THE LONG AND SHORT OF IT

CHAPTER 2 - Sector Analysis: Tools of the Trade

THE FIVE TOOLS OF TECHNICAL ANALYSIS

SECTOR TRADING

UNDERSTANDING RELATIVE STRENGTH IN SECTOR ANALYSIS

USING BREADTH IN SECTOR ANALYSIS

USING VOLUME IN SECTOR ANALYSIS

SCALE SHIFTS

SENTIMENT

CONCLUSION

CHAPTER 3 - Evaluating Probabilities to Improve Profitability

A DYNAMICALLY CHANGING SYSTEM

THE FOUNDATION: 100-YEAR DOW CHART AND LONG-TERM MARKET THEORY

THE STRATEGY: SIMPLIFYING THE COMPLEXITY

TRADING METHODOLOGY: INCREASING PROBABILITIES THROUGH QUANTITATIVE SCREENING, ...

PUTTING IT ALL TOGETHER

SUMMING UP

CHAPTER 4 - The Secret Science of Price and Volume

MEASURING VOLUME FORCE

BEMA GOLD STUDY

SWING HIGH TO SWING LOW

BUY AND SELL SIGNALS

USING THE WYCKOFF METHOD

PUTTING THE CONCEPTS TOGETHER

CONCLUSION

PART II - Fundamental Analysis

CHAPTER 5 - The Keys to Biotech Investing

FIVE RULES

DEVELOP YOUR THEMES

DANGERS OF CHARTING BIOTECH

THE CASE FOR BIOTECH

CONCLUSION

CHAPTER 6 - Investigative Investing: Themes and Methods for Uncovering Value

GENERATING THE IDEA

UNDERSTAND WHAT TYPE OF STOCK YOU ARE INVESTING IN

CASE STUDY

CONCLUSION

PART III - Sentiment

CHAPTER 7 - The Secret Messages of Equity and Options Markets

INVESTOR PSYCHOLOGY AND THE DOLLAR-WEIGHTED PUT/CALL RATIO

THE SMART MONEY AND THE HERD MENTALITY

PUT/CALL RATIOS: SIMPLE AND DOLLAR-WEIGHTED

ADVANTAGES OF REAL-TIME DOLLAR-WEIGHTED PUT/CALL RATIOS

AN INDEX EXAMPLE

A VARIANT OF SUPPORT, PIVOT, AND RESISTANCE LEVELS

CONCLUSION

CHAPTER 8 - Trading Seasonality

THE YEARLY SEASONAL CYCLE

SEASONALITY ZONES

SEASONAL HEAT

SEASONALITY AND OTHER INSTRUMENTS

DEPLOYING SEASONALITY AS PART OF AN OVERALL STRATEGY

CONCLUSION

PART IV - Derivatives

CHAPTER 9 - Volatility and Its Importance to Option Investors

THE ELEMENTS OF VOLATILITY

IMPLIED VOLATILITY

HISTORICAL VOLATILITY

FORECAST VOLATILITY

ALL OPTION STRATEGIES WORK

VOLATILITY THOUGHTS

PREMIUM HARVESTING STRATEGIES

CHAPTER 10 - A New Options Game: The Market Taker

THE NEW OPTIONS DYNAMICS

GREATER LIQUIDITY AND TRANSPARENCY

LOOKING FOR TRADING OPPORTUNITIES

FOLLOWING THE SMART MONEY

CONCLUSION

PART V - Trading Size

CHAPTER 11 - Making Sense of Market Moves: Using Technical and Fundamental ...

INFLUENCES OF THINKING

USING TECHNICAL AND FUNDAMENTAL ANALYSIS

CROWD BEHAVIOR

UPGRADES AND DOWNGRADES AS ANECDOTAL SENTIMENT

A PROFITABLE, REPEATABLE PROCESS

KEY TRADE SIGNATURES

HOW TO DIG

FOCUS ON STOCKS, NOT INDEXES

BUYING FURTHER ALONG THE TREND

SHORT SETUPS

CONCLUSION

CHAPTER 12 - New World Trading of Old World Markets: European Derivatives

UNDERSTANDING MARKET PARTICIPANTS

TRADING VOLATILITY

ADVANTAGES OF TRADING EUROPEAN OPTIONS

HOW TO TRADE EUROPE

NEW TRENDS IN EUROPEAN DERIVATIVES

SUMMARY

CHAPTER 13 - Options Applications to Pairs Trading

MARKET NEUTRALITY

THE HISTORY OF PAIRS TRADING

MARKET NEUTRALITY IN PAIRS TRADING

PAIRS TRADING: A MARKET NEUTRAL STRATEGY

THE GRAPHICS OF PAIRS TRADING

THE TECHNICALS OF PAIRS TRADING

OPTIONS APPLICATIONS TO PAIRS TRADING

IMPLIED VOLATILITY

CONCLUSION

EPILOGUE

About the Author

About the Contributors

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our web site at www.WileyFinance.com.

Copyright © 2006 by Fari Hamzei. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data

Hamzei, Fari, 1957-

Master traders : strategies for superior returns from today’s top traders / [edited by] Fari Hamzei.

p. cm.—(Wiley trading series)

Includes index.

ISBN-13: 978-0-471-79062-4 (cloth) ISBN-10: 0-471-79062-1 (cloth)

1. Speculation. 2. Stocks. 3. Investment analysis. I. Title. II. Series.

HG6041.H275 2006

332.64—dc22

2006014069

In Memory of

Heshmat Afshar-Bakeshlou, Grandmother dearest 1911-1997

Khadijeh Elahi-Taleghani, beloved Mother 1931-1998

Patrick B. Crisafulli, dear friend 1918-2006

Foreword

A former boss and mentor once said to me that investing is a “business of probabilities, not certainties.” Success, therefore, results from one’s effort to measure the probability of a certain outcome while accepting the lack of inevitability.

Fancy words perhaps, but much easier said than done. For how can one possibly know all of the inputs needed to make logical estimates? And, in light of the ongoing geopolitical tensions, as well as the unpredictability of interest rates and economic trends, can an investor reasonably hope for anything more than a lucky call now and then? Maybe not, especially when the market’s daily volatility shakes, rattles, and rolls one’s very confidence. And maybe not, when the media attaches a sense of urgency to every data point, and gives the investor more twists and turns than his favorite chiropractor. In the end, does one really have sufficient control to elevate the probability of success?

The answer is an unequivocal yes, although one would be brazen and less than forthright in minimizing the effort involved in achieving success. Yet, enough people have mastered the daily twists and turns and have developed sufficient financial success to suggest that luck is not a pivotal factor.

Master Traders: Strategies for Superior Returns from Today’s Top Traders is a comprehensive and sweeping look at how various individuals continuously master and overcome the emotionalism of every trading day. While not a daily journal, this wonderfully illuminating book succinctly describes the methodologies that have enabled the writers to translate probability into profitability.

Master Traders is not meant to be a how-to book. Rather, each chapter is more of a tutorial that shares with the reader various regimens that have enabled the traders and market analysts who have written these chapters to develop significant degrees of control over their investment destinies. At the same time it is a concession that there are many ways to skin a cat—that the uniqueness and individuality of every trader will probably be the most important factor in gauging the utility of any methodology.

When Fari Hamzei, the eloquent leader of the Master Traders effort, asked me to write this Foreword, I fretted and feared that the tone of the book would be didactic and condescending (“do it this way, or else”). I’m pleased to see that the tone and ambiance of Master Traders is far from patronizing. Rather, it is more an exhortation—an urging to develop game plans and to practice money management as means of improving the probability of profitability. Methodology and risk control are the common themes in each chapter of Master Traders, a beautiful book that, I hope, inculcates in everyone that you really do have a significant degree of control over your future in trading.

Steve Shobin Vice Chairman Americap Advisers, LLC

Preface

When I started my investing/trading career some 26 years ago, my passion was being a member of the team that would build the next generation of U.S. Navy air superiority fighter jet and U.S. Air Force advanced strategic bomber—not the stock market. I was the manager of the Operations Analysis Department of Northrop Corporation’s Aircraft Division in Hawthorne, California. My only exposure to the stock market in those days was academic, based on my economics and finance courses at Princeton. Then one day, as I was having lunch at my desk, everything changed.

One of my colleagues rushed back from lunch, stopped at my desk and told me that the stock market had just “crashed,” and it had “something to do with precious metals.” What I would soon learn was that the Hunt Brothers had been forced to liquidate their massive silver positions, which created a domino effect in other markets. It was March 27, 1980, and the Dow Jones Industrial Average put in an intraday low of 729.95 on huge volume.

Being an avid capitalist and a believer in the U.S. economy and the strength of the U.S. financial markets, I wondered if this was an opportune time to hunt for some bargains in the stock market. I called my dear friend and Princeton’s Cottage Club mate, Gil Caffray, who was then working at the NYSE specialist firm, Conklin, Cahill & Co. As Gil picked up the line, in the midst of tremendous trading activity for his clients, I asked him point-blank, “Is this a good time to buy?”

“We have a big drop in the market on massive volume,” he explained. “This appears to be an important low in the market. So, yes, it is a good time to get in.”

“What do I buy?” I asked him eagerly.

His explanation was simple and direct: “Buy America.”

My goal was to help my parents build a nest egg. Gil’s advice to “buy America” seemed like a great opportunity for them. The next day, I took my father to the Torrance, California, office of Merrill Lynch Pierce Fenner and Smith to open an account, and on the following Monday we started to “buy America.” We bought Merrill Lynch, Eastman Kodak, IBM, Schering Plough, General Electric, and so forth. (I bought an equal number of shares for my parents’ account; I knew nothing about beta-adjusted equal dollar amounts in those days.)

The ride the following four months was unreal as the market bounced back from that low. I felt like the smartest monkey on earth, blindly throwing darts at the Wall Street Journal’s quote pages; any stock that we bought went up. When the stock averages hit a plateau, our broker suggested that we start selling calls as a way of generating additional income. The only downside, he explained, was that the stock could get “called away,” and as he advised, “No one ever gets poor taking a profit.”

My new task was to learn everything I could about call options. I contacted the Northrop library and asked for research on stock options to be pulled for me. That’s when I discovered the work of Robert Merton, Fisher Black, and Myron Scholes (of the Black-Scholes model fame). Now I was an official investor—granted, on behalf of my parents—buying securities and writing call options. Two years later, working as a strategic planner in the Advanced Systems Division of Northrop, a fellow strategic planner, Meyer Alpert (an old-timer educated at “Harvard College,” as it was known in his day) suggested that I beef up my financial education with a graduate level security analysis course at a local university. I decided to audit courses at the UCLA Anderson Graduate School of Management, where I met Professor Jack Shelton, who in 1967 had devised a corporate warrants pricing model. Options pricing theory owes much of its development to his work. Professor Shelton inspired me to go deeper in my research and trading of options, and as I worked with the Black-Scholes model, the concept of market implied volatility intrigued me from the onset.

At this time, technical analysis was gaining popularity, thanks in part to Dr. Marty Zweig, the inventor of the Simple Put/Call ratio. Armed with my original Apple II Computer and programming donated by my younger brother, Kory, I began studying things such as divergences of the advance /decline line versus key market indexes, and how to use this information for intermediate market timing. Then came the October 1987 crash. Fortunately, I had sidelined myself after partially cashing out on the previous August peak. I had left Northrop in 1983 and now was an entrepreneur involved in two technology-based companies, including as president of a high-tech text messaging company, and had become active in real estate-backed exotic mortgage securities.

In October 1990, with oil hitting a peak price of $40 a barrel (equivalent to $86 per barrel in 2006 dollars), I was working out of my office in Century City, next to the Northrop corporate headquarters overlooking the Los Angeles Country Club. This was just prior to the first Gulf War, and I was trading my own money using XMI options. To continue my financial education—now as a trader and an investor—I enrolled in a very popular derivatives course taught at UCLA by the visiting Professor Edward Thorp of the University of California at Irvine. Back in 1973, Professor Thorp, the author of the bestsellers Beat the Dealer (New York: Blaisdell/Random House, 1962) and Beat the Market (New York: Random House, 1967), had derived and published extensions to the Black-Scholes model allowing stock option contracts on stocks paying a finite series of dividends and having European-style exercise features to be properly priced.

As I relate in Chapter 7, I was looking at the same indicators as everyone else. This was most unnerving to me. I always seek to have an edge, whether I am playing a friendly game of squash or investing/trading in equities and derivatives. This led me, in November 1998, to develop the first generation of Dollar-Weighted Put/Call Ratio code, which in time would become the centerpiece of Hamzei Analytics. The following year, I beta-tested my system with the help of a fellow index trader who was a portfolio manager at Prudential Securities in Pasadena, California. On April 4, 2000—the day the NASDAQ Composite dropped more than 630 points on an intraday basis—the software program experienced its baptism by fire.

Now, fast-forward to today. I am the founder of Hamzei Analytics, LLC, with a stable of proprietary market sentiment indicators, and the proud host of a site that draws men and women of the trading community whom I admire and trust. Sharing information, market insight, and camaraderie makes our work at the trading screens immensely enjoyable and rewarding. In addition, Hamzei Analytics has the honor of being ranked by Timer Digest, and as of May 5, 2006, had tied for first place for stock market timing for the trailing 90 days, 180 days, and 52 weeks among approximately 150 market timers.

Most important, I have always enjoyed studying the work of highly competent people and their research on the markets. Indeed, I have been privileged to assemble a dream team for this book, Master Traders, with the active support and tireless encouragement of Gil Caffray and Steve Shobin, who helped shape and shepherd this outstanding lineup. Our publisher, John Wiley & Sons, immediately embraced this concept, and offered tremendous support (and understanding when traders sometimes sidestep deadlines . . .) to bring this project to fruition.

The real stars of this show are the individual contributors, professional traders and analysts covering many disciplines who undertook masterful dissertations on the market. Without their willingness to give of their time, talent, experience, and wisdom, and their commitment, passion, and attention to detail, this book would not have been possible. Amid turbulent times in our financial markets, they wrote chapters that inspire and inform—which is nothing less than a Herculean accomplishment.

I wish to recognize them individually and collectively here:

• Frank Barbera, co-manager of the Caruso Fund, which trades precious metals, stocks, and currencies, whose technical work in gold and silver stocks is considered among the best in the industry.

• Greg Collins, chief operating officer and portfolio manager of Tuttle Asset Management.

• Timothy Corliss, partner and director of trading at Sierra Global Management, a fund that invests primarily in European derivatives.

• Jeff deGraaf, chief technical analyst at Lehman Brothers, and a perennially top-ranked technical analyst on Wall Street.

• Phil Erlanger, president of Phil Erlanger Research, and twice president of Market Technician Association, as well as former senior technical analyst for Fidelity Management.

• Alex Jacobson, vice president of education at the International Securities Exchange (ISE) and a former vice president of business development for the Chicago Board Options Exchange (CBOE).

• Dennis Leontyev, chief executive officer of Experity Group, LLC, a hedge fund company, where he is the portfolio manager for two market-neutral derivative hedge funds.

• David Miller, CEO and co-founder of Biotech Stock Research, LLC, publisher of Biotech Monthly and one of the few independent small-cap biotech research firms.

• Jon “Doctor J” Najarian, co-founder and partner of Najarian Capital; founder of InsideOptions.com, an online publisher of options and futures commentary; and a former CBOE designated primary market maker.

• Tim Ord, president, editor, and publisher of “The Ord Oracle,” which reports on the S&P, NASDAQ, and gold issues, and frequently listed in the top 10 of market timers in the country.

• Steve Shobin, vice chairman of AmeriCap Advisers, LLC, and former senior vice president of Lehman Brothers.

• Jeffrey Spotts, hedge fund manager at Prophecy Funds, a technically managed hedge fund catering to institutions, pensions, and family offices, and a recognized expert on technical analysis.

• Kai-Teh Tao, president of Asgard Management, LLC., an institutional money management firm that opportunistically invests utilizing proprietary fundamental research derived from its broad network of contacts.

• Kevin Tuttle, president and chief equity strategist of Tuttle Asset Management, and co-founder of Church Street Capital, LLC, which runs a managed growth portfolio for high-net-worth clientele.

With my profound thanks and admiration for these contributors, I am honored to present Master Traders with the sincere wish that it educate, enlighten, and empower us all—regardless of our level or experience in trading. For the trader who stops learning is soon sidelined. Knowledge is power, especially when your hard-earned money is on the line.

All the best,

Fari Hamzei Founder Hamzei Analytics, LLC

Acknowledgments

In honor of my mentors:

• At Farhad School: Mrs. Tooran Mirhadi.

• At Princeton University: Gil Caffray, Provost Neal Rudenstine, Dean Howard Menand, Professor Burton Malkiel, the late Professor Stuart Hunter, Professor Charles Issawi, Professor Fouad Ajami, Professor Bernard Lewis, and Astronaut Charles “Pete” Conrad.

• At Northrop Grumman Corporation: Dr. Donald A. Hicks, M.O. Hesse, Warren Klauer, James D. Willson, and Kent Kresa.

• At UCLA Anderson Graduate School of Management: Professor Jack Shelton, Professor Ed Thorp, Professor Bob Geske, and Professor Richard Roll.

• At Electronic Clearing House: Herbert Lucas, Carl Schafer, and Larry Thomas.

With highest esteem for their invaluable contributions to the financial markets: Professor Robert Whaley at Duke University Fuqua School of Business, and Professor John Hull at University of Toronto Rothman School of Management.

Saluting fellow traders: Brad Sullivan, Mike Heraty, Pete Stolcers, Sally Limantour, Geoffrey Garbucz, James DiGeorgia, Skip Shean, Arnon Kolerstein, Kris Monaco, Dan Zanger, Peter Schultz, Dave Baker, Stan Harley, Larry Katz, Barbara Star, Carl Swenlin, Sunny Harris, Peter Slaga, Margery Nelson, Charmaine Balian, Bijan Khezri, Dimitri Villard, Steve Salek, Omid Nikzad, Max Vafi, Kevin Haggerty, Jim Bittman, Miles Dunbar, Carl Rafiepour, Nestor Turczan, Bill Wong, Joseph Del Rivo, Marshall Fried, Greg McKay, Don Coyne, Helen Lepor, Sterling Nelson, Roberta Brown, John LaRocca, and Bruce Arnheim.

With greatest respect for the financial media: Bob Pisani, Mary Thompson, Tom Costello, Leslie Dodson Laroche, Alexis Glick, Scott Cohn, Julie Hyman, Aaron Task, Dan Fitzpatrick, Dan Colarusso, Jim Schmidt, Todd Harrison, and Kevin Wassong.

Recognizing my tireless dream team at Hamzei Analytics, LLC: Lawrence Studnicky, Lawrence Brown, Nancy Scott, Maya Sobolev, Matt Boyce, Jing Shao, Randy Ali, Tom Sawyer, Mark Staskus; and the senior technical staffs at eSignal (Jason Keck), TradeStation, and Townsend Analytics (Joe Goldberg and Jeremy Spanos).

Many thanks to friends and supporters: Elizabeth & Kevin Weiss, Don Seitz, Whitney Baldwin, Skip Walsh, Cathleen Hoza Lysak, Bo Torrey, Kim Torrey Kraus, John Bodel and Brian Morris (aka Bomo), Jack Herbert, Bill Hines, George Howell, Hamp Skelton, Catherine McCarthney Miller, Dennis Love, Scott Quackenbush, Bruce Quackenbush, Ella Cooper, Matthew Glinka, Jim Rutherford, Bob Turecamo, Chris Rulon-Miller, Bob Klein, Tom Leighton, Tom Page, Nancy Gengler, Nader Safai, Farhad Safai, Leah Lundquist, Richard Lundquist, Tricia Crisafulli, Joe Tulacz, Chuck Thompson, Marisa Arnold, Raphel Finelli, Darla Tuttle, Kevin Edgmon, Med Nikbin, Mitch Zarrabi, Lou Friedmann, Mike Felix, Kambiz Shokati, Ladan & Massoud Atefi, Mahsha Behzadi, Behzad Shahpar, Ramin Khajevi, Firooz Farmand, Parviz Ilbagian, Rob Sepasi, Sam Sepasi, David Afradi, Kash Mokhber, Amir Ansari, Bradley Benjamin, Vegis Nuri, and German Bitar.

With love to my family and those dearest to me: Dad, Ahmad, Hamid, Nahid, Kory, Pearl, Nader, Siamak, Ashley, Tess, and Julie Anne Carruthers.

And with special thanks to my Wiley editors: Kevin Commins, who espoused the vision for this book from inception, Emilie Herman, who tirelessly marched forward on the project while taking no prisoners, Laura Walsh, and Todd Tedesco.

And I seek forgiveness from those too numerous to mention here without whom I could not have embarked on this lifelong journey that led to this project.

INTRODUCTION

Trader Evolution and the Keys to Success

Greg Collins

I am not a master trader. Rather, I share—no doubt with all of you—a desire to learn more about what it takes to become a more successful trader. To that end, I’ve been fortunate enough to spend the last few years working and interacting with countless gifted professionals. As I worked with these “masters,” I listened and learned. And, while there is no substitute for sitting in the bunker with great traders day after day, this book does contain helpful guidance that a number of astute professionals have agreed to share. Great traders follow no set of secret recipes; rather, they acknowledge that trading is as much art as science.

This book focuses on how the contributors achieve their own brand of master trading. None of them claims to have figured out the stock market in its entirety. What they have managed to find is a system that works for them. As you read their discussions of systems and strategies, you will sometimes be reviewing basics. But even master traders who have moved on to greater levels of sophistication understand the need to conquer the basics and progress beyond them. The contributors to this book are, first and foremost, students of the markets, willing to offer ideas and share a career-long commitment to learning.