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I am a mathematician and political scientist by training and have utlized these 2 disciplines to develop a fundamental and technical perspective to trading. I quite often analyse the news and use graphs to pinpoint entry points. I have worked as a stockbroker, for the United Nations, and am... More
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Phase Shift Trader
  • The New US/Middle East Oil Paradigm

    There is a fascinating theory doing the rounds recently in the political and commodities world of oil. Recent data shows that US is no longer dependent on Middle Eastern oil. The latest edition of the International Energy Agency's World Energy Outlook says the US will surpass Saudi Arabia as the biggest oil producer in 2020 and become self-sufficient in energy by 2030 as new drilling technologies, alternative fuels and declining consumption reduce the need to import oil.

    The US may continue to use oil from Canada, Venezuela and other nearby countries if prices are competitive, but the IEA predicts Asian nations will end up consuming 90% of the oil produced in the Persian Gulf. The IEA said also said that the shift in the oil trade could redefine military alliances.

    Based on this prophetic prediction it is believed that the US will gradually pull out of the Middle East and allow the totally chaotic region to fend for itself or handover security to the Chinese who depend on this as their source of oil.

    The Carter Doctrine has guided US policy.

    "An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America," Carter declared in his 1980 State of the Union address. "Such an assault," Carter said, "will be repelled by any means necessary, including military force."

    The sharply reduced dependence on Persian Gulf oil is raising questions about whether the Carter Doctrine should still apply.

    Many of the recent wars in the Middle East have been linked to oil. When Iraq invaded Kuwait in 1990, threatening the Gulf oil supply, the United States and its allies intervened. The public aim was to help Kuwait restore its sovereignty and restore its oil.

    There will clearly be to a shift in the political nature of US involvement in the Middle East as US foreign policy and military commitments in the Middle East have long been tied to US dependence on oil from the region. However, there is a massive Global security rationale for US power projection that is not entirely dependent on oil.

    On the military front the US has massive commitments to its allies in the Persian Gulf and will need to keep a watchful eye on events in Iran, Afghanistan, Pakistan, and Israel's borders.

    The economic cost has been huge as the US has constantly posted men and material in the region and fought 2 large wars to secure Iraq and is fighting another in Afghanistan. Furthermore, the US has consistently said it is willing to go to war to keep the oil flowing. The Pentagon's new defense strategy, released last January, said the United States should "rebalance" toward the Asia-Pacific region. But it did not call for a downgrading of the US role in the Middle East.

    On the political front, things may change a bit. The need to keep the oil flowing has meant US administrations have consistently supported the unsavoury leaders of the oil nations in the Middle East. The Shah of Iran and the current Saudi regime are good examples of totalitarian states that have escaped criticism. The Arab Spring proved that the US is in part willing to allow regime change in its client states in the Middle East, even with the potential disruption to oil flows.

    The old myth that the high price of oil will lead to an economic collapse has been well and truly disproved. At one stage commentators thought oil at 50 dollars would be a disaster for the global economy. This price has been consistently surpassed for a long time and the world has still survived.

    So the US is quite happy tinkering with the political merry-go-round in the Middle East and replacing one regime with another. It can even unilaterally decide who can do deals with Iran and sway Saudi Arabia's hand to pump more oil. Have you noticed that OPEC meeting are no longer important as the organisation has been conveniently neutralised on the global stage.

    Currently the largest clients of Middle Eastern oil are China, Japan and Korea. Persian Gulf oil will remain important, and somebody will need to secure those Gulf shipping lanes. These countries are benefiting from the huge US security presence in the region, and yet does little to assure that flow is not disrupted by local tensions.

    If the US pulls out of the Persian Gulf, the nations of East Asia will either have to play a bigger military role in the Middle East, or find other sources of oil. America might have sufficient new-found reserves of fossil fuel to supply Japan and South Korea in an emergency, but concern about access to Persian Gulf oil would undoubtedly exacerbate tensions over who owns contested oil reserves in the South China Sea and elsewhere.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 04 11:08 AM | Link | Comment!
  • Playing Chicken And Winning In Trading And Life

    Trading is essentially about confidence. Confidence in your system and confidence in your ability to take the trade and follow it through. This confidence does not appear overnight but involves a bit of cultivation and perhaps a change in behavior. Inevitably, lack of confidence stems from conflict within and outside. One of the best ways to manage conflict is using a well-known theory from Game theory called Chicken.

    In game theory the game of chicken involves two seemingly rational people driving full speed towards each other in cars. The point of the game is to overcome fear and stay on course. The driver that gets scared and swerves away is the loser. The problem, of course, is that if both stay on course, then both will crash and die. The principle of the game is that while each driver prefers not to yield to the other, the worst possible outcome occurs when both drivers do not yield.

    But, of course, it does not end there. True tacticians say the winner accepts the inevitable and throws his steering wheel out of the window right before the collision. This clearly states his intention and forces the other driver to yield.

    The game of chicken is so dangerous that it would be nice if we could just avoid it. But an unfortunate reality is that we are faced with the same reasoning, every day we live and trade. In the uber competitive world of markets, one has to learn how to play the game of chicken. Here are a few strategies that can help you be the winner:

    1. Dig in

    In the game of chicken, your flexibility is a weakness. One of the best solutions is to prove that you will not change course. Limiting your options, and metaphorically becoming immovable like the steering wheel incident, can show the other side that you will not back down.

    2. Pretend: Get a reputation for being tough

    If you can't credibly limit your actions, the next best option is to get a reputation for being tough so people don't bother believe that you are serious.

    3. Go for broke

    Sometimes you cannot lock in your actions but instead have to fight head on. In this case it might be wise to show you are serious by going for broke.

    The player that has nothing to lose is more dangerous and such threats will be taken more seriously.

    4. Raise the risk to your actions

    Brinkmanship is a strategic move where you raise the risk of the game-bringing everyone closer to the brink-unless the other side relents. While you may prefer not to use these tactics you have to be aware of them as your opponents may employ them. MAD (Mutually Assured Destruction was a good example of this)

    5. Withdraw from the game

    Walk away, if you do a quick assessment and realize your are totally out numbered and out gunned then you retreat and regroup.

    6. Get lucky: change the game

    In some situations, you can avoid the game of chicken by being creatively. Change the game and you can create incentives to cooperate rather than intimidate.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Nov 30 1:10 PM | Link | Comment!
  • Assymetric Trading: Using Your Advantage As A Small Trader

    Asymmetric warfare is war between belligerents whose relative military power differs significantly, or whose strategy or tactics differ significantly.

    Private traders often think they are at a disadvantage because of the resources available to big banks and funds. However, trading on your own with small lots can be quite an advantage in the fast paced world of trading. As we have seen after the multitude of bank failures financial institutions are placing layer after layer of risk management algorithms in their trading models. Understandably, the high frequency traders make money in milliseconds from slight changes in the market, but we are not competing with them anyway.

    Most private traders these days have access to as much information online as a corporate trader. Most technical analysis packages have all the signals needed and so much news and so many pundits can be easily followed on Twitter. All this can have negative implications, the fog of war.

    New traders depend on too much information to make a decision. This multitude of information channels makes rapid decision-making difficult and takes out the edge of being a private trader. This is a problem the majors are faced with, the multitude of analysts, program trades and information.

    The principle of asymmetric warfare is to move fast with stealth like weapons. Private traders can do that. We trade smaller lots so don't need to worry about moving markets and we don't have risk managers and compliance officers monitoring all our moves. Use these advantages they are great to level the playing field.

    We should use our advantage of stealth and use some guerilla warfare tactics. You make rapid decisions, pounce and ambush trades and leave quickly if necessary. That is the edge of a mercenary. In military speak it is known as asymmetric warfare.

    Lets call it asymmetric trading. It's the only way to fight the market and take out the big players.

    Analyze information rapidly

    Make quick decisions based on available information


    Asymmetric warfare is also about getting out quickly when things are not going your way.

    The market is volatile but having a pre-determined point at which losses are unacceptable is an important security factor in trading. That point must be clearly established based on your money management criteria.

    Signal contagion.

    Now to my second point. To make all this easy you need a well-defined system and entry and exit points. Often traders need the comfort of having lots and lots of signals (MACD, RSI, Stochastics, MA, Bollinger) you know what I mean. All these signals come from the same information, price, they just present it differently. You should play around with the signals and see which ones work for you. Back test the system and then use it.

    Basically you only need 2 indicators.

    One measuring trend (one of these)

    MA, Bollinger band

    And an oscillator (one of these)

    Stochastic, MACD , RCI, RSI, ADX, there are others.

    Or you can just follow price action and monitor the news.

    After that set up your entry and exit points and you are set.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Nov 29 2:39 AM | Link | Comment!
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