Money Flow Trading Method along with Risk Management

https://www.zerohedge.com/markets/cl...ops+to+zero%29

When it comes to occasional (or chronic) dollar shortages, and the plumbing of the overnight lending market, which as everyone knows suffered a spectacular heart attack early this week when the overnight repo rate soared to 10%, the New York Fed and its open markets desk, is the authority on any potential plumbing blockages.

Yet it now appears that the most important regional Fed when it comes to maintaining market stability, is just as clueless as the rest of us as to why the repo market froze up. sending funding rates to never before seen highs.

In an interview with the FT, New York Fed president John Williams, who earlier this year unexpectedly fired not only the head of the NY Fed's markets desk, Simon Potter, arguably the most important trader in the world, manning the world's most important trading desk but also the second most important person at the NY Fed's "Plunge Protection Team", the head of the Financial Services Group, Richard Dzina, said that the New York Fed is examining "why banks with excess cash failed to lend to the overnight money market, following a week that revealed cracks in the US’s financial plumbing."


Specifically, Williams questioned the hesitancy of the large, liquid banks, saying "the thing we need to be focused on today is not so much the level of reserves [held at the Fed]. It’s how does the market function."


What is troubling about that statement is that it is precisely the level of reserves that the New York Fed should be focusing on - after all, that would justify the repo deep freeze as it has now been abundantly clear that the US financial system will need about $400BN more in reserves, but not how the market functions: if anything, that's the one thing the NY Fed should know by now; yet the fact that the career economist Williams admits that the Fed is clueless about the market plumbing, is extremely concerning.

As noted earlier today, following several days of oversubscribed overnight repo operations to ease liquidity pressure in the market, on Friday the Fed announced it would also offer up to $90bn in two-week long loans to further reduce funding pressures during the notorious quarter-end period when liquidity tends to collapse.

Yet while this action will likely further ease the stress in the funding market, the finger pointing has begun, with market participants claiming that the week’s volatility arose from a shortage of cash in the financial system, which in turn was the result of the unwinding of the Fed's post-financial crisis intervention. In response, Fed officials have said it's not their fault, and instead have focused on the role played by banks, or rather the role banks with excess liquidity did not play but stepping into fund their liquidity-challenged peers.

Specifically, Williams and Lorie Logan, senior vice-president in the markets group at the New York Fed, said officials were looking at why cash failed to move from banks’ accounts at the Fed into the repo market, where banks and investors borrow money in exchange for Treasuries to cover short-term funding needs.

The irony, of course, is that it is precisely the Fed's job to know why money isn't moving from point A to point B; admitting its cluelessness will not only reignite questions about why Williams fired the two most experienced traders at the Fed, but also why the Fed knows no more than the rest of us about what is going on in the interbank market.

Logan pointed to the concentration of excess cash at a small number of banks as one potential issue.

“Reserves are concentrated, the excess reserves relative to the minimum level each bank is demanding is concentrated,” she said. “And the key question is how those reserves, as the level was coming down, would get redistributed, and how smooth that redistribution process would be.”

Almost as if the Fed had no idea what the adverse consequences of its unprecedented actions would be...

To be sure, Fed officials expected some pressure in the market this week as a result of corporate tax payments and Treasury settlements, which would drain cash out of the system. As it monitored short-term lending markets, the New York Fed paid particular attention to the amount of reserves available. It did not expect the general collateral repo rate to explode from 2.5% to 10% in a matter of minutes.


Logan said the expectation had been that as repo rates rose, banks would withdraw excess cash held at the Fed and lend it into the repo market to earn the higher rate of interest. Instead, the New York Fed had to step in to provide that cash as banks remained on the sidelines as banks were terrified to enter the repo market.


Which in turn begs the question: just what are the big, well-funded banks so afraid to share some of their liquidity with their less fortunate peers?

What do they know that we - and the NY Fed - don't?

And tied to that, why did Margaret McConnell, the NY Fed employee tasked with foreseeing every apocalyptic outcome no matter how improbable, fail to anticipate this outcome?

One person who may have an answer is Citi's Matt King, whose latest presentation - a bear market in trust - explains everything that is wrong with the current financial system.

https://www.zerohedge.com/political/...CURRCWqRR1Zk9M


Interest Rate Business Model is Dead
The cash cow bank lending model is dead, buried by the European Central Bank (ECB).

The coup de grace came at the recent meeting. As ECB President Mario Draghi squeezed the negative interest rate for banks even deeper.

The ECB will restart its bond purchase program in November. This time, without a time limit. Thus, the monetary authorities have permanently chained the long-term interest rate at a low level and cut the profit opportunities of the financial sector to a level that isn't sustainable. For a long time, institutions have made good money from the difference between long-term and short-term interest rates.That time is now over.


In 2016, Commerzbank employed more than 50,000 people. CEO Martin Zielke wants to close one-fifth of the 1,000 branches and even wants to part with an important source of income including his Polish subsidiary MBank. The workforce should be reduced to around 38,000 by the end of 2020.
The sale of Mbank is a desperate attempt at salvation.

In terms of stock market value, Deutsche Bank and Commerzbank are now loosely hanged even by more regionally active institutions from Norway and Sweden. [That is a direct translation that reads wrong but I do not know how to fix it].

Even the once proud Landesbanken is a restructuring case. This is a dangerous development.

"With the allowance, the ECB has relieved the German banks in the short term by around 500 million euros. At the same time, banks will be burdened considerably by the continuation of the low interest rates for an indefinite period, "says Peter Barkow, financial expert at Barkow Consulting. "Especially the German banks are very much dependent on income from the long-term investment of customer deposits at higher interest rates, called maturity transformation. This strategy only works very limited, "warns the expert. [The allowance refers to the ECB not charging banks a portion of the negative interest on excess reserves]


In the multi-billion loan portfolios, the institutions are losing a lot of money due to ECB policy. Accordingly, the shares of Deutsche Bank and Commerzbank have fallen in sync with the interest rate differential. How dramatic the situation is for the banks, the analysts of JP Morgan have written down.
In a 120-page analysis, JP Morgan analysts calculated what effects the ECB policy will have on the banks. They used Japan as an example. Japan has had negative interest rates for some time now and there institutions have been unable to earn anything for two decades with time. The JP Morgan analysts' conclusion: Interest margins could continue to shrink and continue to weigh on the earnings side.

"The negative interest rate policy of the ECB is ruining the financial system and is a socio-political poison," says Frank Kohler, CEO of Sparda-Bank Berlin. The financial system is absurd if we have to explain to the children that money has a negative value - and thus debt is good, because you may not have to repay everything.

Socio-Political Poison
Bingo.
Thanks to Anne Kunz and Holger Zschäpitz for an excellent article and apologies again for any translation errors I may have made.

https://www.zerohedge.com/economics/...ops+to+zero%29

Via SchiffGold.com,
Central bankers suffer from what some might call fatal conceit. They actually believe that if they tinker enough, they can come up with a policy that will work “just right.” Maybe we should call it the Goldilocks Syndrome.

But the truth is they don’t know.


Of course, the Federal Reserve and other central banks have lots of critics — President Trump for instance. After the last Fed rate cut, he blasted Powell and company on Twitter tweeting, “Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!”

Trump wants the Fed to cut deeper. Trump isn’t necessarily wrong to criticize the bank. But he appears to suffer from the same conceit as the central bankers, imagining there is a “right” policy that will make everything work.


He doesn’t know what that is either.
Peter Schiff criticizes the Fed as well. In a recent podcast, he said no matter what the central bank does, or what they call it – it’s going to stink to high heaven. The difference between Powell and critics like Trump, and Peter is that Peter doesn’t advocate for some perfect interest rate or ideal monetary policy.

Economics professor Gary M. Galles is of the same mind as Peter. As he pointed out in a recent article published at the Mises Wire, nobody knows the “correct monetary course” the Fed should follow. It’s not something that can be planned.

https://zh-prod-1cc738ca-7d3b-4a72-b...c6e67c_b_1.jpg

Jerome Powell has only been Fed chairman since last February, but he has already been initiated into the worst part of the job. Whatever the Fed does, some complain that it didn’t act sooner and/or do enough, while others complain that it acted too soon and/or did too much. The sniping also extends to every word he did or didn’t say and when he did or didn’t say it. And even the president who appointed him frequently treats him like his 2020 scapegoat-in-waiting.
When they focus on particular failings by the Fed, critics may well be correct in their objections. But they typically go farther and propose “solutions” which reflect a presumption that they know what the proper Fed policy is for whatever economic problems they see. Unfortunately, not only might their vision of the problems be faulty or incomplete, or both, but there is a huge gap between identifying monetary policy issues and knowing the right answers to them — between Fed snipers and Fed saviors.

The fact is that if we rely on discretionary monetary policy, nobody knows precisely what monetary course the Fed should follow.
The first problem facing successful discretionary stabilization or manipulation of the economy is the long and variable time lags between monetary policy changes and their effects on the economy (most often, but not always, 6 to 18 months). In addition, the lag before output and employment response tends to be shorter than the lag before prices respond, so that solving an employment problem can create a lagged inflation problem or solving an inflation problem could create a lagged employment problem. But even apart from that “solutions causing new problems” issue (or how much of monetary-policy-induced investment is really malinvestment, and the future problems that will impose), the different and varying lags mean that for Fed policy to effectively stabilize or stimulate the economy, it must focus on uncertain future output and inflation patterns, not present circumstances.

That problem is compounded by the notorious difficulty of accurately forecasting turning points in the economy, when it is most essential to read the tea leaves correctly. When things are stable, there is little which could improve that stability, so there is little need to accurately forecast when little or nothing should be done. But responding appropriately to sharp turning points in the economy requires that the right thing be done, to the right extent, at the right time. Yet earlier this year, Simon Kennedy and Peter Coy cited not just the “widespread failure to forecast America’s Great Recession,” but a marked pattern of unreliability over time and across countries. Other indicators have similar problems. For example, downturns in the most-watched forecasting tool, the index of leading indicators, have preceded recessions by half a year to two-and-a-half years since the 1950s, but did a poor job of predicting their magnitudes, and have even predicted recessions that did not happen on multiple occasions. Absent highly reliable, commonly accepted forecasts, deciding what to do and when to do it is a far cry from a reliable science. This is even more so when every other country’s future developments and policy changes (e.g., Brexit, slowing international growth and negative interest rates in some countries) must also be factored into decisions.

Active monetary policy is made even more difficult by the continually changing torrent of economic data the Fed must rely on to judge the state of the economy. That torrent includes everything from new claims for unemployment and purchasing managers’ surveys to raw materials prices and new home sales, each released at a different time, and reams of international data, as well. But every piece of data has limitations in both timeliness and accuracy (limitations that are virtually unknown to the public). Further, the data typically sends conflicting signals about the state of the economy (e.g., overall inflation and “core” inflation may be acting differently, or employment growth can be slowing while unemployment rates are falling). When no statistic is precisely right, deciding which combination of conflicting pieces of evidence provides the most accurate read this time is a task beyond our knowledge, made even harder by multiple potential interpretations of “what it all means.”

The difficulty in conducting active monetary policy “correctly” is compounded still further by the need to accurately predict how, and how quickly, the public’s expectations will respond to any policy change. The Fed needs to anticipate how its actions and its members’ statements will alter expectations about both the present and future state of the economy and the path of future policy. It also needs to take account of what will then happen to expectations as each subsequent piece of economic news, good or bad, emerges afterward. In doing so, the Fed is hampered by the fact that today’s expectations will not change exactly as in the past, because the situation is never exactly the same and because people have adapted to some extent from what has happened in the past. But no one knows how much current reactions will differ from earlier episodes.

There is always the potential for valid criticisms of active monetary policy, particularly about the necessity, timing, magnitude, and mechanisms of policy changes (including innovations, such as the introduction on interest payments on bank reserves and their effects), and how clearly the Fed’s intentions are communicated. However, in the blurry and constantly changing real world of conflicting economic indicators and forecasts, competing interests and policy surprises, activist policymakers do not know exactly what the “right” policy is today.

Neither do their activist critics, however. Yet this should not come as a surprise. As Austrian economists have recognized for decades, central planners cannot know enough to reliably achieve efficiency or whatever else they intend, and monetary policy is a form of central planning. In fact, it is an unusually pernicious form, whose interventions undermine the accuracy of particularly important prices — interest rates — and the ability of savers and investors to productively coordinate their behavior, which teaches us not to trust our current monetary policy saviors to live up to that billing, or that every monetary policy sniper qualifies as a monetary policy savior.

Combined Account Statement
Statement Period:from Jul 3, 2019 8:05:03 PM through Sep 25, 2019 12:21:06 AM
User Name:
FXCM_CANADA_FRIEDBERG


Canada
Trade account #: 03294504 Created at: Jul 3, 2019 8:05:03 PMStatus: ActiveMargin Call (as at end of statement period): NBase currency: USD

ACCOUNT SUMMARY
Beginning Balance0.00DivDividend-2,268.30RolloverRollover Fee-1,204.00PnLProfit/Loss of Trade67,245.60DeposDeposit50,000.00 Ending Balance113,773.30 Floating P/L 0.00 Equity 113,773.30 Necessary Margin0.00 Usable Margin 113,773.30

https://moneymaven.io/mishtalk/econo...7gxBCgKg816vjc

The self-described "BondFreak" noticed a shift in Fed vocabulary from "zero bound" to "effective lower bound".

Why?

Powell Ready to Cut Rates to "Effective Lower Bound" via "Conventional" Policy
A Google search for "effective lower bound" just happened to turn up my own post Powell Ready to Cut Rates to "Effective Lower Bound" via "Conventional" Policy.

Here are the pertinent statements from a speech Powell made on June 4 at a "Conference on Monetary Policy Strategy, Tools, and Communications Practices".

Emphasis is mine.

While central banks face a challenging environment today, those challenges are not entirely new. In fact, in 1999 the Federal Reserve System hosted a conference titled "Monetary Policy in a Low Inflation Environment." Conference participants discussed new challenges that were emerging after the then-recent victory over the Great Inflation. They focused on many questions posed by low inflation and, in particular, on what unconventional tools a central bank might use to support the economy if interest rates fell to what we now call the effective lower bound (ELB). Even though the Bank of Japan was grappling with the ELB as the conference met, the issue seemed remote for the United States.


The next time policy rates hit the ELB—and there will be a next time—it will not be a surprise. We are now well aware of the challenges the ELB presents, and we have the painful experience of the Global Financial Crisis and its aftermath to guide us. Our obligation to the public we serve is to take those measures now that will put us in the best position deal with our next encounter with the ELB.

The big difference between then and now is that the federal funds rate was 5.2 percent—which, to underscore the point, put the rate 20 quarter-point rate cuts away from the ELB. Since then, standard estimates of the longer-run normal or neutral rate of interest have declined between 2 and 3 percentage points, and some argue that the effective decline is even larger. The combination of lower real interest rates and low inflation translates into lower nominal rates and a much higher likelihood that rates will fall to the ELB in a downturn.

Why the shift?

I believe the answer is the Fed no longer believes zero is the ELB. So this leads to a different question.

Where the Heck is the ELB?
First, we need a definition.

What's the Definition of ELB?
Effective Lower Bound is the point beyond which further monetary policy in the same direction is counterproductive.

I propose the Bank of Japan and the ECB are already below ELB. I further propose the ELB can never be negative but it can be well above zero.


Reversal Interest Rate
I happened across an article just the other day on the ELB moving target.

Please consider The Reversal Interest Rate
The “reversal interest rate” is the rate at which accommodative monetary policy “reverses” its intended effect and becomes contractionary for the economy. It occurs when recapitalization gains from duration mismatch are more than offset by decreases in net interest margins, lowering banks’ net worth and tightening its capital constraint. The determinants of the reversal interest rates are (i) banks asset holdings with fixed (non-floating) interest payments, (ii) the strength of the constraints that they face, (iii) the degree of interest rate pass-through to deposit rates, and (iv) the initial capitalization of banks. Furthermore, quantitative easing increases the reversal interest rate and hence should only be employed after interest rate cut is exhausted. Over time the reversal interest rate creeps up, since the capital gains effect fades out as longterm bonds holdings mature while the net interest margin effect does not.


The authors propose the rate can be above or below zero but it gets higher over time especially if QE is involved.

Bank Lending Constraints
In our model, as in reality, the risk-taking ability of the banking sector is constrained by its net worth. If the latter is high enough so that the constraint does not bind, or if capital gains are strong enough to actually increase net worth, then an interest cut generates the boom in lending that the central bank seeks to induce.

However, if capital gains are too low to compensate the loss in net interest income, net worth decreases to the point where the constraint binds, limiting banks’ ability to take on risk. At that point, i.e. at the reversal interest rate, any further interest cuts generate a decline in lending though the net-worth feedback. Moreover, an interesting amplification mechanism emerges. As the negative wealth effect further tightens banks’ equity constraint, banks cut back on their credit extension and are forced to increase their safe asset holdings. As safe assets yield lower returns, banks’ profits decline even more, forcing banks to substitute out of risky loans into safe assets, which in turn lowers their profit, and so on.

Huge Failure Already
I discussed lending constraints the other day (and many time priors) in ECB's New Interest Rate Policy "As Long As It Takes" Huge Failure Already

Banks Lend Under Two Conditions

1. They are not capital impaired
2. They believe they have good credit risks

If either condition is false, then banks don't lend.

Negative interest rates did not induce either Japanese or European banks to lend.

What's Going On?
Either European banks are more capital impaired than the ECB wants everyone to believe, or banks believe there are few good credit risks worth taking.
Take your pick. I expect both are true.

Stealth Recapitalization
We then uncover the determinants of the reversal interest rate in our baseline model. The reversal interest rate depends on bank assets interest rate exposure, the tightness of financial regulation, as well as the market structure of the banking sector. If banks hold more longterm bonds and mortgages with fixed interest, the “stealth recapitalization” effect due to an interest rate cut is more pronounced, and the reversal interest rate is lower. Stricter capital requirements rise the reversal interest rate. Lower market power, which decreases profits, also generates a higher reversal interest rate. For example, in a negative interest rate environment, innovations that allow depositors to substitute bank accounts for cash more easily hurt the banks’ margins and raise the reversal interest rate; if such innovation occurs below the reversal interest rate, it directly feeds back into lower lending.

The article mentions "stealth recapitalization" of banks. I have discussed that many times recently but in a different context.

The Fed pays interest on excess reserves but the ECB charges them. Whereas the Fed gave free money to banks, the ECB charged the banks for excess reserves it forced into the system.

Negative Interest Rates Are Social Political Poison
In contrast to the authors, I do not believe negative interest rate policy can ever work as it violates basis economic principles on time preference and the time value of money.

Moreover, a dive below the ELB supports the position I presented on September 23: Negative Interest Rates Are Social Political Poison

ELB Comments

1. I like the notion of ELB, or Reversal rate if you prefer.
2. I do not believe it can ever be below zero but accept the notion it can be higher.
3. It is not fixed
4. It varies bank-by-bank and changes over time

Chasing Tail Madness
Searching for the ELB is like chasing tails.


It's only by accident can a central bank catch the tail. But even if it does catch the tail, the tail can still move. Further efforts to re-catch the tail are as likely as not to be in the wrong direction.

With that, let's return to the BondFreak's question. Why the word change?

Perhaps the Fed is aware the ECB is on the wrong course, negative rates are counterproductive, or the ELB just might be above zero.

Perhaps it's meaningless happenstance.

Deeper Down the Rabbit Hold
Yesterday, I noted Draghi Open to MMT and a People's QE

Every attempt to fix the perceived problem of "too low inflation" goes deeper and deeper down the rabbit hole.

It's economic madness, yet, here we are.

The solution is to let the free market set interest rates rather than a tail-chasing consortium of economic wizards who have never spotted a bubble or a recession in real time.


Of, course, we also need to get rid of central banks and fractional reserve lending.


Got Gold?
Unfortunately, central banks will not vote to abolish themselves. It's also certain that government efforts to take direct control of money will be even worse than the actions of central banks.

A position is gold is the best counter to monetary policy madness.

Mike "Mish" Shedlock

https://www.oftwominds.com/blog.html


Financial Storm Clouds Gather

September 24, 2019
The price of this "solution"--the undermining of the financial system--will eventually be paid in full.

The financial storm clouds are gathering, and no, I'm not talking about impeachment or the Fed and repo troubles--I'm talking about much more serious structural issues, issues that cannot possibly be fixed within the existing financial system.


Yes, I'm talking about the cost structure of our society: earned income has stagnated while costs have soared, and households have filled the widening gap with debt they cannot afford to service once the long-delayed recession grabs the economy by the throat.


Everywhere we look, we find households, enterprises and local governments barely able to keep their heads above water--in the longest expansion in recent history. This is as good as it gets, and we're only able to pay our bills by borrowing more, draining rainy-day funds or playing accounting tricks.


So what happens when earned income and tax revenues sag? Households, enterprises and local governments will be unable to pay their bills, and borrowing more will become difficult as the financial markets awaken to the re-emergence of risk: as shocking as it may be in the era of Central Bank Omnipotence, borrowers can still default and lenders can be destroyed by the resulting losses.


The era of Central Bank Omnipotence has been characterized by two things:
1. A disconnect between risk and return. Since "central banks have our backs," risk has been vanquished, and since central banks socialize losses by bailing out corporations and banks who gambled and lost, then the financial Oligarchs have been free to ignore risk since the Federal Reserve has implicitly guaranteed returns will always be secured by Fed backstops, market interventions, etc.
2. Costs have been ignored because "we're all getting richer" via asset bubbles. Your healthcare insurance just doubled in a couple of years? Forget it, Pal, that's chump change compared to the big-time gains in the value of your house and 401K stock holdings. This is the wealth effect: even as rising costs consume earned income, we ignore this financial erosion and borrow and spend more because we feel richer when we look at our home and stock valuations.
In other words, the wealth effect has been deployed to paper over the enormous structural gap between income and expenses. The wealth effect doesn't just affect households: rising real estate valuations have boosted local government tax revenues, and small businesses have been buoyed by the spending of the top 20% who own 93% of the stocks owned by households and who have seen their homes soar in value. (Note that the top 5% own 71% of the stocks; the top 10% own 84%.)



But asset bubbles always pop, and once they do, the wealth effect reverses and people feel poorer as the value of their homes and portfolios decline. They borrow and spend less, and all the capital gains that boosted local tax revenues dry up, too.


Here's reality: wages haven't kept up with expenses. This chart displays healthcare costs, but rent, higher education, childcare, etc. have similar asymmetries.
https://www.oftwominds.com/photos201...-costs2-19.jpg


Not to pick on these households, but they are representative of the enormous asymmetry between stagnant income and rising costs, and of the "solution": debt, and lots of it.

I was surprised to find such an honest account in the mainstream (i.e. cheerleader of "good news") Wall Street Journal:
Families Go Deep in Debt to Stay in the Middle Class


Wages stalled but costs haven’t, so people increasingly rent or finance what their parents might have owned outright Median household income in the U.S. was $61,372 at the end of 2017, according to the Census Bureau. When inflation is taken into account, that is just above the 1999 level. How households earning $61,000 can acquire cars costing half their gross income is a story of the financialization of the economy.


More accurately: financialization is the result of the cost structure pulling away from our ability to pay our expenses with earned income. The only way to enable costs to continue soaring far above our ability to pay them is to financialize the economy, making debt the core mechanism to pay the bills, and asset bubbles the core mechanism to create phantom collateral to support the skyrocketing debt.


Here's the problem with reducing the cost structure to levels we can actually afford: all the fat in our system is screaming that it's bone. The slightest reductions trigger titanic lobbying by whatever group of insiders or vested interests will bear the brunt of the cuts.

This leaves politicians with one easy way out: borrow enough money to satisfy the demands of every constituency, every clique of insiders and every vested interest. Rather than re-aligning costs with our ability to pay, we're going to use debt to keep all the constituencies happy.
The price of this "solution"--the undermining of the financial system--will eventually be paid in full to the detriment of everyone, including all the layers of productivity-killing fat that proclaimed themselves essential bone.



Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 ebook, $12 print, $13.08 audiobook): Read the first section for free in PDF format.


My new mystery The Adventures of the Consulting Philosopher: The Disappearance of Drake is a ridiculously affordable $1.29 (Kindle) or $8.95 (print); read the first chapters for free (PDF)
My book Money and Work Unchained is now $6.95 for the Kindle ebook and $15 for the print edition. Read the first section for free in PDF format.


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America teeters on the precipice: our government is now captive to special interests and big money, twin cancers that threaten our democracy. This accelerating crisis is exacerbated by a toxic social media-fueled tribalism that has replaced “what do you think?” with “which side are you on?”


Our crisis isn’t just political—it’s structural: as the pace of change explodes from gradual to non-linear, the organizations that dominate our economy—centralized corporations and government—become destined to fail. We see this failure in both the soaring inequality that has hollowed out the American Dream as well as in the rising tide of social and political disunity.


To prevent the fall of our democratic republic, we must transform our economy and society from the ground up. As we enter a new era of rapid, unprecedented tumult, it is we citizens who will need to save our democracy. For our political and financial elites will cling to their centralized power, doing more of what’s failed, even as civil society unravels.


All is not lost--yet. Our way forward starts with understanding the fatal flaws of our brittle, self-serving status quo and embracing this basic truth: better options are available if we’re willing to explore.


To pathfind our way to a better destiny, we must create new localized structures optimized for resilience and adaptability—a flexible, decentralized, sustainable, democratic, opportunity-for-all nation.

https://www.zerohedge.com/crypto/day...ops+to+zero%29

Authored by Scott Melker via CoinTelegraph.com,
Almost all traders are aware of the widely publicized statistic that “95% of traders lose money.” When you drill deeper, research implies that this number is likely higher. The profession chews up and spits out aspiring traders at an astounding rate.
So why are so many intelligent people drawn to a profession with incredibly high odds of failure?

https://zh-prod-1cc738ca-7d3b-4a72-b...25_6-53-24.jpg
image courtesy of CoinTelegraph


6 striking stats showing traders have it rough
There are the obvious reasons — the appeal of working for yourself, sitting in your underwear on your couch all day making millions. There’s the (false) promise of “easy money” and the draw of independent wealth.
The truth is, day trading is extremely difficult, emotionally taxing and far more likely to destroy your life than enrich it.
Let’s start with a few key statistics, from online educational resource Tradeciety:

1. 80% of all day traders quit within the first two years;
2. Among all day traders, nearly 40% day trade for only one month;
3. Within three years, only 13% continue to day trade. After five years, only 7% remain;
4. The average individual investor underperforms a market index by 1.5% per year;
5. Active traders underperform by 6.5% annually;
6. Traders with up to a 10 years negative track record continue to trade.

The last point suggests that day traders even continue to trade when they receive a negative signal regarding their ability.
Astounding. Almost everyone loses, they lose fast, they underperform simple, mindless investments, and they continue trading even after being proven unprofitable. Why?


The truth is, most would-be traders are woefully underprepared for the challenge ahead and learn many hard lessons with their real money. They underestimate the psychological challenges of trading and fail to eliminate emotion from their trades.

They fail to trade with a defined system. When they have a defined system, they often take trades outside of their own, established rules. These are all obvious reasons.

What is “random reinforcement”?

Perhaps a less notable reason that traders fail is the principle of “random reinforcement.” This concept also explains why they often continue trading, even after failing repeatedly. As defined by Investopedia, “Random Reinforcement” is:
Using arbitrary events to qualify (or disqualify) a hypothesis or idea; attributing skill or lack of skill to an outcome that is unsystematic in nature; finding support for positive or negative behaviors from outcomes that are inconsistent in nature—like the financial markets.
The market has a tendency to reward bad habits, while concurrently punishing positive behaviors, especially with a small sample set. Let’s take a theoretical example to display this principal.


Bob wants to leave his job and become a crypto trader. He sets aside some starting capital, follows the markets and the “big names” on twitter. He sees them talking about an altcoin, opens the chart and sees that price is rising fast. He buys, goes to take a shower, returns and sells for a quick profit. He does this again before lunch and strings together a few successful trades. Bob starts to feel confident that he is a talented trader.

So what is the problem? Bob is trading without a system or a plan and is being fooled into believing that a successful outcome on a few random trades is indicative of likely success moving forward. The market has rewarded his bad behavior. We know how this story ends — Bob continues to make impulsive trades and eventually loses his capital.


There is a flip side to this coin. Let’s say that Bob learns his lesson and spends months developing a trading plan, complete with risk management, proper portfolio allocations and trading rules.

He identifies a trading opportunity that fits, takes the perfect entry and… stops out of his trade. He tries again. And again. He loses 7 times in a row. The market is punishing Bob for his good behavior. Bob starts to doubt his system and takes a high-risk trade that violates his system — and is successful. To his surprise, he tries this a second time and also makes money. Bob is now back to square one, trading without a system because the market has rewarded his bad behavior.


Through random reinforcement, the market has re-conditioned the way Bob approaches trading by distracting him away from his trading plan. He has allowed himself to be manipulated into an impulsive, high risk, revenge based trading approach.


Everyone was a genius in 2017

The concept of random reinforcement was never more evident than in the crypto bubble of 2017. During this parabolic bull market, it was easy to mistake luck for skill.

Amateur traders were making money hand over foot by simply throwing cash into random altcoins and selling after massive, immediate gains. Everyone was a “genius” in the 2017 crypto market. Then 2018 happened — the bubble popped, and these amateur traders were ill-prepared to deal with the drawdown. They failed to sell their assets and held blindly until they had lost everything.

Understanding that markets are dynamic and in constant flux is key to being profitable. A trader must learn to be able to determine when a certain string of losses or profits can be attributed to their skill and when it is random. This is done by trading with a defined plan over a long period of time.
Every trader should have a well developed and tested (through paper trading) plan, with written rules for entries, exits and stop losses, position sizing and risk. They should NEVER trade outside their plan.

Bitcoin trading: sticking to your plan

No more than 1% of a trader’s portfolio should be at risk on any single trade — this is the key to sustaining multiple, consecutive losses. They should test and tweak their plan over a long period of time — hundreds of trades. A good system gives a trader an edge over a long time frame because randomness becomes less of a factor with a larger sample.

A good trade should be defined as one where a trader planned their trade, traded their plan and managed their risk — those are all elements they can control.

It is NOT defined by the outcome.

A bad trade, on the other hand, is where a trader fails to follow their rules and executes trades against their better judgment. This is always going to be a bad trade even if it happens to be profitable.

By developing a well-tested plan, traders can overcome the pitfalls of random reinforcement, eliminate emotion and impulse, and learn to be profitable. That’s how you become a part of the 5% that make it as traders.

i wish if i could see “screen shots” of your live trading account