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Who’s Being Naïve, Kay?

All great literature is one of two stories: a man goes on a journey or a stranger comes to town. – Leo Tolstoy (1826 – 1910) Satan: Dream other dreams, and better! – Mark Twain, “The Mysterious Stranger” (c. 1900) Twain spent 11 years writing his final novel, “The Mysterious Stranger”, but never finished it. The book exists in three large fragments and is Twain’s darkest and least funny work. It’s also my personal favorite. Stanley Moon: I thought you were called Lucifer. George Spiggott: I know. “The Bringer of the Light” it used to be. Sounded a bit poofy to me. George Spiggott: Everything I’ve ever told you has been a lie. Including that. Stanley Moon: Including what? George Spiggott: That everything I’ve ever told has been a lie. That’s not true. Stanley Moon: I don’t know WHAT to believe. George Spiggott: Not me, Stanley, believe me! – “Bedazzled” (1967) A must-see movie, and I don’t mean the 2000 abomination with Brendan Fraser, but the genius 1967 version by Peter Cook and Dudley Moore. Plus Raquel Welch as Lust. Yes, please. Harold Hill: Ladies and gentlemen, either you are closing your eyes to a situation you do not wish to acknowledge, or you are not aware of the caliber of disaster indicated by the presence of a pool table in your community! – “The Music Man” (1962) The Pied Piper legend, originally a horrific tale of murder, finds its source in the earliest written records of the German town of Hamelin (1384), reading simply “it is 100 years since our children left.” Wade Wilson: I had another Liam Neeson nightmare. I kidnapped his daughter and he just wasn’t having it. They made three of those movies. At some point you have to wonder if he’s just a bad parent. – “Deadpool” (2016) Shape clay into a vessel; It is the space within that makes it useful. Cut doors and windows for a room; It is the holes which make it useful. Therefore benefit comes from what is there; Usefulness from what is not there. – Lao Tzu (c. 530 BC) It’s like trying to find gold in a silver mine It’s like trying to drink whiskey from a bottle of wine – Elton John and Bernie Taupin, “Honky Cat” (1972) Michael : My father is no different than any powerful man, any man with power, like a president or senator. Kay Adams : Do you know how naïve you sound, Michael? Presidents and senators don’t have men killed. Michael : Oh. Who’s being naïve, Kay? – “The Godfather” (1972) As Tolstoy famously said, there are only two stories in all of literature: either a man goes on a journey, or a stranger comes to town. Of the two, we are far more familiar and comfortable with the first in the world of markets and investing, because it’s the subjectively perceived narrative of our individual lives. We learn. We experience. We overcome adversity. We get better. Or so we tell ourselves. But when the story of our investment age is told many years from now, it won’t be remembered as a Hero’s Journey, but as a classic tale of a Mysterious Stranger. It’s a story as old as humanity itself, and it always ends with the same realization by the Stranger’s foil: what was I thinking when I signed that contract or fell for that line? Why was I so naïve? The Mysterious Stranger today, of course, is not a single person but is the central banking Mafia apparatus in the US, Europe, Japan, and China. The leaders of these central banks may not be as charismatic as Robert Preston in The Music Man , but they hold us investors in equal rapture. The Music Man uses communication policy and forward guidance to get the good folks of River City to buy band instruments. Central bankers use communication policy and forward guidance to get investors large and small to buy financial assets. It’s a difference in degree and scale, not in kind. The Mysterious Stranger is NOT a simple or single-dimensional fraud. No, the Mysterious Stranger is a liar, to be sure, but he’s a proper villain, as the Brits would say, and typically he’s quite upfront about his goals and his use of clever words to accomplish those goals. I mean, it’s not like Kay doesn’t know what she’s getting herself into when she marries into the Corleone family. Michael is crystal clear with her, right from the start. But she wants to believe so badly in what Michael is telling her when he suddenly reappears in her life, that she suspends her disbelief in his words and embraces the Narrative of legitimacy he presents. I think Michael actually believed his own words, too, that he would in fact be able to move the Family out of organized crime entirely, just as I’m sure that Yellen believed her own words of tightening and light-at-the-end-of-the-tunnel in the summer of 2014. Ah, well. Events doth make liars of us all. Draw your own comparisons to this story arc of The Godfather , with investors playing the role of Kay and the Fed playing the role of Michael Corleone. I think it’s a pretty neat fit. It ends poorly for Kay, of course (and not so great for Michael). Let’s see if we can avoid her fate. But like Kay, for now we are married to the Mob … err, I mean, the Fed and competitive monetary policies, as reflected in the relative value of the dollar and other currencies. The cold hard fact is that since the summer of 2014 there has been a powerful negative correlation between the trade-weighted dollar and oil, between the trade-weighted dollar and emerging markets, and between the trade-weighted dollar and industrial, manufacturing, and energy stocks. Here’s an example near and dear to the hearts of any energy investor, the trade-weighted dollar shown in green versus the inverted Alerian MLP index (AMZ), a set of 43 midstream energy companies, principally pipelines and infrastructure, shown in blue. Click to enlarge © Bloomberg Finance L.P. as of 05/02/2016. For illustrative purposes only. Past performance does not guarantee future results. This is a -94% correlation, remarkably strong for any two securities, much less two – pipelines and the dollar – that are not obviously connected in any fundamental or real economy sort of way. But this is always what happens when the Mysterious Stranger comes to town: our traditional behavioral rules (i.e., correlations) go out the window and are replaced with new behavioral rules and correlations as we give ourselves over to his smooth words and promises. Because that’s what a Mysterious Stranger DOES – tell compelling stories, stories that stick fast to whatever it is in our collective brains that craves Narrative and Belief. There’s nothing particularly new about this phenomenon in markets, as there have always been “story stocks”, especially in the technology, media, and telecom (TMT) sector where you have more than your fair share of charismatic management storytellers and valuation multiples that depend on their efforts. My favorite example of a “story stock” is Salesforce.com (NYSE: CRM ), a $55 billion market cap technology company with 19,000 employees and about $6.5 billion in revenues. I’m pretty sure that Salesforce.com has never had a single penny of GAAP earnings in its existence (in FY 2016 the company lost $0.07 per share on a GAAP basis). Instead, the company is valued on the basis of non-GAAP earnings, but even there it trades at about an 80x multiple (!) of FY 2017 company guidance of $1.00 per share. Salesforce.com is blessed with a master story-teller in its CEO, Marc Benioff, who – if you’ve ever heard him speak – puts forth a pretty compelling case for why his company should be valued on the basis of bookings growth and other such metrics. Of course, the skeptic in me might note that it is perhaps no great feat to sell more and more of a software service at a loss, particularly when your salespeople are compensated on bookings growth, and the cynic in me might also note that for the past 10+ years Benioff has sold between 12,500 and 20,000 shares of CRM stock every day through a series of 10b5-1 programs. But hey, that’s why he’s the multi-billionaire (and a liquid multi-billionaire, to boot) and I’m not. Here’s the 5-year chart for CRM: Click to enlarge © Bloomberg Finance L.P. as of 05/20/2016. For illustrative purposes only. Past performance does not guarantee future results. Not bad. Up 138% over the past five years. A few ups and downs, particularly here at the start of 2016, although the stock has certainly come roaring back. But when you dig a little deeper… There are 1,272 trading days that comprise this 5-year chart. 21 of those trading days, less than 2% of the total, represent the Thursday after Salesforce.com reports quarterly earnings (always on a Wednesday after the market close). If you take out those 21 trading days, Salesforce.com stock is up only 35% over the past five years. How does this work? What’s the causal process? Every Wednesday night after the earnings release, for the past umpteen years, Benioff appears on Mad Money , where Cramer’s verdict is always an enthusiastic “Buy, buy, buy!” Every Thursday morning after the earnings release, the two or three sell-side analyst “axes” on the stock publish their glowing assessment of the quarterly results before trading begins. It’s not that every investor on Thursday believes what Cramer or the sell-side analysts are saying, particularly anyone who’s short the stock (CRM always has a high short interest). But in a perfect example of the Common Knowledge Game , if you ARE short the stock, you know that everyone else has heard what Cramer and the sell-side analysts (the Missionaries, in game theory lingo) have said, and you have to assume that everyone else will act on this Common Knowledge (what everyone knows that everyone knows). The only logical thing for you to do is cover your short before everyone else covers their short, resulting in a classic short squeeze and a big up day. Now to be sure, this isn’t the story of every earnings announcement…sometimes even Marc Benioff and his lackeys can’t turn a pig’s ear of a quarter into a silk purse…but it’s an incredibly consistent behavioral result over time and one of the best examples I know of the Common Knowledge Game in action. But wait, there’s more. Now let’s add the Fed’s storytelling and its Common Knowledge Game to Benioff’s storytelling and his Common Knowledge Game. Over the past five years there have been 43 days where the FOMC made a formal statement. If you owned Salesforce.com stock for only the 43 FOMC announcement days and the 21 earnings announcement days over the past five years, you would be UP 167%. If you owned Salesforce.com stock for the other 1,208 trading days, you would be DOWN 8%. Click to enlarge Okay, Ben, how about other stocks? How about entire indices? Well, let’s look again at that Alerian MLP index. Over the past five years, if you had owned the AMZ for only the 43 FOMC announcement days over that span, you would be UP 28%. If you owned it for the other 1,229 trading days you would be DOWN 39%. Over the past two years, if you had owned the AMZ for only the 16 FOMC announcement days over that span, you would be UP 18%. If you owned it for the other 487 trading days you would be DOWN 48%. Addition by subtraction to a degree that would make Lao Tzu proud. Click to enlarge I’ll repeat what I wrote in Optical Illusion / Optical Reality …it’s hard to believe that MLP investors should be paying a lot more attention to G-7 meetings and reading the Fed governor tea leaves than to gas field depletion schedules and rig counts, but I gotta call ‘em like I see ‘em. In fact, if there’s a core sub-text to Epsilon Theory it’s this: call things by their proper names . That’s a profoundly subversive act. Maybe the only subversive act that really changes things. So here goes. Today there are vast swaths of the market, like emerging markets and commodity markets and industrial/energy stocks, that we should call by their proper name: a derivative expression of FOMC policy . Used to be that only tech stocks were “story stocks”. Today, almost all stocks are “story stocks”, and the Common Knowledge Game is more applicable to helping us understand market behaviors and price action than ever before. You see this phenomenon clearly in the entire S&P 500, as well, although not as starkly with a complete plus/minus reversal in performance between FOMC announcement days and all other days. Over the past five years, if you had owned the SPX for only the 43 FOMC announcement days over that span, you would be UP 17%. If you owned it for the other 1,229 trading days you would be UP 28%. Over the past two years, if you had owned the SPX for only the 16 FOMC announcement days over that span, you would be UP 5%. If you owned it for the other 487 trading days you would be UP 2%. Click to enlarge What do I take from eyeballing these charts? The Narrative effect and the impact of the Common Knowledge Game have accelerated over the past two years (ever since Draghi and Yellen launched the Great Monetary Policy Schism of June 2014); they’re particularly impactful during periods when stock prices are otherwise declining, and they’re spreading to broader equity indices. That’s what it looks like to me, at least. So what does an investor do with these observations? Two things, I think, one a practical course of action and one a shift in perspective. The former being more fun but the latter more important. First, there really is a viable research program here, and what I’ve tried to show in this brief note is that there really are practical implementations of the Common Knowledge Game that can support investment strategies dealing with story stocks. I want to encourage anyone who’s intrigued by this research program to take the data baton and try this on your favorite stock or mutual fund or index. You can get the FOMC announcement dates straight from the Federal Reserve website . This doesn’t require an advanced degree in econometrics to explore. I don’t know where this research program ends up, but it’s my commitment to do this in plain sight through Epsilon Theory . Think of it as the equivalent of open source software development, just in the investment world. I suspect it’s hard to turn the Common Knowledge Game into a standalone investment strategy because you’re promising that you’ll do absolutely nothing for 98 out of 100 trading days. Good luck raising money on that. But it’s a great perspective to add to our current standalone strategies, especially actively managed funds . Stock-pickers today are being dealt one dull, low-conviction hand after another here in the Grand Central Bank Casino, and the hardest thing in the world for any smart investor, regardless of strategy, is to sit on his hands and do nothing , even though that’s almost always the right thing to do . Incorporating an awareness of the Common Knowledge Game and its highly punctuated impact makes it easier to do the right thing – usually nothing – in our current investment strategies. And that gets us to the second take-away from this note. The most important thing to know about any Mysterious Stranger story is that the Stranger is the protagonist. There is no Hero! When you meet a Mysterious Stranger, your goal should be simple: survive the encounter. This is an insanely difficult perspective to adopt, that we (either individually or collectively) are not the protagonist of the investing age in which we live. It’s difficult because we are creatures of ego. We all star in our own personal movie and we all hear the anthems of our own personal soundtrack. But the Mysterious Stranger is not an obstacle to be heroically overcome, as if we were Liam Neeson setting off (again! and again!) to rescue a kidnapped daughter in yet another “Taken” sequel. At some point this sort of heroism is just a reflection of bad parenting in the case of Liam Neeson, and a reflection of bad investing in the case of stock pickers and other clingers to the correlations and investment meanings of yesterday. The correlations and investment meanings of today are inextricably entwined with central bankers and their storytelling. To be investment survivors in the low-return and policy-controlled world of the Silver Age of the Central Banker , we need to recognize the impact of their words and incorporate that into our existing investment strategies, while never accepting those words naïvely in our hearts.

Portfolio Construction In The Age Of Extraordinary Monetary Policy: Part I

Why This Series? This will be the beginning of a multi-article series that seeks to assess the Fed’s monetary policy and its effect on markets, and thus how we should invest going forward. My objective in writing this series is to make the case for why the traditional models of asset allocation will not provide the same results going forward as they have in the past, and thus a new approach is necessary. I form this conclusion by analyzing the data, and exploring the economic environment that investors find themselves in, as well as the unprecedented level of global central bank action and how this will affect the process of portfolio construction to meet the goals of the future. The series will have a particular focus on engineering the best portfolio possible by incorporating cutting edge academic research into the portfolio construction process. The series will consist of five pieces which together represent an in-depth discussion about the Fed, the economy, and how to invest in the new normal. The 2008 Financial Crisis and The Fed’s Response The 2008 financial crisis was the worst since the Great Depression of 1929, and by some measures, it was worse. In 2008, the S&P 500 fell by over 37.02% as the financial crisis took hold, figures four, five, and six below illustrate the take no prisoners effect of a violent market drop. The crisis was caused by a combination of government induced lending to unqualified borrowers, brought on by the community reinvestment act (12 U.S.C. 2901), as well as Wall Street speculation on real estate prices. Wall Street banks packaged Mortgage Backed Securities (MBS) rated AAA with subprime debt in various groups called tranches. These tranches of debt, then went bad when the subprime loans were deemed worthless. Wall Street packaged Collateralized Debt Obligations (CDO), which are pools of securities packaged together for sale to investors. The senior tranches of this debt are generally safer and have higher credit quality, while junior tranches are generally made up of riskier securities with higher yields. The challenge during the crisis was that Wall Street was packaging these CDOs with more and more risky debt and less and less of the AAA debt. On top of this, they created securities known as Synthetic CDOs, which use derivatives and other securities to obtain their investment goals without owning the assets of a CDO. The following chart depicts the creation of a Synthetic CDO in detail. Source: Financial Crisis Inquiry Commission When these junior tranches went bad, the House of Cards came down and brought trillions in consumer real estate and equity market wealth with it. Banks were most seriously hit with billions in worthless securities on the books. In response, the government took action to combine failing banks to create even larger financial institutions, and initiated new regulations under Dodd-Frank. The reality, however, is that this bill does little to increase the safety of our financial institutions, and only provides the illusion of safety with increased capital requirements. A Quantitative Analysis of Risk In conducting a quantitative analysis of the risks within financial services firms, there are multiple avenues to be considered. In terms of fair value accounting, IFRS 13 and FASB 157 are the two methodological statements for application. As we are going to focus the analysis on U.S. banks, I will limit the scope of this writing to U.S. GAAP application, and leave concerns from IFRS out of the discussion. Currently, U.S. GAAP only requires netting of derivatives exposure, providing investors with only a part of the overall exposure of any financial institution. Two additional pieces are required to more accurately understand the risks from derivative securities. First is the PFE, the potential future exposure, largely calculated through counter party risk. The second piece is the CVA (Credit Value Adjustment), this adjusts for the deterioration in credit quality of counter parties. It is important to note, however, that the CVA has no standardized method of calculation, adding another layer of uncertainty in arriving at a dependable quantifiable value of the derivatives exposure. (For additional exploration-Ernst & Young laid out this point well in this piece .) One additional layer of exposure is found in the Level 3 section of the valuation hierarchy. According to FASB 157, assets can be valued according to a hierarchy. Level 1 represents securities where readily available markets are available, and thus observable pricing exists. Level 2 are securities where inputs are observable either directly or indirectly, such as in markets that are thinly traded or where observable inputs can be estimated based on the prices of similar assets. Level 3 assets are assets where no observable market prices are available. In such a scenario, banks are allowed to use various methodologies to determine the prices of these assets. In my opinion, the challenge with these Level 3 values is that they are given a certain value simply because the banks say that is what they are worth. With no observable inputs, it is hard to put much confidence in the stated prices of these assets without a more dependable model for price discovery. It is important to note that the challenges with Level 3 assets extend beyond the world of bank balance sheets. The May 4, 2015 issue of Barron’s includes a very interesting exploration of the subject on page 31, as it relates to bond mutual fund financial statements. The article discusses a specific fund currently under investigation, but also deals with the issues of Level 3 securities on the books of many mutual funds. The story quotes the independent auditor of the specific fund in question in its most recent annual report as stating the following in relation to Level 3 assets: “These estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.” The article also warns investors that during a crisis many assets classified as Level 2 can quickly become Level 3. I would echo this view in relation to bank balance sheets, as we learned during 2008 many of these arcane securities buried deep within bank balance sheets may carry a material variance between stated value and real market value.” Analyzing Level 3 in the Largest Banks Bank of America (NYSE: BAC ) As you can see from this analysis from page 241 of Bank of America’s annual report (2014), Level 3 assets represent 3.37% of the total assets after netting. The company is holding over 1,592,332M in total Level 1, 2, and 3 assets before netting with Level 2 making up 86.7%. I give BAC management a great deal of credit for maintaining a low value of Level 3 assets, but I believe the high value of Level 2 assets may expose investors to unquantifiable, and possibly material risks, in a financial crisis as there is no way of knowing how much of Level 2 would become Level 3 in such a scenario. Additionally, according to the OCC’s Quarterly Report on Bank Trading and Derivatives Activities for the 4th quarter of 2014 , BAC had total credit to capital exposure of 93%, and 85% as of the fourth quarter of 2015. Wells Fargo (NYSE: WFC ) Note 17 and Table 65 of the 2014 Annual Report, illustrates an exposure of 2% for investors to Level 3 securities. WFC is holding the majority of its assets at level 2, representing 94% of assets after netting. Additionally, according to the 4th quarter OCC report on Bank Trading and Derivatives Activities, WFC has total credit to capital of 22%, and 31% for the fourth quarter of 2015. JPMorgan Chase (NYSE: JPM ) Page 163 of the Annual Report indicates total Level 3 assets as a percentage of total assets measured at fair value of over 7.2%, which appears to be rather high when compared to peers. Additionally, according to the 4th quarter OCC report on Bank Trading and Derivatives Activities, JPM has total credit to capital of 177%, and 209% for the fourth quarter 2015. Note 3 of JPM’s annual report lays out the detail for fair value accounting for the firm. Citigroup (NYSE: C ) Page 262 of the 2014 Annual Report shows total Level 3 exposure of 2.42%. Additionally, Citi had a credit to capital ratio in 2014 of 172%, and 166% in the fourth quarter of 2015. Before netting exposure, Citi is holding close to a trillion dollars in derivatives at $892,760M. After netting of $824,803M occurs, this number is reduced to $67,957M, and this total includes Levels 1, 2, and 3 securities. The total Level 3 exposure after netting is $11,269M which is 16.58% of the net exposure of $67,957M, and 2.42% of total investments in Levels 1, 2, and 3 of $302,901M. What would be worrisome to me if I were a Citi shareholder is that the vast majority of the assets in the hierarchy are recorded in Level 2. The question is how much of Level 2 would become Level 3 in a crisis? It is important to note that many of these risks are mainly material to the investment thesis if we were to have another financial crisis. Level 3 assets are not a day-to-day concern for investors, generally speaking. That being said, they would be material should another crisis befall us. As nothing has been done to address the root cause of too big to fail, we now have larger financial institutions with more complex securities on the books, and another financial crisis may be inevitable. The Fed Response to the Crisis The Federal Reserve acted quickly instituting, what could be best characterized as an unprecedented experiment in monetary policy. The Fed put these extraordinary monetary policy measures in place to unfreeze markets and induce risk taking in the economy. They did this by implementing a combination of Large Scale Asset Purchases (LSAP) as well as Zero Interest Rate Policy (ZIRP). The combination of these policies were introduced to drive down the risk premium for long-term bonds (BRP), and drive up the risk premium for equities (ERP). While Ben Bernanke , the Fed Chair at the time defends his actions in monetary policy, the effects of these policies, which I will explore in the next article, are muddled at best and a down right failure at worst. The Fed’s objective in instituting this monetary policy was to drive up the prices of equity securities with the hopes of creating a real wealth effect. At the same time, the Fed hoped to induce risk taking in the real economy by driving down interest rates. The idea was that the two-fold effect of driving down interest rates to the zero lower bound, and inducing a rising equity market would allow us to avoid the negative effects of the great depression. But many question whether this was simply a mechanism to delay rather than avoid the worst of the financial crisis. In part II, we will discuss the implications of these policies on asset prices. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: This article is for informational purposes only and is not an offer to buy or sell any security. It is not intended to be financial advice, and it is not financial advice. Before acting on any information contained herein, be sure to consult your own financial advisor.

5 Simple Trading Lessons From Hell’s Kitchen

By John Benjamin Hell’s Kitchen, one of Chef Gordon Ramsay’s many reality TV shows is quite an entertaining show to watch. Chefs face off to win a grand prize of running their own restaurants at the end. However, the path to success isn’t easy as the contestants are truly put to hell. From having to deal with their peers to putting their differences aside and working as a team, Hell’s Kitchen simply draws the viewer into it. However, this article isn’t a review about Hell’s Kitchen, but rather the lessons a viewer can take away from it. From a trading perspective, there are quite some interesting nuggets of wisdom that can truly help you to become a better a trader. Here are the five biggest lessons that stand out however. 1. Never lose focus Starting from the first episode to the end, a common recurring theme in Hell’s Kitchen is the fact that contents that are the most focused and have their eyes fixed on the prize are the ones who often end up on the tops. There is a bit of luck involved too. But isn’t that the case anywhere? For traders, staying focused on their goals is what determines the best from the rest. There are ups and downs, but that doesn’t mean you have to give up because you hit a losing streak. In Hell’s Kitchen, some of the top chefs hit rock bottom, often coming close to being eliminated. However, some of them manage to bounce back simply through sheer determination and focus to come out on the tops. Never lose focus 2. Preparation is important The main event in every episode of Hell’s Kitchen is the grand service that is put out. This is often a time of high pressure and shows Gordon Ramsay at his very best, swearing at the contestants and going nuts. It is a recurring theme to find contestants either running out of ingredients or failing to have a backup plan. It does sound a bit familiar in the trading world doesn’t it? In the heat of trading, the stress a trader goes through is no different. However, the preparation that one needs to do ahead of trading is very important. Do you take time out to analyze the charts or understand the main driving themes for the day? Do you really have a plan of attack? Always prepare yourself before you start trading. Get to know the markets and what’s driving them 3. Constant learning Another impressive feat from the Hell’s Kitchen winners is the fact that it is not your education or your experience that matters. There have been winners on the show who were not even professional chefs to begin with. What they lack as experience or education is made up by the zeal to learn and improve on their weaknesses. For traders, this is a very important lesson. Learning doesn’t necessarily mean having to buy tons of books and read through them all. Lessons can be found anywhere. From a losing trade to a winning trade, you only need to know where to look. Some of the most successful traders often ensure that they always learn something from a losing trade and most importantly, ensure that they don’t repeat it again. The constant loop of feedback and learning ensures that you overcome your weakness over time. 4. Strategize Every episode of Hell’s Kitchen concludes with a best performer of the evening having to put up two contestants on the hot seat for elimination. Quite often you will come across contestants being put up for elimination in a strategic way. Eliminating the biggest competitor and moving one step closer to the goal. While this works, there are also instances where the strategy backfires, such as the competition being put up for elimination quite early on. An important lesson for traders is strategy and timing. You can have a great strategy, but if you miss out on the timing it can backfire. A great example is where you find a nice reversal candlestick pattern on the charts and you execute it. However, pullbacks can be frustrating. Without correct timing to execute your strategy you could end up under water for quite a while. While strategy is important, timing also plays a crucial role when it comes to your trading plan 5. Consistency is key! Finally, a recurring theme among the winners of Hell’s Kitchen is their consistency to keep up their performance and standards. There are many contestants on Hell’s Kitchen who start with a bang but soon fizzle out under pressure. Likewise, there are contestants who start off weak but manage to rise to the challenge only to peak out and get eliminated. Staying consistent is one of the key aspects for trading as well. Almost any trader at some point has had a winning trade, but if you are not consistent in your trading chances are that you will simply peak out at some point. Consistency is not about having a winning streak; it is all about how well you can trade according to your plan. For traders, consistency plays a big role in the longer term success of your trading. The better you are at consistently churning out winners, the more the chances of you staying in the trading game for the long term. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.