May your new year be filled with profits and a lack of bureaucracy.

From my Little Book of Trading:

Even though he loved his job in the markets, Dave Druz soon entered medical school to hedge his bets. Yet he still took his vacations at the brokerage firm–working. Medicine was interesting to him, but he was 100 percent fascinated with the markets. Did he have lots of money? No. The only money he had was $5,000 in stock that his father had given him. Druz cashed that out and put it into his account. At that same time the brokerage firm offered him a job, a full time job to quit medical school and go work for them. They offered Druz $50,000 to start. That was really good money in the 1970s. A slightly drunk friend told him, “Dave, don’t take that job. You can be a really good trader, but if you take that job, you’ll never be a great trader. You’ve got to get a nest egg for security. You don’t want to trade with scared money. Finish medical school, be a doctor, and then you’ll be a great trader.” Does that make sense to you? Maybe not at first blush, but it was the wisest piece of information anyone ever told Druz. He has since seen many people over the years trading with scared money–meaning they would make decisions on the value of the money to them (read: emotional decisions about a new car, suit, or wife), and not follow the exact rules of their trading plan. “Don’t quit your day job” is another critical success lesson–write it down and tape it over your desk. Druz took his $5,000 and started to trade. He wasn’t very good at first, and his account dropped down to around $1,500. At that point he had hit rock bottom and trading success was beginning to move out of sight. He then received a message from his brokerage firm, “You got a fill on your trade.” Druz said, “I don’t have any orders in. I’m out of business.” The brokerage replied, “No, you had a ‘Good Til Cancelled’ order (GTC) in and it is ‘limit up’.” Druz was back in business! The universe apparently would not allow him to quit—he truly believed that. You too might think sometimes, “If I only had one more chance,” but when the next opportunity or chance does come around again you have to be willing to get in the game and play again—without thinking about your negative first experience. Second chances are telling you something. Heed their advice.

Nice.

Some random happy reading across my desk today:

A Doomsday View of 2012
Things That Make You Go Hmm, Such As Looking Back At The Key Events Of… 2012
A Strategic Alpha Preview Of 2012: Hope And Expectations

Finally, Richard Russell offers:

At the close of the market on Dec. 23, Lowry’s Buying Power Index stood at 262 and their Selling Pressure Index stood at 434. This means that Selling pressure (supply) was 172 points above Buying Power (demand).

This is the posture of a bear market and not a bull market. It means that any sudden drop in Buying Power or a sudden rise in Selling Pressure can send the stock market spiraling down almost without notice. In other words, this market is walking on a tight rope and is in dangerous territory.

The news is now so confused and mixed that it is of little help to fundamentalists who trade on the news. Today, fundamentalists not only have to read and analyze events in the US, but they also have to keep an eye on both Europe and Asia. Moreover, as I’ve often said, markets don’t trade on today’s news, they trade on what the best minds see for tomorrow and next month or even next year.

Therefore, the intelligent position is to analyze the action of the market itself, rather than invest on the basis of news, and the market’s supposed reaction to the news.

The public is further misled since every move of the Dow is attributed to something that has occurred in the news. Example: “The Dow was up today as it reacted to improving auto sales.” Or “The market backed off today on disappointing forecasts concerning after-holiday retail sales.” Or “The market closed on a brighter note as Ford reinstated its dividend after five non-dividend years.”

Hovering over the whole picture is the dismal fact that the dividend yield on the Dow is now a lowly 2.59%. Anything below 3% is a caution signal that should not be ignored.

Gosh, I hope the upcoming year is not so morose, but let’s sure hope big trends abound!

From Charles Hugh Smith from ‘Of Two Minds’:

I have devoted significant portions of my books Survival+ and An Unconventional Guide to Investing in Troubled Times to an explanation of how community and self-reliance have atrophied under the relentless expansion of the dominant Savior State.

The social capital and “return on investment” earned from investing time and energy in community and other social networks has been replaced by a check from the Savior State–a transfer payment that surely beats the troublesome work of investing in community in terms of risk and return.

The net result of the Savior State dominating society and the economy is the rise of a pathological mindset of entitlement and resentment–the two are simply two sides of the same coin. You cannot separate them.

Once self-reliance has been lost, so too has self-confidence been lost, and the Savior State dependent–individual and corporation alike–soon distrusts their ability to function in an open market.

This is a truly sad, self-destructive state of affairs, and deeply, tragically ironic. The calls for “help” quickly lead to dependence on the Savior State, and that dependence quickly breeds complicity and silence in the face of repression and predation by the State and its corporate partners.

In a very real sense, citizens relinquish their citizenship along with their self-reliance and self-worth once they accept dependence on the State.

I often mention that the U.S. has much to learn from so-called Third World countries that are poorer in resources and credit. In many of these countries, the government is the police, the school and the infrastructure of roadways and energy. Many of these countries are systemically corrupt, and the State is the engine of enforcing that corruption.

Rather than something to be embraced and lobbied, involvement with the State is something to be avoided as a risk. In everyday life, people rarely encounter the government except in law enforcement or schooling.

As a result, people depend on their social capital and community for sustenance, support, work and connections.

This is not altruism, it is mutually beneficial.

Once a community dissolves into atomized individuals who each get a payment from the Central State, then they no longer need each other. Rather, other dependents on the State are viewed as competitors for the State’s resources.

These atomized, isolated individuals have a perverse relationship with the State and what remains of the community around them: lacking the self-worth earned from work or engagement/investment in a community, then their only outlet for self-identity is consumption: what they wear, eat, drink, etc. as consumers.

This dependence on the State also serves the State’s goal, which is a passive, compliant populace of dependents, and distracted, passive workers who pay their taxes. Thus dependence on the State and a hollow consumerism are ontologically bound: one feeds the other.

The era of debt-based consumption as the engine of “growth” and “prosperity” is coming to an end. Adding debt via credit no longer creates growth; it actually takes away from the economy by expanding debt service (interest payments).

The vast majority of developed-world people have had the basics of life since the late 1960s — transport, food, shelter and utilities. The “growth” since then depended on cheap, abundant oil and a consumerist mentality in which one constantly re-defines and renews one’s identity not from social investments in others or the shared community but from consumption.

Not coincidentally, this dominance of consumption as the only metric for “growth” (as opposed to, say, productive activity) has been paralleled by the dominance of the Central State.

The end of credit-based consumption will be a very positive development, as will the devolution of the Savior State. The Savior State is like oil–both are at their peaks and are starting their inevitable slide down the S-curve. The world they created was not as positive for human fulfillment and happiness as we have been told.

Indeed, study after study has found that people with the basics for life, a higher purpose that requires sacrifice and a tight-knit community are far and away happier than isolated, atomized, insecure consumers, regardless of their wealth and consumption.

This potential to re-humanize our economy is why I am hopeful.

Nice. Words for 2012.

Firemen, donuts and meetings.
The more or less choice.
Is America at a digital turning point?
Optimism has its advantages, but some worry the region may lose touch with the rest of the world.
Entrepreneurial grab bag.
Leadership lessons from the Shackleton expedition.

Yes, you need a technical indicator as part of your trend following system, but you need those links even more for a chance at profit in our charmingly chaotic world.

Is it all good out there? Stuff I found to be white noise, but clearly popular:

A Few Tips For Developers On How To Get Hired By A Startup
SEC Ups Its Game to Identify Rogue Firms
Answers to Google Interview Questions

Merry Christmas!

FAQs:

What makes the TREX system different?

The core is money management. Within the system you have the ability to turn money management on/off. It makes a huge difference. Here are a few hypothetical examples:

Without Money Management:
Corn: $22,125.00
Sugar: $52,016.00
Japanese Yen: $86,187.50

With Money Management:
Corn: $107,450.00
Sugar: $158,422.00
Japanese Yen: $167,362.50 [disclaimer below]

You can trade minis, full-size contracts and choose your level/risk per trade, etc. It is 100% plug-and-play into the TradeStation® platform. Backtested results assume a maximum risk per trade of $4,000. You can change the $4000 to any number you want.

Do I need to use TradeStation® for brokerage services if I buy the code?

No. You can use the code without having a brokerage account with TradeStation®. Our software package is available for purchase alone. TradeStation’s® fees are here.

Do I need real time data to run the system?

No. The system runs on end of day data. You do not need real time data.

Can I customize the system to my parameters?

Yes. You can customize many of the variables and money management settings in the system code. Two people can run the same code and have different results. Why? Risk tolerances are not universal. People have different appetites.

Can I add markets not shown on the examples page?

Yes. We include a sample of these markets in the trading logic manual provided with the system.

What is included?

Each purchase includes the trading system program, open code, and a manual describing how to use and modify our TradeStation® trend following system.

Disclaimer: Trend Following℠, TurtleTrader® & TurtleTrader.com® provides analytical tools, research and trading systems. Company programs are for trend following trading training and managed futures educational purposes only. Testimonials included may not represent typical results. Neither unique experiences, past performances, historical tests, nor included or accessible strategies constitute recommendations or guarantee future results. Users are solely responsible for selection of stocks, currencies, options, commodities, futures contracts, strategies, and monitoring their brokerage accounts. The Company, its subsidiaries, employees, and agents do not solicit or execute trades or give investment advice, and are not registered as brokers or advisors with any federal or state agency. For more information about commodities and futures trading, please see the Commodities Futures Trading Commissions web site at www.cftc.gov. Trading in forex, stocks, futures and options is speculative in nature and not appropriate for all investors. Investors should only use risk capital that they are prepared to lose when trading forex, stocks, futures, and options because there is always the risk of substantial loss. Clients should fully examine their own personal financial situation before trading

Seen in the WSJ is wisdom that “central banks are creating a tinderbox by keeping alive many very bad investments”:

The ubiquitous greenery of the season has me thinking conifers and stock market crashes. There is much to be learned from the coned evergreen trees that form vast forests across the Northern Hemisphere. As the oldest trees on the planet, the mighty conifers have survived threats of catastrophic extinction since the time of the hungry herbivorous dinosaurs.

The conifer’s secret to longevity lies in a paradox: Their conquest has been largely the result of episodes of massive forest destruction. When virtually all else is gone, conifers show their strength and prowess as nature’s opportunists. How? They have adapted to evade competitors by out-surviving them and then occupying their real estate after catastrophic fires.

First, the conifer takes root where no one else will go (think cold, short growing seasons and rocky, nutrient-poor soil). Here, they find the time, space and much-needed sunlight to thrive early on and build their defenses (such as height, canopy and thick bark). When fire hits, those hardy few conifers that survive can throw their seeds onto newly cleared, sunlit and nutrient-released space. For them, fire is not foe but friend. In fact, the seed-loaded cones of many conifers open only in extreme heat.

This is nature’s model: overgrowth, followed by destruction of the overgrowth, and then the subsequent new growth of the healthiest and most robust, which ultimately leaves the forest and the entire ecosystem better off than they were before.

Pondering these trees, it is not too much of a stretch to consider the financial forests of our own making, where excess credit and malinvestment thrive for a time, only to be destroyed—and then the releasing of capital into markets where competition has been wiped out. The Austrian school economists understood this well, basing a whole theory around this investment cycle.

After the purge, great investment opportunities are created, from which prolific periods of growth emanate—provided that sufficient capital remains to reinvest into the fertile and now-open landscape.

Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire.

What obviously occurred was that the most fire-susceptible plants had been given repeated reprieves (bailouts, in a sense), and they naturally accumulated, along with the old, deadwood of the forests. This made for a highly flammable fuel load because when fires are suppressed the density of foliage is raised, particularly the most fire-prone foliage. The way this foliage connects the grid of the forest, as it were, has come to be known as the “Yellowstone Effect.”

A far better way to prevent massively destructive fires is by letting the fires burn. Human intervention in nature’s cycles by suppressing fires destroys the system’s natural homeostatic forces.

Strangely parallel to the Yellowstone catastrophe was the start of the federal government’s other fire-suppression policy with the 1984 Continental Illinois “too big to fail” bank bailout. This was followed by Alan Greenspan’s pronouncement immediately after the 1987 stock market crash that the Federal Reserve stood by with “readiness to serve as a source of liquidity to support the economy and financial system,” which heralded the birth of the “Greenspan put.” The Fed would no longer tolerate fires of any size.

From a forestry point of view, the lessons were learned. In 1995, the Federal Wildland Fire Management Policy stated, “Science has changed the way we think about wildland fire and the way we manage it. Wildland fire, as a critical natural process, must be reintroduced into the ecosystem.”

Herein are pearls of great wisdom for central bankers today. Central banks are creating a tinderbox by keeping alive many very bad investments, fertilizing them with everything from artificially low interest rates to preferential liquidity to outright securities purchases. As these institutions and instruments overrun the financial landscape, they hamper the economic ecosystem and perpetuate the environment of low growth and high unemployment in which we currently find ourselves.

Seeing periodic, naturally occurring catastrophes as part of the growth cycle requires thinking more than one step ahead, not only longer term but, more specifically, intertemporally. This is perhaps an insurmountable cognitive challenge, both to investors and central bankers in today’s news-flash world. When contemplating the forest, we may intuitively understand nature’s logic of growth. Yet when we look at the seeds of destruction we have sown through current monetary policy, it is clear we are lost in the trees.

Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments L.P., based in Santa Monica, Calif.

No one is going to pay attention to logic like that when we are all locked in a ZIRP world.

Do you believe an ability to process nonstop daily news, economic data and assorted fundamentals is necessary to make money in markets? Do you also believe the person who can do this the quickest has the best chance to profit?

If you believe this…where is the evidence that this is true?

Note: Of course there are those who spend millions to have their servers next to exchange servers, and yes that is an advantage, but the average person can’t compete with light speed trading. Guess what? You don’t have to compete with subatomic arbitrage to profit.

From Richard Russell:

Once the Dow breaks under 10,000, I believe that the analysts and the PUBLIC will become frightened and start to cut back on their buying. The newspapers will halt their bullish stance, and a great stillness will envelope that land. That stillness will be the result of shock as it dawns on Americans that they are seeing something far different than what they were expecting.

Russell has seen much, and has wisdom that comes from nearly 90 years, but market betting on predictions is tough living. In terms of his overall economic and political views? He might very well be right, but that’s not enough for market profit. You can be right about markets and still lose money. Think about it.

Give Rod Serling credit for figuring it all out back in 1960, and give him more credit for burying it in an episode of The Twilight Zone:

Alien visitor #1: Understand the procedure now? Just stop a few of their machines and radios and telephones and lawn mowers…throw them into darkness for a few hours, and then just sit back and watch the pattern.

Alien visitor #2: And this pattern is always the same?

Alien visitor #1: With few variations. They pick the most dangerous enemy they can find and it’s…themselves. All we need to do is sit back…and watch.

Popular delusions are a foundation of trend following profit? You bet. Since 1929 there have been 18 market crashes. Clearly, 100-year floods actually happen far more frequently…