Category Archives: Entry

The Line of Least Resistance

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We stand on the shoulders of giants.

I’m not guilty about using their work and ideas.

Firstly, obviously, I’m going to quote them. Then, I plan to achieve something new, whilst standing on their shoulders. Those will be my two pennies, and feel free, people, to use my two pennies copiously.

The phrase “line of least resistance” was first coined by none other than Mr. Jesse Livermore. He lost a fortune finding it, then won a fortune following it, and again lost a lot of money at times when he ignored his own discovery.

Pioneers have it tough.

Carving out a new path is perilous, to say the least.

So, what is the line of least resistance?

Imagine yourself to be poking and shoving around, looking for a clear path in the dark. Something gives. You push further, and discover that you can easily traverse the path that emerges, without stumbling. For a while.

Let’s just remain there.

You are travelling along seamlessly on this path you’ve discovered after poking and shoving around.

Freeze.

Now imagine the price of an underlying. Any underlying, that tends to trend. GBP vs USD would be a great example.

Price pokes and shoves (at resistance), as it tries to break out.

Once it has broken out, you need to understand why it has broken out.

It is not encountering enough resistance to make it stop.

It’ll keep moving along this line of least resistance, till there develops sufficient new resistance that is enough to make price stop, or even reverse.

That’s a price move. You want to be part of it. Thus, you look for it. The pokes and the shoves are your entry tries. One of your entries will chance upon the line of least resistance. You’ll experience a clear move, which you’re a part of. The move will continue till resistance builds up again.

The idea, obviously, is to stay with the move to make up for failed entries and then some.

You stay in the trade till there is enough resistance to make the underlying reverse more than your threshold.

That would be your trigger stop.

When a concept is broken down to its absolute basics, it becomes easy to understand.

Can I Really Really Really Do Without Fundamentals?

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I like to trade without a bias. 

Lack of bias means freedom… 

… freedom to think independently…

… not falling prey to another person’s opinion…

… which then allows you to listen to your system…

… trade identification…

…setup demarcation…

…trigger-entry…

…trade triggered…

…trade management…

… trigger-exit…

… exited.

That’s it, move on to the next trade. 

News gives me a bias. 

No news. 

You know what else gives me a bias?

Fundamentals. 

I don’t wish to look at fundamentals. 

If my eyes are seeing a setup in the EuroDollar, I would like to take it without the nagging thought of “what will happen if Scotland says NO or YES”.

I don’t want to care about inflation numbers, or job figures, or industrial output or what have you. 

I mean…can I just …do it?

Meaning, can I just do away with fundamentals, and focus on technicals only, which is my area of specialization?

Sometimes, I get a little unsure. 

I start looking around. 

How are others doing it? The experts, that is. 

My uncertainty gets fanned a little more, when I see experts not really ignoring fundamentals, even though they might be specialized in technicals. Hmmmm. I’m still not happy looking into fundamentals. I mean, why should I take time-out from my strong suit, and devote it to my very weak suit?

No, I decide. I’m really not going to look at fundamentals. 

What’s the worst that could happen?

Let me just see if the worst that could happen is bearable.

Ok…I ID a trade…demarcate a setup…and the trade goes against me because of the announcement of some number in the afternoon. People looking at fundamentals would have waited for the announcement of the number and then traded. Fine. 

In the world of trading, it is always good to have the worst-case scenario unwrapped and right before your eyes to see what it really means. 

You know, I can take this. 

Would you like to know why?

Firstly, I would like you to understand that we are looking at large sample-sizes here. Any sensible reasoning would only apply to large sample-sizes. 

Over the long run, and over many, many trades, Mrs.Market will go either way after an announcement of a fundamental number with a chance of roughly 50:50. 

If this is true, it is very good news for me, good enough to just kick fundamentals out of the equation. 

At times, the market reacts as per the crowd’s anticipation. 

At other times, it reacts in the opposite fashion. 

I assume that the ratio of the above two directions taken by Mrs. Market over a very large sample-size would be 50:50.

I think my assumption is correct. I don’t want to go through the labour of proving it mathematically. 

Ok, let’s assume that my assumption is correct. I then kick fundamentals, and go about my work while relying on my strong-suit, i.e. technicals. This trajectory will very probably have a happy ending. 

Now let’s assume that my assumption is wrong. 

What saves my day?

Technicals. 

Technicals very often give setups that factor in crowd behaviour and crowd anticipation of market direction. 

Technical setups get one into the build-up to an announcement. 

More often than not, one is already in the trade, in the correct direction, enjoying the build-up to an announcement without even knowing that the announcement is coming, if one is not following fundamentals. 

Technicals can actually do this for you. I’ve seen them do it. I mean, the GBPUSD has been giving short setups during the entire 1000 pip run-down recently. To have availed such a setup, people haven’t needed to know that a referendum is coming. All they’ve needed to do is to take the trade once they see the setup. 

Actually, that’s it. I don’t need more.  

I don’t need to reason anymore with myself. Everything is here. 

I think I can let go of fundamentals safely.

Even this trajectory should have a happy ending.

Charting Charting Charting

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Why don’t you just…

… trade what you see?

Trade the chart, dammit.

Not the level.

Not the expectancy of a turnaround.

And, although I still do this because it gives me a kick, why do we even trade corrections?

Why can’t we just trade the sheer chart?

Every chart is either going up, down or nowhere.

So it’s pretty obvio, that the first step would be to…

… to what?

… to decide where the chart is going.

Again, it should be pretty obvio, that if a chart is going nowhere, then you are doing… what?

Are you trading such a chart?

NO!

Wait for such a chart to break out in one particular direction.

Wait for the LTT to turn in this direction.

Then trade this chart. Not before.

Yeah, LTT stands for long-term trend.

Yeah, we’ve befriended the LTT so much, that we have an abbreviation going for it…

Once you’ve sorted out the direction, look for an entry setup.

Be patient.

If the entry setup hasn’t formed yet, wait for it. If you can’t stop your twiddling fingers from doing something, feed in a trigger entry in case of a hypothetical setup formation within the next few hours / days, if your trading station allows this.

There’s no up or down anymore, to be honest. You are going where the chart is going, period.

You are also not asking the stooopidest question of them all…

… you guessed it… “Did the sensory index go up, or down?”

Just forget about the sensory index, ok?

I mean, we’re so done with sensory indices in this space.

Why?

DLF could tank 20 bucks on a day the Sensex goes up. Dow Jones could be down 50 points, but Pfizer could just spring into a stellar upwards move. Why should we have lost the short-side opportunity that DLF hypothetically gave, or the long-side opportunity that Pfizer could present, for example? We will do exactly that, i.e. lose the opportunity, if our focus is on the sensory index.

Focus on the underlying.

To be more precise, focus on the chart of the underlying.

Happy trading.

🙂

And…How Much Connection Time Exactly?

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Well, somebody’s got to ask these questions…

Don’t see very many around me doing so, so I just thought what the heck, let it be me…

This one’s not for all you test-tube jocks in the lab, you know…

Answer’s not about the math really; it’s more about feeling, again…

Nevertheless, this is a very important question.

Answer it wrongly for yourself, and market-play will wreck your life – all avenues of your life, that is. 

And, answer it correctly for yourself – lo and behold, you’ll actually start enjoying your market activity.

The human being ultimately excels in anything he or she enjoys doing. 

This means that if you answer this question correctly, your market activity will yield you profits. 

Told you. This question is important. Answer it.

Let me tell you how I’ve answered it for myself. 

Before that, please understand, that my answer doesn’t have to apply to you.

However, for those who don’t know where to begin while trying to answer the question, it’s a start.

I detest giving Mrs. Market too much power. This was my clue initially, and I built up on this fact. 

Initially, Mrs. M used to take over my life. She used to govern my emotions. It started to rub off on my family. I knew I had to draw a line. 

I started to trade lightly – amounts which my mind could ignore. Then, I did one more thing. 

I started to connect minimally. The was the key step, and it swung the emotional tussle in my favour. Mrs. M’s days of emotional control were over. 

What does minimal connection mean?

You only connect when you have to. Period. 

When you don’t have to connect, you just don’t.

I’ll tell you when all I connect to Mrs. M.

Order-feed – 0 to once a day. Very rarely twice for this in one day. 

Connection for me is having my trading terminal on, and seeing live price-feeds face to face. 

My market research is all offline, so that’s not a connection for me. 

Squaring-off a position – again 0 to once a day. Very rarely twice a day.

Watching the live price-feed – 0 to once a day, and only if if I’m unclear about the buying-pressure versus selling pressure ratio.

That’s it. 

When I don’t identify a potential trade in my offline research, I don’t connect at all. 

When do I connect next?

Whenever I’ve identified the next trade, or a squaring-off situation, all offline. 

There can be two or even three day stretches when I just don’t connect. 

I use options, because they allow me this kind of play for Indian equities. 

Why am I stressing upon the value of minimal connection? 

Connection means exposure to the “Line”. You’ve met the Line before. If not, look up the link on the left (“The Line”). 

Connection to the Line taxes your system, because market forces interfere with your bio-chem. 

Keeping the connection minimal keeps you healthy, and you can go out and do other stuff in life, which rounds you off and refreshes you for your next market-play. 

Keeping the connection minimal detaches you from Mrs. M. You are able to detach at will. This lets you focus on your family when your family members require your attention. 

Keeping the connection minimal makes the task of swallowing your small losses smoother. 

Lastly, keeping the connection minimal helps you let your profits run. 

So, how does one define minimal?

Do the math, and come out with rules for your minimal connectivity, like the ones I’ve come out with above, for myself. 

After that, while sticking to your rules for minimal connectivity, only connect to Mrs. M when you feel the burning desire to do so, like for example upon the identification of a sizzling hot trade, or for the order-feed of a trigger exit after a profit-run or something like that. 

Yeah, you minimise even after your rules.

That’s your minimal connection.  

So…What Does Trade Selection Hang Upon?

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Feeling.

Feeling first, feeling last. 

Math in the middle. 

That’s my recipe for trade selection. 

For me, trading is an art. 

I rely a lot on gut. 

Many people tell me that’s wrong. 

Everyone’s got a right to their opinion. 

What works for Jill might not work for Jack.

People tell me to get emotion out of the way.

Emotion can be an ally too. 

Just try and get the hang of your gut feel. 

Let the trade speak out to you. 

You’re looking at a chart, and the chart should shout out to you – “Trade me!!”

That’s what I call “Feeling First”.

There’s something about first impressions. 

I mean, whoever made that proverb about first impressions sure knew what he or she was talking about. 

So, after your first impression tells you that a chart is tradeable, you then need to see some kind of a mathematical fit going for you. 

You plan your trade.

You try and fit some mathematical model into the underlying’s previous behaviour, and plan the trade into the near future based upon the future-play which your model spits out. 

You calculate a stop according to your money-management rules. Just more math. 

Now comes “Feeling Last”. You look at your chart, which contains the entire map of your trade.

At this stage, your gut must speak to you. 

Yes or no. 

Nothing else. 

Are you pulling the trigger or are you not pulling the trigger.

If not, then no whys. It’s a no. Learn to take a no. Look for another trade setup, elsewhere. 

If yes, then again – no more whys. It’s a go-ahead. Have the guts to follow through. 

Keep it simple. 

The best ideas in the world are – simple. 

Options Strategy – Entry, Stop and Exit

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What are we doing with options anyways?

We are trying to play a market without needing to be with the market the whole time. Also, we are defining our risk quite exactly. The option premium is the money that’s at risk. You don’t have to lose all of it if the trade goes against you. You can bail out anytime and save whatever option premium is left. The option premium is the total you can lose in the trade. With that, you’ve done one great thing. You’ve installed a stop which will stay with you during the entire trade. Is that possible in any other segment in India? Nope. If my info is correct, stops have to be installed everywhere on a day to day basis. Not so the case with options. You have your stop with you, always. 

That allows you to do other stuff. You can have an alternate profession, and still play options. 

You don’t need to be afraid of the time element in options. You can trade them in a manner where the time element is rendered useless. I’ll tell you how.

Though you try and go with the overall long-term trend, you try and pick up an option during a retracement. That’s when you’ll get it cheap. 

The idea is to buy cheap and sell expensive, right?

Secondly, give yourself breathing space. If the current month is well under way, pick up the corresponding option for the next series month. Give the trade 4-5 weeks to pan out in your favour.

A lot can happen over 4-5 weeks. 

Thirdly, you’re trying to pick up out-of-the-money options, which seem to have gotten out-of-the-money as an aberration. These will be even cheaper. Like what happened to Tata Motors the other day. For no apparent reason, the stock drifted towards what was formerly seeming to be an unlikely support to be hit, around the Rs. 430 level. On the previous day, it was nowhere near this level, and didn’t look like reaching it in a hurry at all. An event in the US occurred, and Asia opened down, with the scrip in question falling to the support and bouncing off. At the market price of Rs. 430 – Rs. 435, if you’d have picked up the out-of-the-money option of Tata Motors for the strike price of Rs. 450, which was going very cheap, that would have resulted in a good trade. 

Basically you are looking for such predefined setups – buying off a support / selling off a resistance, buying / selling at a defined retracement level, buying / selling upon piercing of a bar etc. etc. etc. 

Let’s say you’ve identified a setup. 

You’ve seen buying pressure, or selling pressure. Chances of repetition are high, you feel. You try and enter into the option at a time when the buying or selling pressure is off, and everyone thinks that this buying or selling pressure is not coming back. 

In this manner you’ll get some cheap entries. 

Now you have to wait, to see if your analysis is correct. If not, you’ll probably lose most or all of your option premium. Don’t be afraid of loss. It’s a chance you have to take. Without taking the risk, there is no chance of reward. You have to put yourself in line for the reward by going out there and entering into the option.

It’s possible that the scenario you imagined actually plays out. Let it play out even more.

You can exit in two ways. You could trail the market with a manual stop. This way you’ll be in the trade to perhaps see another day of even more profits. The downside is, that during lulls in the day, your stop could well be hit. The second exit possibility is to calculate an unusually high price, which is slightly unlikely to be reached. You feed in the limit order at this price. If this price is reached, you’re out after having made good money. Now, the scrip can go down for all you care. The downside is that the scrip can go deeper in your trade direction after you’ve exited, and that’s a little painful. The reason this latter scenario is often used is that the time-element keeps getting scraped off the selling price for the option as the series month approaches its end, and your exit on that very day at an unusually high price is more lucrative than you might think. You see, buying or selling pressure in your direction might or might not make itself felt again in the current month. If not, you’ve lost a prime opportunity to cash out at a high. Is it the high? You’ll never know. Therefore, you’ll need to try both exit scenarios and see which suits you more. Sooner or later, you’ll get a feel for both exit scenarios, and will be able to implement either, depending upon the situation. 

That’s it for today. 

Heavy?

It’s not. 

Options are easy. 

Playing options is like playing poker. it’s fun!

🙂

And What’s so Special about Forex?

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Imagine in your mind …

… the freedom to trade exactly like you want to.

Is there any market in the world which allows you complete freedom?

Equity? Naehhh. Lots of issues. Liquidity. Closes late-afternoon, leaving you hanging till the next open, unless you’re day-trading. Who wants to watch the terminal all day? Next open is without your stop. Then there’s rigging. Syndicates. Inside info. Tips. Equity comes with lot of baggage. I still like it, and am in it. It doesn’t give me complete freedom, though. I live with what I get, because equity does give me is a kick.

Debt market? A little boring, perhaps. Lock-ins.

Commodities? You wanna take delivery? What if you forget to square-off a contract? Will you be buying the kilo of Gold? Ha, ha, ha…

Arbitrage? Glued to screen all day. No like. Same goes for any other form of day-trading.

Mutual Funds. Issues. Fees. Sometimes, lock-ins. MFs can’t hold on to investments if investors want to cash out. Similarly, MFs can’t exit properly if investors want to hang on. And, you know how the public is. It wants to enter at the peak and cash out at the bottom. 

Private Equity? Do you like black boxes? You drive your car? Do you know how it functions? You still drive it, right? So why can’t you play PE? Some can. Those who are uncomfortable with black boxes can’t. 

CDOs? @#$!*()_&&%##@.

Real Estate? Hassles. Slimy market. Sleaze. Black money. Government officials. Bribery. No like.

Venture Cap? Extreme due diligence required. Visits. Traveling. The need to dig very deep. Deep pockets. Extreme risk. No. 

Forex? 24 hr market. Order feed is good till cancelled. Stops don’t vanish over weekends. Stops can be pin-pointedly defined, and you can even get them to move up or down with the underlying, in tandem or in spurts. You can feed in profit-booking mechanisms too, and that too pin-pointedly. You watch about 10-11 currency pairs; you can watch more if you want to. 10-11 is good, though. You can watch 4, or even 2 or 1, up to you. Platforms are stupendous, versatile, malleable, and absolutely free of charge. You can trade off the chart. Liquidity? So much liquidity, that you’ll redefine the word. No rigging – market’s just too large. The large numbers make natural algorithms like Fibonacci work. Technicals? Man, paradise for technicals. Spreads? So wafer thin, that you barely lose anything on commissions. Oh, btw, spreads are treated as commissions in forex; there’s no other commission. Money management? As defined as you want it to be. Magnitude? As small or as large as you want to play? Comfort? You make your morning tea, sip it, open your platform, feed in orders with trigger-entry, stop and limit, and then forget about the forex market for the rest of the day, or till you want to see what’s happening. Yeah, comfort. Challenge? You’re playing with the biggest institutions in the world. What could be more challenging? I could go on. You’re getting the gist. 

Yeah.

Forex is a very special market. 

Also, the forex market is absolutely accessible to you, online. 

If you decide to enter it one day, play on a practice account till you feel you’re ready for a real account. 

If and when you do start with a real account, for heaven’s sake start with a micro account, where 1 pip is equal to 0.1 USD. 

🙂

 

 

 

Who’s Responsible for that Last Technical Bit?

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Planning a technical trade?

You’ve got your chart open. Scrip’s been falling.

You plan to initiate a buy on that last support. Still a few percentage points to go. 

Your buy point seems a bit off, right? 

Scrip might not reach it, huh?

It might just take off before reaching your buy point, hmmm?

What you need to understand is this – for nothing comes nothing.

You don’t want to risk a buy at current market price. That’s a fact. An acceptable one. Fine … as long as you are willing to pay the price for this fact. 

The price is that you might not be in the trade as the scrip might take off without your stop-type trigger entry price being hit. 

The up-side is that the scrip might correct to your buy price, triggering your entry, and thereby giving you a perfect technical entry point, along with a great margin of safety, since you’ll then have bought low as compared to current market price. 

Yeah, that’s the trade-off.

Is this trade-off acceptable to you?

Yes?

Fine. In my opinion, you would not be doing anything wrong in going ahead with your planned course of action, as long as you have mentally accepted the trade-off. 

What’s the other guy at? You know, the fellow who’s entering at current market price. Well, he’s taking a risk. He’s buying a little high, without margin of safety. What’s his trade-off? For starters, he’s in the trade. Scrip can take off immediately for all he cares, leaving you behind. He’ll be most happy. What’s his down-side? Scrip can correct to technical support, your buy-point. He’ll already be in a losing trade, and you’ll be just entering. In his worst-case scenario, his stop will already be hit as you are just entering. If the scrip takes off on him now, he’ll probably be puking. Yeah, that’s his trade-off. He’s accepted it mentally. After such acceptance, in my opinion, he’s doing nothing wrong by entering at current market price. 

What’s going to happen?

No one knows. Either of the outlined scenarios can play out.

Who’s that last technical correction left for? Yeah, who or what exactly will be responsible for that last technical correction?

An event. A negative one.

At this point, a negative event can happen. On the other hand, it may not happen. 

If it happens, the scrip will very probably open at the technical buy point the next day, and your buy will be triggered. 

If there’s no negative event, and buying pressure goes up, the scrip will take off without you.

Why is that last bit left to an event?

Events give prices a push or a pull, depending upon their positivity or negativity. 

That last support was made a bit low, right? You were wondering how the scrip reached so low, huh? In high probability, an event pushed it low for a few hours, and a low was made. If this low coincided with a past low, one started to speak of a lowish support, which was a little low considering current market price, and for which the scrip needed a pull-back to reach. 

Like this morning’s pull-back. The US decides to allow air-strikes in Iraq. Japan opens 3% down. India opens 1% down. 

A lot of scrips open really down this morning. 

Some of them even open at lowish supports they were not (at all) intending to touch yesterday. 

Connection & Disconnection

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Sizzling hot stuff is best kept at an arm’s length … … something I learnt along the path … …

You reach for it at a conducive time, do what you need to do, and then you let it be. This way it doesn’t burn you. 

When you’ve let it be, you’re not thinking about it. Your mind has switched off from it. It is utilising its resources to do other stuff … … till it’s time to work with your sizzling hot stuff again. 

Now replace sizzling hot stuff with Mrs. Market.

There’s no doubt in my mind that Mrs. Market can burn you. You need to work with it in a manner that it doesn’t. 

You’ve understood that whole deal about the establishment of an emergency fund. Such a fund will render any burns only temporary. You have to have an emergency fund going first up, before you enter Mrs. Market. The income generated from this fund needs to cater for the basic requirements of your core family. Period.

Ok, good, so now you’ve got your protective gear on. Till you’re getting it on, you are absolutely disconnected from Mrs. Market.

Now let’s talk constant connection and disconnection. 

Why allow something or someone to control your moods?

No!

You are absolutely not giving Mrs. M that much power. 

Therefore, play small. 

How small?

Small enough to not lose any sleep over Mrs. M. 

Play with stops. These allow you to disconnect from Mrs. M and focus on other work. Other work is as important as Mrs. M, or perhaps more important. Yeah, show Mrs. M her place in your life. This way she’ll behave herself. Giver her any more leeway, and she’ll take over your life, and you don’t want that, right?

So, connect to Mr. M, do your work, place your stops, and disconnect. 

Don’t think about Mrs. M till you connect to her again. 

The period in between connection and disconnection is your time. Use it for any activity that has nothing to do with Mrs. M.

Day in, day out.

 

 

Speed of Rise vs Speed of Fall

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Specifically, equity markets have this one repetitive characteristic.

Their average speed of rising is lesser than their average speed of falling. Much lesser, I would say. 

Why?

Falling has to do with selling pressure being more than buying pressure. Selling pressure is connected to fear. Add caution to fear, and one has already sold out. 

Rise has to do with buying pressure being more than selling pressure. Buying pressure is connected to optimism. As markets keep nudging higher, slowly, optimism turns into euphoria, with a hint of caution. This caution slows the speed of rising, till greed takes over in the last stage of the rise, and one fails to see any caution anymore. At this time, the speed of rising is the highest, but is still lesser than the speed of falling at the nadir. Why?

What is the prevalent situation at a nadir? There’s blood. People are running for their lives. They take action before asking questions, and before looking here or there. 

Many times, you come across someone holding a stock which he or she has inherited from a parent. This someone comes to you with the ubiquitous query – what to do, sell it now? You look at the chart. Whoahhhh! You see the buy price, one and a half decades ago. You look at the current level. You calculate the profit. Along the time axis of the chart, you also see that the stock fell back to its buy price or below in a market crash, all within a month and a half. After this, the stock has recouped its losses of the crash, and is showing a healthy profit again, six years after the crash. During the crash, how long did it take the stock to fall below the buy price of one and a half decades ago? A month and a half. Holy moly!

That’s the equity playground for you. 

It’s directly connected to human emotions. 

Anything can happen on this playground, so keep your eyes and ears open, and…

… be prepared. 

Playing the Stock or Playing a Scenario?

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Many roads lead to Rome.

Everyone’s approach to the markets is different.

Today I speak about two approaches.

One can choose to play the stock. 

Here, one decides to follow the same stocks everyday. One decides to learn their nuances. The number of stocks that one follows is manageable. As a thumb-rule, one should be able to count them on one’s fingers. No more. One should be able to recall the stocks one follows in a jiff, with no sweat at all. 

The chart of a stock begins to make sense. Trading plays emerge. One needs to then follow the progress of the same stocks everyday, and take trades as and when entry setups make themselves available. This methodology requires following the action everyday, live, during market hours.

What if we don’t want to be glued to our screens everyday?

Can we still get one action?

Yes. 

How?

Simple.

We then don’t follow any stock in particular.

We define a scenario which contains all that we want to see in the chart of a stock at that point of time, when we decide to follow the markets and perhaps take a trade. 

We then convert this scenario into an algorithm.

Again, don’t let the word algorithm scare you.

You don’t need to know how to programme. Your market software should allow you to put your algorithm together by combining chunks of simpler algorithms which define singular pieces of your scenario. These simpler algorithms are visible in your market software. You then need to copy, paste and combine your copy-pastes together with mathematical symbols. This is a vital statement. This is technology-power at its peak. This practically puts a very powerful weapon in your hands. 

From this point onwards, trade identification is a piece of cake. Your let your algorithm run through the gamut of stocks quoted on the markets. Your software does this for you in under a few minutes. Your algorithm picks those stocks that are currently exhibiting your scenario, and opens their charts for you. You need to define your algorithm in such a way, that not more than 50 charts open up. You then sift through the 50 in about 5 minutes. Just pure eyeballing. You narrow the 50 down to 5, which are showing good entry setups. You pick the stock with the best setup. Then you feed in a trigger entry order in your trading account. The whole exercise take less than 15 minutes.

Isn’t that wonderful?

Thunder, Lightning and the Road Ahead

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Why do you look here and there?

If there’s a road ahead of you which you have defined, why don’t you just go ahead and tread it?

Is it mandatory to get distracted by things that don’t concern the path?

In the marketplace, it’s all about mind-set.

Free your mind.

Unburden it.

Dump all useless stuff into the bin. 

Secure your family’s basic bread and butter.

Identify a portion of your surplus cum non-invested cash as your NGHM (nobody’s-getting-hurt-money).

Enter the marketplace with your NGHM.

You are armed with your system.

You know how to identify your trades. 

You further know how to enter, manage and exit your trades.

These are the basics.

From here on it a mind-game.

Not partially. 

Fully.

It’s fully a mind-game from this point on. 

Mentally resilient? Are you? Well, you’re going to create thunder with your system then. 

Don’t get distracted by the lightning on the path.

Tread the path with complete confidence, drawing upon your full mental resilience. 

The road ahead is painted with glory.

How to Swallow Small Losses…

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… as if nothing has happened … is one of my biggest trading goals.

You see, our society teaches us not to lose. 

It doesn’t teach us that we can lose a bit 5 times, and after that we can win big, recovering all our losses and making money overall.

No. 

It teaches us to try and win all the time. 

That’s the exact reason 90%+ of all society members actually lose in the markets. They’ve not learnt how to lose small, move on, and take the next trade.

Mrs. Market won’t budge an inch for you. You’ll have to make the adjustment. 

So how does one take a loss in one’s stride?

Only one type of loss is immediately digestible – a small one. Therefore, define your risk in the market. Cut and scoot when required. Don’t get married to your trade.

Then, once the small loss has happened, and has been taken, it will nag you. 

It’ll be there, trying to bite your brain in the background. 

Focus on your next trade. 

Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – … … [what’s the difference between implementation and entry? Well, you could be implementing the trade through a trigger, which is not equivalent to entry yet].

Don’t let the nagging bother you by keeping yourself busy with Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – … … 

Ultimately the nagging will die out, as your mind starts to revolve around your current trades. 

If you give in to the nagging, it will grow, and will slow you down. You might snap at a family member. You might go into depression. You might freeze. DON’T. Don’t give in to the nagging. Don’t let it grow. Don’t let it slow you down. Maintain your family equilibrium at all costs. Move on. 

The nagging is worst if there’s been a close below your stop, and the market is to open the next day, or after the weekend. You have to deal with this one. If you’re not able to deal with this particular situation, you’ll either need to expose your mental stop prematurely and feed it in intraday (before there’s been a close under it), or you’ll need to follow the progress of your trade from half an hour before next market open onwards.

Yes, this last one’s tough, and you need to absolutely work your way around it. 

You can do it with a bit of practise. 

🙂

Emotion in the Marketplace – Enemy or Ally?

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Either or…

… choice is yours baby.

I’m not going to pretend we don’t have emotions.

We do.

We need to make these work for us.

Everyone feels exhilaration upon winning.

We’re down after a loss. 

Before you enter the marketplace again, dump all this somewhere …

… which, btw, is the most difficult thing in the world.

Didn’t anyone tell you that? What about your professor in financial college? Oh, I forgot, he or she never had his or her own money on the line, so he or she didn’t know this one. 

Arghhhhhhhhhhh@#$%^!

Don’t learn anything about finance from anyone who doesn’t have his or her own money on the line, and that too regularly on the line (((financial theory is worth mud unless it is realistic, applicable, and ultimately…profitable). 

So, what is this “line”? [More about “The Line” here – https://magicalbull.wordpress.com/2012/01/13/the-line/ ].

The line is an invisible connection between the vicissitudes of the marketplace and our emotional centres in the brain. 

The line gets activated once one is in a trade, or once one has initiated an investment. 

Once the line has been activated, we need to deal with its effects upon our systems. For optimal efficiency, we need to nullify the effects of the line on our systems. After that, we enter the marketplace again. 

So, acknowledge whatever emotion you are experiencing. Then deal with it. 

Dump the emotion of a loss in a safe place, to be nullified by a big future win. 

Dump the emotion of a big win in another safe place, lest it causes you to exit improperly and prematurely. 

How does one nullify this particular emotion? 

You see, your next activity in the marketplace can make you blow up, if there is any remnant hubris from a previous big win. 

You close your eyes, tell yourself that under no circumstances are you going to suffer the humiliation of blowing up, you centre, focus, you identify the next trade, and then you just take the next trade, as if nothing has happened. 

You have to work yourself around your own emotions. In the marketplace, emotions are your allies only if and when they are properly dealt with before the next market activity. 

Otherwise, they become your enemy. 

Loss can lead to depression and ultimate exit from the marketplace. One needs to understand and accept the concept of taking small losses. Why small? Why not small? You can define your loss. You can cut it when it’s small. Once one has understood and accepted the idea of taking small losses, these won’t bother you any more. That’s how you set yourself up to win big. Big wins, unless dealt with properly, lead to hubris, which can cause one to blow up permanently. We work ourselves around the negative potential of big wins through visualisation. 

Once you’ve sorted out the emotional angle…well, just take the next trade. Don’t wait. Just take it. 

Approaching a Contrarian Buy as a Pivot Point Trade

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Approaching a Contrarian Buy as a Pivot Point Trade


Long live Jesse Livermore!

In his colourful life, Jesse pioneered the science of pivot points. He went bust many times while trying to understand pivot points, but ever since the fundamentals have been delineated by him, pivot points have stood the test of time.

After falling to a pivot point, where there is heavy volume, a stock then doesn’t look back for a while. Entry into a stock is considered ideal at or around a pivot point. Due to the surge-potential at pivot points, one’s trade gets into the money very fast here.

I don’t think pivot points can be predicted off-hand. Potential pivot points make themselves visible at newer lows. Their trademark is the accompanying very high volume.

So, what does one do here?

One punches in a trigger-buy above the pivot-bar or pivot-candle.

If the point pans out as a pivot, and the characteristic surge follows, one’s entry is triggered as the price pierces the pivot-bar high. Good entry.

Now manage the trade, and exit properly.

How does one exit properly?

I’ve spoken about this many times, and will do so again, not today, but very soon.

Cheers!

Taking the Pan out of Panic

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Panic – Pan = ic = i see = I SEE.

Times are unprecedented.

We’re breaking new lows of evil everyday.

Ours looks to be a hopeless nation.
Is it over for us?

Shall we pack up our bags and migrate?

Just take a deep breath. Bear with me for a moment. Try and cast your panic aside. Try and think clearly.

I’ll share with you an observation. Take any Indian. Doesn’t have to be an outperformer. Take an under-averagely performing Indian, for all I care. Weed him or her out of our pathetic system, and place him or her in a nation with good governance.

Lo and behold, our candidate will start performing. Not only that, soon, he or she will be outperforming. After a decade or so, he or she will probably have mastered the system and punctuated it with innovative short-cuts.

Get my point?

We are a resilient race. We might look fickle, frail and harmless superficially, but we can struggle, bear, survive, and finally break out. Just give us good governance.
Don’t panic. We’re not going down that easily.

What’s happening currently is a purge. Yeah, it’s a catharsis with a big C. While it continues, asset classes across the board will probably get hammered.

What does that mean for you?

Only one thing.

Stay in cash. Accumulate it. Learn to sit on cash. Sit on it as long as the purge lasts. Let its value depreciate, doesn’t matter. Park it safely with a conservative private bank. Fixed deposits would be the instruments of choice. Yeah, you don’t want to leave unattached cash lying around. Potentially, unattached cash could be susceptible to online fraud. Attach your cash, safely, and keep it before your eyes. Put some watch-dogs in place, as in sms and email alerts. Password-change attempt? You are immediately alerted. New payee added? You are immediately alerted. Watch-dogs bark.

As per my instinct, though we probably won’t go bankrupt as a nation, we might just go a long way down before the purge is over. After the purge, there will be tremendous bargains on offer, across the board, in all asset-classes. Cash will be king. Save your cash and sit on it – for that day.

Meanwhile, your wealth-manager will try to push you into panic purchases with your cash. As in, buying gold at 32k, and the USD at 65. Don’t listen. These are crazy levels. One doesn’t invest at crazy levels. These are not even normal trading levels. Yes, they are institutional trading levels. One does not invest at institutional trading levels.

It’s time to use your common-sense and maintain a cool head.

You can only do that by refusing to panic.

Shaken, and not Stirred, Mr. Trader…

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Trading models crumble. Happens often.

Does this shake you?

Please don’t let it. Models are meant to crumble.

Construct a new trading model, instead of mourning over the loss of your current one.

Your belief in your model might be shaken, but you are not stirred, right? Helooooo, Mr. Trader, are you there?

Let’s get this straight – you are not stirred. You stand solid as a rock.

What allows you to do so?

Firstly, your safety net stands. Meaning, nothing’s making your safety net crumble. That’s the first thing you do as a trader – construct  a safety net that stands. Your safety net generates steady income and affords your family a comfortable lifestyle. Before that happens, not a single trade is pulled.

Secondly, ever since your safety net has been standing, you have been trading lightly. You’ve been chiselling away at this trading model, but are still a little uncertain about it, and thus, you’ve been going light. It’s recent crumbling has given you losses – which are also light. You are able to swallow such losses easily, since their magnitude is digestible. You’ve been very sensible in not scaling up prematurely.

Then, you’ve stuck to all your trading rules, and this is helping you immensely. Your rules called for a week’s break between two trading models, and you took it. You were not afraid to not work for a week. You didn’t care about what society said. You were confident about yourself, and made your own rules. This week off has kept your personality balanced, and you continue to be a good human being, working for the welfare of society. Your relationship with your family continues to be excellent, despite any losses on the markets.

Yeah, you’re still standing, and pretty comfortably so. Recuperated, and rejuvenated. You are raring to put together a new trading model after the collapse of your old one.

Slowly, you start chiselling again. You watch the market and its movements for a week. Charts are studied. A befitting trading instrument is identified. Trading direction is pinpointed. Trading magnitude is determined. A comfortable entry setup is chosen…and you’re in. Your trade triggers.

After trade upon trade upon trade, your fine-tuned trading model takes shape and yields profits…until it crumbles and gives way to a newer one.

Welcome to the world of trading. You’ll be shaken, many times, but if you stick to a few basics, nothing will be able to knock you off the path.

All the best! 🙂

Can Anyone Match Our Financial Sentinels?

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It was the aftermath of ’08.

There was blood everywhere.

In my desperation to get a grip on things, I was about to make yet another blunder.

The Zurich International Life pitch had found its way into my office through a leading private bank.

The pitch was fantastic.

I got sucked in.

Access to more than 150 mutual funds world wide…

No switching fee…

Switch as many times as you want…

Joining bonus…

Premium holiday after 18 months…

I quickly signed the documents.

What remained cloudy during the pitch was the 10-year lock-in.

Also, nobody mentioned that the exit penalty was exorbitant. I mean, as I later found out, the level of the exit penalty would make Shylock look like JP Morgan.

In the pitch, I found myself hearing that one could exit after 18 months upon payment of 9% interest p.a. on the joining bonus.

Nobody mentioned the full management fees, which I later calculated to be a staggering approximate of 7.75% per annum for myself, since I had opted for a premium holiday as soon as I could.

I mean, when about 7.75% was being deducted from your corpus each year, what in the world was the corpus going to generate? I found myself asking this question after four years of being trapped in the scheme.

I had soon realized that the pitchers had lied in the pitch. In the fine-print, there was no such clause saying that one could exit after 18 months upon payment of 9% interest p.a. on the joining bonus. If I escalated the matter, at least three people would lose their jobs. Naehhh, that was not my style. I let it go.

When I would look at interim statements, the level of deductions each time made me suspect that there were switching fees after all. I could never really attribute the deductions to actual switches, though, because the statements would straight-away show the number of mutual fund units deducted as overall management fees. If there were switching fees, they were getting hidden under the rug of management fees. Since the level of overall fees was disturbing me totally, I had this big and nagging suspicion that they were deducting something substantial for the switches, and were not showing this deduction openly in their statements.

When I compared all this to how Unit-Linked Insurance Plans (ULIPs) were handled in my own country, I was amazed at the difference.

In India, customer was king.

The customer had full access to the investment platform, and could switch at will from his or her own remote computer. Zurich did not allow me such direct access.

The expense-ratio in India was a paltry 1.5% – 2.0% per annum. Compare this to the huge annual deductions made in the case of my Zurich International Life policy.

Lock-ins in India were much lesser, typically three odd years or so.

Some ULIPs in India allowed redemptions during lock-ins, coupled with penalties, while others didn’t. Penalties were bearable, and typically in the 2 – 5 % (of corpus) range. Those ULIPs that did allow such redemptions only did so towards the latter part  of the lock-in, though. Nevertheless, lock-in periods were not long when compared to ten whole years, during which the whole world can change.

The debt-market funds paid out substantially larger percentages as interest in India when compared to the debt-market funds encompassed by Zurich International Life.

In India, deductions from ULIP premiums in the first few years (which were getting lesser and lesser each year due to legislature-revision by the authorities) were off-set by absence of short-term capital gains tax and entry/exit equity commissions upon excessive switching. This meant, that in India, short-term traders could use the ULIP avenue to trade without paying taxes or commissions. Whoahh, what a loop-hole! [I’m sure the authorities would have covered this loop-hole up by now, because this research was done a few years ago.]

ULIPs in India allowed at least 4 switches per annum that were totally free of cost. After that, switches would be charged at a very nominal flat rate of typically about the value of 2-9 USD per switch, which, frankly, is peanuts. I was suspecting that the Zurich fellows were knocking off upto 1% of the corpus per switch, but as I said, I didn’t see the math on paper. Even if I was wrong, their yearly deductions were too large to be ignored. Also, was I making a mistake in furthermore deducing that Zurich was deducting another 1% from the corpus each time the corpus changed its currency? I mean, there was no doubt in my mind that the Indian ULIP industry was winning hands-down as far as transparency was concerned.

In India, people in ULIP company-offices were accessible. You got a hearing. Yeah. Zurich International Life, on the other hand, was registered in the Isle of Man. Alone the time difference put an extra day (effectively) between your query and action. Anyways, all action enjoyed a T+2 or a T+3 at Zurich’s end, and the extra day made it a T+4 if you were unlucky (Indian ULIPs moved @ T+0, fyi & btw). Apart from the T+x, one could only access officials at Zurich through the concerned private bank, and as luck would have it, ownership at this private bank changed. The new owners were not really interested in pursuing dead third-party investments made by their predecessors, and thus, reaching Zurich could have become a huge problem for me, were it not for my new relationship manager at this private bank, who was humanitarian, friendly and a much needed blessing.

By now, I had decided to take a hit and exit. It would, however, be another story to get officials at Zurich to cooperate and see the redemption through. On her own level, and through her personal efforts, my diligent relationship manager helped me redeem my funds from Zurich International Life.  I am really thankful to her. Due to her help, my request for redemption was not allowed to be ignored / put-off till a day would dawn where really bad exit NAVs would apply. Zurich did have the last laugh, knocking off a whopping 30 odd percent off my corpus as exit penalty (Arghhh / Grrrrr)! Since I had managed to stay afloat at break-even despite all deductions made in the four years I was invested, I came out of the investment 30% in the hole. The moment it returned, the remaining 70% was quickly shifted to safe instruments yielding 10%+ per annum. In a few years, my corpus would recover. In less than 4 years, I would recover everything. In another two, I would make up a bit for inflation. Actually, the main thing I was gaining was 6 remaining years of no further tension because of my Zurich International Life policy. This would allow me to approach the rest of my portfolio tension-free.

The Zurich International Life policy had been the only thorn in my portfolio – it was my only investment that was disturbing me.

I had taken a hit, but I had extracted and destroyed the thorn.

It was a win for the rest of my portolio, i.e. for 90%+ of my total funds. Tension-free and full attention heightens the probability of portfolio prosperity.

Yeah, sometimes a win comes disguised as a loss.

When I look back, I admire the Indian financial authorities, who ensure that the Indian retail customer is treated like a king.

Retail customers in other parts of the world receive very ordinary treatment in comparison.

I know this from first-hand experience.

I don’t plan to invest overseas as long as our financial authorities continue to push such discipline into our financial industry.

I don’t often praise too much in India, but where it is due, praise must emanate from the mouth of a beneficiary. We are where we are because of our fantastic financial sentinels!

Three cheers for the Securities and Exchange Board of India, for the Insurance Regulatory and Development Authority, and, of course, three cheers and a big hurray for the Reserve Bank of India.

A Chronology of Exuberance

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The biggest learning that the marketplace imparts is about human emotions.

Yeah, Mrs. Market brings you face to face with fear, greed, exuberance, courage, strength, arrogance … you name it.

You can actually see an emotion developing, real-time.

Today, I’d like to talk about the chronology of exuberance.

In the marketplace, I’ve come face to face with exuberance, and I’ve seen it developing from scratch.

When markets go up, eventually, fear turns into exuberance, which, in turn, drives the markets even higher.

What is the root of this emotion?

The ball game of exuberance starts to roll when analysts come out with a straight face and recommend stocks where the valuations have already crossed conservative long-term entry levels. As far as the analysts are concerned, they are just doing their job. They are paid to recommend stocks, round the year. When overall valuations are high, they still have to churn out stock recommendations. Thus, analysts start recommending stocks that are over-valued.

Now comes the warp.

At some stage, the non-discerning public starts to treat these recommendations as unfailing cash-generating  opportunities. Greed makes the public forget about safety. People want a piece of the pie. With such thoughts, the public jumps into the market, driving it higher.

For a while, things go good. People make money. Anil, who hadn’t even heard of stocks before, is suddenly raking in a quick 50Gs on a stock recommendation made by his tobacco-seller. Veena raked in a cool 1L by buying the hottest stock being discussed in her kitty party. Things are rolling. Nothing can go wrong, just yet.

Thousands of Anils and Veenas make another 5 to 6 rocking buys and sells each. With every subsequent buy, their capacity increases more and more. Finally, they make a big and exuberant leap of faith.

There is almost always a catalyst in the markets at such a time, when thousands make a big and exuberant leap of faith into the markets, like a really hot IPO or something (remember the Reliance Power IPO?).

Yeah, people go in big. The general consensus at such a time is that equity is an evergreen cash-cow. A long bull run can do this to one’s thinking. One’s thinking can become warped, and one ceases to see one’s limits. One starts to feel that the party will always go on.

Now comes the balloon-deflating pin-prick in the form of some bad news. It can be a scandal, or a series of bad results, or some political swing, or what have you. A deflating market can collapse very fast, so fast, that 99%+ players don’t have time to react. These players then rely on (hopeful) exuberance, which reassures them that nothing can go wrong, and that things will soon be back to normal, and that their earnings spree has just taken a breather. Everything deserves a breather, they argue, and stay invested, instead of cutting their currently small losses, which are soon going to become big losses, very, very big losses.

The markets don’t come back, for a long, long time.

Slowly, exuberance starts dying, and is replaced by fear.

Fear is at its height at the bottom of the markets, where maximum number of participants cash out, taking very large hits.

Exuberance is now officially dead, for a very long time, till, one day, there’s a brand new set of market participants who’ve never seen the whole cycle before, supported by existing participants who’ve not learnt their lessons from a past market-cycle. With this calibre of participation, markets become ripe for the re-entry of exuberance.

Wiser participants, however, are alert, and are able to recognize old wine packaged in a new bottle. They start reacting as per their designated strategies for exactly this kind of scenario. The best strategy is to trade the markets up, as far as they go. Then, you can always trade them down. Who’s stopping you? Shorting them without any signals of weakness is wrong, though. Just an opinion; you decide what’s wrong or right for you. The thing with exuberance is, that it can exercise itself for a while, a very long while – longer than you can stay solvent, if you have decided to short the markets in a big way without seeing signs of weakness.

At market peaks, i.e at over-exuberant levels, long-term portfolios can be reviewed, and junk can be discarded. What is junk? That, which at prevailing market price is totally, totally overvalued – that is junk.

Formulate your own strategy to deal with exuberance.

First learn to recognize it.

Then learn to deal with it.

For success as a trader, and also as an investor, you will not be able to circumvent dealing with exuberance.

Best of luck!

Three Ways to Double Down

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To win big as a trader, one needs to understand and implement a strategy of doubling down when things are looking good.

The difference between mediocre success and mega-success as a trader is linked to a trader’s ability to double down at the proper time.

We’ve discussed position-sizing. That’s one way to double down.

A day-trader, or a very short-term trader has the luxury of seeing one trade culminate and the next trade start off after the first one culminates at its logical conclusion. For most longer-term traders, many trades can be occurring simultaneously, because started trades have not yet come to their logical end, and new opportunities have cropped up before trades commenced have come to their logical end.

What do such traders do? I mean, they do not know the final outcome of the preceeding trades.

Yeah, how could such traders position-size properly?

Well, a trade might not have come to its logical conclusion, but you do know how much profit or loss you are sitting on at any given point of time. The calculation of the traded value for the next trade is simply a function of this profit or loss you are sitting on. Simple, right?

Well, what if you don’t like to position-size in that manner?

What if you say, that here I am, and I’ve finally identified a scrip that is moving, and that I’m invested in it, and am sitting on a profit. Now that I know that this scrip is moving, I’d like to invest more in this very scrip.

Good thinking. Nothing wrong at all with the thinking process.

You now pinpoint a technical level for second entry into the scrip. Once your level is there, you go in. No heavy or deep thinking required. As a trader, you are now accustomed to plunging after trade identification and upon setup arrival.

Question is, how much do you go in with?

Is your second entry a position-sized new trade? Or, do you see how much profit you are sitting on, and enter with the exact amount of profit you are sitting on? The latter approach is called pyramiding, by the way. Pyramiding is a close cousin of position-sizing. Normally, one speaks about pyramiding into one very scrip, when the trader buys more of that very scrip after showing a profit in that scrip. Once could, however, also pyramid one’s profits into different scrips.

When you’re pyramiding into one very scrip, you’re putting many eggs in one basket. Right, the risk of loss is higher. The thing going for you is that this risk for loss is higher at a time when your profits are up in a scrip that’s on its way up. Therefore, the risk during a downslide is higher, but the probability of that risk’s ability to result in an overall loss for you is lower than normal. You understand that you have balanced your risk equation, and with that understanding, you don’t have a problem putting many eggs in the same basket. After all, it’s a basket you are watching closely. Yeah, you know your basket inside out. You are mentally and strategically prepared to take that higher risk.

There’s yet another way to double down. I’d like to call this the “stubborn-bull trading approach”.

Let’s say you are sitting on a profitable trade. Yeah, let’s say you are deep in the money.

Now, a safe player would start raising the stop as the scrip in question keeps going higher and higher.

On the other hand, a trader with an appetite for risk could risk more and more in the scrip as it keeps going higher and higher – by not raising the stop, till a multibagger is captured. On the other hand, this trader would also be setting him- or herself up to give back hard-earned profits. Yeah, no risk – no gain.

What’s the difference between the stubborn-bull trading approach (SBTA) and investing?

When you’re adopting the SBTA, you’ll cut the trade once it loses more than your stop. You’ll sit on it stubbornly only after it has shown you multibagger-potential, let’s say by being up 20-50% in a very short time. You’ll keep sitting on it stubbornly till your pre-determined two-bagger, three-bagger or x-bagger target-level is reached. After that, you’ll start raising the stop aggressively, as the scrip goes still higher. Eventually, the market will throw you out of your big winning trade. You see, the SBTA strategy is very different from an investment strategy. For starters, your entry into this scrip has been at a trading level, not at an undervalued investment level. Undervalued scrips normally don’t start dancing about like that immediately.

Let’s be very clear – to reap big profits in the long run, you, as a trader, will need to adopt at least one of these doubling down strategies – position-sizing, pyramiding and / or the stubborn-bull trading approach.

Have a profitable trading day / week / month / career! 🙂