Category Archives: Exit

The Thing with Focus

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Depth. 

Confidence. 

Proper entry. 

Decent exit, if required. 

Understanding. 

Lack of panic. 

Overall picture. 

These are some of the things that focus is capable of giving. 

Swagger? 

One-basket attitude. 

Over-depth. 

Narrow-mindedness. 

Loss of overall picture due to over-chewing one subject. 

Robotic mindset leading to freeze. 

Yeah, these too. Within the capabilities of focus. 

We want the former qualities. 

We’re discarding the latter ones. If they come knocking at our doorstep, we’re shooing them away. 

We spoke about diversified focus. 

Whatever we do in life, let’s do it well. 

We’ll have our many baskets. Why should we take the risk of having just one basket? 

And, into our many baskets, we’ll delve deep-deep-deep. 

Period. 

Making the Skew – work for you

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Anomalies.

Anomalies?

Opportunities.

Yeah.

It’s all about perspective.

Just align your perspective.

Get into the skin of the anomaly.

Why?

You were in this to make money, right?

So chop chop.

Anomalies are like waves.

They swell… and recede.

If you’ve missed one, wait for its one-offset to start swelling.

Oh yeah, forgot to reiterate, you’re out before it recedes.

That would be a great trade.

Getting in well before the swell and staying in would be an investment entry-strategy.

Getting out after a swell would be an investment exit-strategy.

Use your imagination.

Wishing you a lucrative market-footprint!

🙂

How I Wish to Trade

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Tension?

No.

Hassle-free?

Yes.

Profit?

Yes.

Fun?

Too. 

I want it to make me want to come back. 

In the background?

Yes.

Part of my normal life?

No. 

Disturbing me in the night?

No?

Terminal on – ideally once a day. Max twice. That’s it. 

Protection?

Yes. Stops for forex. Hedges for options. No naked options. 

Exits?

Make me exit. Yeah, Mrs. Market needs to make me exit. I don’t wish to exit on my own. She needs to throw me out of a trade. 

Fear?

None.

Why?

Bread and butter secured through other-than-trading instruments.

Trading with surplus.

Surplus can potentially become zero. Will I still take the next trade?

Yes. After scanning strategy for errors.

Loss?

Will take small ones, again and again and again. That’s the only way to find the large profit moves. 

Once profit sets in, what then?

Nothing then. 

Normal. 

Behaving as if nothing has happened. 

Giving the trade room. 

It needs to make even more profit. 

It is a potential multi-x trade. Why should I nip it in the bud? As I said, make me exit. Throw me out. 

Family life?

Balanced.

Remnant anger from trading?

None. 

When yes, stop trading. Trading should never be allowed to disturb family life. 

Evolutionary?

Forever. Learning, learning, learning. 

Bias? 

None. 

News?

No. 

Tips?

None. 

Peers?

Maybe to start a strategy with. After strategy is made to fit – no peers any more. 

Discussion?

None. Hopefully. 

Don’t like to discuss trades after terminal shuts. 

Losses piling up?

Review strategy. Discard, renew, implement, trade again. 

Profits piling up?

Great. Do nothing. 

Are you getting the gist?

Similarly, you need to figure out how you might want to trade.

Many things I might be doing will not suit you automatically. 

You need to make things fit. 

If something doesn’t fit, discard it. 

Look for something new that might fit. 

Make a trading strategy that’s lucrative and gels with you and your lifestyle and environment. 

Such a strategy will blossom. For you. 

When are you doing it Right?

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There’s something called the Line.

You feel it.

It’s abstract.

You have to be its master.

Then, you’re doing it right.

Controlled, the line won’t disturb your life.

It’ll very probably add to your life, in terms of wealth.

If you let it control you, everything is finished.

Goodbye.

Life. Wealth. Peace of mind.

It pays to master the line.

How do you feel the line?

By being invested, or in a trade.

How do you master the line?

By being invested or in a trade, again and again, again and again, and then some. Simultaneously, you’re nipping your bad behaviour in the bud, while the line is on.

You control your temper. You don’t lose it.

You develop patience with loved ones.

You learn how to position-size the line, while winning or losing.

You attenuate all kinds of disturbance.

You keep going on and on like this, till one fine day, the line’s presence becomes a part of your life. Line-switch being on doesn’t change you or alter your behaviour in any negative manner anymore.

That’s when you’re doing it right.

Effects?

Trade on = like when trade was not on.

Investment? You’re not thinking about it.

You sleep well.

Good family life… not disturbed by the presence of the line.

Yeah.

Line.

Master it.

Stop-Loss vs Hedge – what’s what and how?

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Insurance.

Makes you sleep easy.

Simultaneously, you are able to take a calculated risk.

Risk?

Why should you take a risk?

No risk no gain.

It’s as simple as that.

You have to put something on the line to possibly gain something.

That’s what market activity is all about.

You’re doing this all the time.

Day in, day out.

You’ve become used to a steady and dynamic LINE. Your line doesn’t harm you anymore. It doesn’t disrupt your life.

Well done.

How did you achieve this?

By using stops and hedges.

What’s the difference?

The difference is technical, and then practical.

For some mindsets and positions, a stop is more suited.

When you don’t mind exposing your market-play, and want to close your terminal and do other stuff, use a stop.

You get up from your desk, engage in other activity, and have forgotten about your position, because now you don’t need to tend to its needs for 24 hours, for example.

Great.

Your position will either play out, or it won’t.

If it doesn’t, your stop will automatically throw you out of your position.

The level of the stop is digestible.

Next morning, you simply move on to a new trade.

Let’s say you don’t want to to expose your market play, or, in some cases, when you don’t need to expose your market play – how do you then insure yourself?

Hedge.

A hedge maintains general market neutrality.

It leaves windows open for what-if scenarios.

For example, the trade could make money, and then the hedge could make money.

Or, vice-versa. As in lose-lose. Sure, there are win-loss and loss-win scenarios too.

The starting point is somewhat neutral, and then there are permutations and combinations.

Some people prefer this kind of play.

They like the possibility of maximizing profit from the total position at a calculated higher risk.

Also fine.

Generally, the idea is for your main position to make money and your hedge to lose money.

It might or might not play out like that.

Some like this uncertainty and know how to benefit from it.

A stop is sure-shot and straight-forward. It is low-risk as long as it is digestible.

Hedges open you to the risks of a meta-game. Play becomes more interesting, consuming, and possibly, more profitable, for experienced hedgers.

In my opinion, a hedge is slightly higher in risk than a stop.

However, both entities lower overall risk.

Currency pair forex trades are typically taken with a stop. However, they can be hedged too.

Market-neutral option-trades are typically taken using hedges.

Step into a trade with either or, for peace of mind and career longevity.

Cheers.

🙂

Patience and Nerves Anyone?

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As someone I look up to put it recently – “It’s a game of patience and nerves!”

What is?

The stock-market. 

For whom?

The long-term investor. 

Do you have any?

What?

Patience, or nerves, or both?

You do?

Well, then you’ll do well in the markets, over the long-term. 

We look for complication. Meanwhile, we forget the basics. 

These are basics. 

If you’re not patient, you’ll for example jump into a stock at the wrong time, or you’ll jump out of it too early, or what have you. 

If you don’t have patience, well, develop it. 

If you can’t, do something else instead. Trade. Don’t long-term-invest then. 

If you cannot develop patience, you are not cut out to be a long-term holder. 

One method to cause the tree of patience to grow in you is to create the correct environment. 

Just don’t do anything that will make you jump. 

Invest your sur-sur-plus, money that is then pickled away, money that you won’t miss, yearn for or require over the very long-term. 

Go in with margin of safety. 

Stay in a stock you’ve singled out and entered until there’s a glaring reason to exit. Try to exit upon a high. This is the market. Highs are its nature. So are lows. That means that highs come. Wait for them to come, to exit from anything you need to exit from. 

Nervers, well, they come into play if you’ve not invested with margin of safety. 

I do remember two instances though, where everyone’s nerves were tested. October 2008, and March 2009. At these times, stocks sold for a song. Good ones and bad ones alike. Fear did the rounds, extreme fear. That’s what fear does. It creates once-in-a-lifetime opportunities. Take them. Maintain a clear head. Your nerves of steel will do that for you. Create an environment for your nerves to become strong. Or, perhaps expressed another way, create an environment where any weakness in your nerves is not required to show itself, and gets subdued into extinction. 

How?

Again, just go in with your sur-sur-plus. You’re not going to miss this money even if the sky is falling upon your head. And you’ve gone in with margin of safety. Your nerves will stay intact. 

Ensure your basics. Allow them to shine. 

The rest will take care of itself. 

Good investing. 🙂

Understanding and Assimilating the Fear-Greed Paradox

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Holy moly, what are we talking about?

Let’s say you’ve done your homework.

You’ve identified your long-term stock.

Fundamentals are in place. Management is investor-friendly. No serious debt issues. Earnings are good.

Valuation is not right.

You wait.

How long?

Till the price is right.

What happens if that doesn’t happen.

You don’t pull the trigger. It’s difficult, but you just don’t pull.

Let’s say the price is becoming right.

You are looking for an extra margin of safety.

You are waiting to pounce. How long?

What’s your indicator?

Your gut?

Many things have been said about the gut.

It does feel fear.

Look for that fear.

Scrip is near a very low support, but holding. You are afraid that this last support might break and that the scrip might go into free-fall. Look for that fear. There goes your buying opportunity, you are probably saying. Intraday, support is broken. You are now sure it’s gone. Look for that feeling. Intraday, scrip comes back. Closes over support. Large volume. This chronology is your buy signal. You pick up a large chunk. Scrip doesn’t look back.

You don’t have to go through this rigmarole. You don’t have to bottom-pick. This exercise is for those who want that extra margin of safety.

Now invert the situation.

You’re sitting on a multibagger.

Lately, you’re not agreeing with the company’s business plans. You want out. Best time for you to exit would be now, sure. But, scrip is in no resistance zone, and is going up and up and up. What do you do?

Look for greed within yourself, when you start saying “Wow, this is going to be the next 100-bagger!” Look for the moment during this phenomenal rise when you’re getting attached to the scrip and don’t want to get rid of it, despite having concluded that you don’t agree with the vision of the promoters. Look for the time you start going “My Precious!”

Sell.

This chronology is your intrinsic sell signal.

Sure, radical.

I agree.

Sure, I’m combining trading techniques to fine-tune my investing.

I’ve stood on the shoulders of giants.

I’ve seen from their heights.

It’s time I start contributing.

What’s the Frequency, Flipkart?

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Hmmm, a zero-profit company…

In fact, a loss making company…

Do you get the logic?

People are probably seeing an Amazon.com in the making.

Amazon exists in a highly infrastructure-laden country with systems.

Can we say the same about us?

As of now – no.

Are we on the trajectory?

Sometimes yes, sometimes no. It’s been five steps forward and then three back till now.

What’s all the hype about?

Institutions want to make money during the ride.

Whether the ride culminates into an Amazon.com is irrelevant for institutions.

Public opinion acknowledges the ride.

That’s enough for institutions.

They’ll ride to a height and exit, irrespective of any MAT or what have you.

While exiting, they’ll hive off the hot potato to pig-investors in the secondary market, post IPO.

Hopefully, a valuation is calculable by then. Even the PE ratio needs earnings to spit out a valuation. No earnings means no divisor, and anything divided by zero is not defined.

Keep your wits about you. Follow performance. Follow earnings. Follow bearable debt. If you see all three, a sound management will already be in place. Then, look for value. Lastly, seek a technical entry.

Don’t follow hype blindly.

Cheers! 🙂

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.

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.  

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!

🙂

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. 

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. 

🙂

Why work for less than 1:1?

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It’s a funny world.

In this funny world, many people work for less than 1:1.

Many of these people don’t have a choice. Their circumstances are such.

Some do, and they still choose losing odds.

What are we talking about?

The reward : risk ratio.

In the marketplace, our risk needs to be defined by default.

If we’re not thinking about defining our risk pinpointedly before entering the marketplace, let’s just pack our bags and study music instead, or biochemistry, if you please, with no disrespect to either music or biochemistry.

Define your risk! Set a stop!

Nobody plays to lose, right?

Once the risk is understood, one starts looking at reward.

Reward potential must be at least equal to or greater than the defined risk. This statement, coupled with a large sample size and more than 50 trades moving your way out of every 100 is already a winning combination.

Anyone can pick 50:50. All you need is a coin-flip.

60:40 is definitely achievable with research.

You don’t need more to win big.

Now make the 1:1 work for you. In 40 out of  100 trades, you’re stopped out at – 1 (minus being for trade going against you, and 1 being your defined unit of risk). I know it’s difficult to do, but take the next trade with a smile. When a trade starts to run, don’t cut your profit at the  +1 level. Let your profit run.

At +1, lift your stop to 0. At +2 lift your stop to +1. So on, so forth.

Don’t exit manually.

Let the market throw you and your profit out.

That’s called a proper exit.

I had promised that I would be speaking about proper exits.

Well, there you have it.

Cheers!

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!

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! 🙂

How Does One Position-Size?

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What is the singular most lucrative aspect of trading?

Any ideas?

Want a hint?

Ok, here’s the hint. It is also the safest aspect of trading.

Give up?

Here’s the answer. It’s called position-sizing. (The pioneer of position-sizing is Dr. Van K. Tharp, @ www.iitm.com, and I have learnt this concept through him).

Surprised? I would be surprised if you weren’t surprised.

Yeah, trade selection is important too, but other things are more important while trading.

For example, trade management is more important than trade selection. So is exit. Entry might be paramount to an investor, but to the trader, entry is run of the mill. It happens day in, day out. The trader … just enters a selected trade. There’s no deep thinking involved. The trader knows this. Crux issues are to follow. The trader is saving his or her energies for the crux issues.

So far, we’ve spoken about the chronology of a trade, i.e. entry – management – exit.

Before entry, you decide how much you want to trade with, and how much you want to risk. That’s the size of your position, or your position-size. Remember, for the concept of position-sizing to make any sense, your stop-loss percentage must remain constant from trade to trade. Only your traded value goes up or down.

What does the level of your traded value depend upon?

It depends upon HOW WELL YOU ARE DOING.

If you’re on a roll, your traded value for the next trade goes up. The increment is proportional to the profits you are sitting on. Since the stop is a constant percentage, the amount risked is also higher. Return is proportional to the amount at risk, and the long-term net return of such a trade will also be higher. All this means, that the more you make, the more you set yourself up to make even more…!

Take a coin. Flip it millions of times. There will be a stretch, where you’ll flip tails 5 times in a row, or six times in a row, or maybe even ten times in a row. The 50:50 trade called “coin flip” can well result in a series of back to back losses. You are an experienced trader. Your trade selection ratio could be 60 winning trades to 40 losing trades, or perhaps a little better, let’s say 65:35. Even a trade selection ratio of 65:35 will result in back to back losses. As a trader, you need to take large drawdowns in your stride, as long as you are confident, that in the long run,  your system is working. What’s working in your favour during the large drawdown?

Your position-size is.

You see, as trade after trade goes against you, and your losses pile up, your position-size KEEPS GOING DOWN. Your stop percentage remains constant. This means, that the more you lose, the more you set yourself up to lose lesser and lesser, trade after trade. Yeah, position-sizing gives you the safety of losing less. Nevertheless, because of this safety assurance from your position-sizing strategy, you keep yourself in the market by just taking the next trade without too much deep thinking (and with no melancholy whatsoever), because your next trade could be the one decent trade that you are looking for. Yeah, your very next trade could cover all losses and then some. TAKE IT.

Now, two things can happen.

Firstly, if you keep losing, and hit your loss cut-off level for the month, well, then, you just stop trading for the rest of your month. You then spend the rest of the month reviewing your losses and your system. You tweak at whatever needs tweaking, and come back fresh and rested the following month. Position-sizing kept you in the market, ready to take the next opportunity to earn big. The auto-cut takes you out of the market for a while. That’s why, in my opinion, while position-size is still activated, it provides more safety, because it keeps you in the market to recover everything and then some, starting with your VERY NEXT trade. Having said that, auto-cut is auto-cut. It overrides position-sizing.

The second thing that can happen is that your losing streak ends before your month’s cut-off is reached. Yayyy, position-sizing is still activated! You’ve lost lesser and lesser on each losing trade as long as you were in the losing streak, and now that you are winning again, each win sets you up to win more in the trade that follows.

After many, many trades, just cast a glance at your trading corpus. It will boggle your mind!

Your position-sizing strategy has kept raising your corpus, because your system is 60:40+, and you win more than you lose. Ultimately, your corpus has become substantial. Its size exceeds your expectations BY FAR.

All thanks to position-sizing.