Category Archives: Profits

The Concept of Satmya

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This one’s from the world of Ayurveda, folks.

We’re not geeks.

We move around amongst all segments of life, grab whatever is useful, and then try and apply its usefulness into our world of applied finance.

And that’s exactly what we’re going to do with the concept of Satmya.

Imagine in your minds a first-time smoker. The first puff breaks him or her out into a coughing flurry. A new stimulus is choking the respiratory system. The body rejects it.

That’s roughly the story for any first-time stimulus which is disturbing.

Upon repeated exposure to the stimulus, the body slowly gets habituated. Ultimately, rejection recedes. One’s tissues are now not only bathing in the stimulus, they are enjoying it. In fact, they want more.

Habituation is where we want to keep it at, no further. That’s the point of Satmya. At the point of Satmya, you enjoy the stimulus without falling sick, since your body-chemistry can now deal with the stimulus without getting imbalanced.

When we put on a live trade in any market, we expose ourselves to market-forces. A gamut of emotions comes alive inside of us. The level of reaction in our system is proportional to the size of the trade. First exposure makes us erratic. Therefore, it is very important to keep this first exposure small.

Markets swing. Joy wells inside of us with notional profit. Sorrow consumes us upon notional loss. Body-chemistry now needs to adapt.

If losses are kept small owing to the usage of stops, one’s system gets used to small losses. Meaning to say, small losses don’t shake you anymore. Market exposure results in small losses all the time, provided you’re using stops. Once these don’t shake you, and your entire world is still balanced despite them, you’re not afraid to put on the next trade, even after a string of losses. This very next trade could well turn out to be a multi-bagger, so you need to put it on. If you’re afraid to put on the next trade, you take yourself out of circulation, and fail to catch a big market move.

A habituated system makes one put on the next trade.

When the market swings in your favour, your notional profit causes you to become emotionally imbalanced. The first time this happens, you effervescently go about promising everyone the world, and get into situations you can’t deliver upon later. You might even make the other mistake of booking your profit early, not allowing the underlying to yield even more profit. Why, why, why?

Get used to sitting on a profit. Let it happen many, many times. Don’t go jumping about when it happens. Take it in your stride. Let the trade develop into a multi-bagger so that it can make up for your many small losses and yield even more beyond your overall break-even point. Such a state of mind is only earned once your system is habituated with regard to profit-yielding situations.

Another big mistake we make after a profitable trade is to put on a disproportionately large position-size in the next trade. Habituate your system to not increase position-size disproportionately. Calm it down after a profitable trade. Then coolly calculate your new position-size, taking total equity and steady maximum-loss percentage into account. Only increase position-size as per the mathematics of your trading strategy, not according to how good you are feeling after a profitable trade.

Habituation will also fine-tune you while lessening position-size after a string of losses. On the one level your math proposes a new lower size to trade in such a situation. On the second level, your body-chemistry will signal to you from inside whether you are comfortable with this size in a new position. Listen to your body and mind. If they are not able to take more than a certain quantum of market-forces at a given time, they will tell you. If you are able to listen to them and then can adjust your position-size further down to a level that body and mind are comfortable with, you are then taking the concept of position-sizing to a metaphysical level.

So, see what the concept of Satmya or habituation has done to your trading. It has made trading holistic for you. With the incorporation of this concept, you are trading in a manner that is comfortable for your mind and body.

The net result is that you don’t fall sick because of trading, and because you stay in the game, you are able to catch the big winners when they come.

Happy Trading! 🙂

Moving on to a Higher Table

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You’ve started to rake in regular profits on your poker table, or, if you will, on your regular trade-size.

Common-sense now tells you, that you need to scale it up a bit. After all, you’d still be risking the same percentage of your stack-size per trade. Simultaneously, if your win-ratio remains constant, you’d be allowing your stack to grow at a faster pace.

You move on to a higher table.

Welcome to the concept of position-sizing.

Those who position-size can evolve into huge winners in minimum time. Even though the idea of position-sizing is so central to trading, it is still one of the most under-discussed of topics. We need to thank Dr. Van Tharp for teaching this concept properly.

Think about it. When you win, your principal increases. On the next trade, you then put the same principal percentage at risk like you’ve always done. Because your new principal was more, it allowed you to buy more. Thus, you put yourself on the line to win more.

What’s essential here is also to down-size your position when you are losing. Taken a few bad beats in a row? Move down to a lower table for a bit, man. Allow your stack to recuperate at this lower level and then some before moving back higher. With that, when you’re losing, you start to risk less. Crucial point.

Of the different methods available to you to position-size, here, we speak about increasing trade-size when a new trade starts.

The advantage you enjoy when you’re doing pure equity is that on each new trade, your position-size can pinpointedly be adjusted according to your stack-size. Scale-up, scale down, trade upon trade, as the situation demands. Beautiful.

Why does this work out so beautifully for you?

You see, your system gives you an edge. You are opening your positions on high-percentage winners only. Period. Simultaneously, you are cutting your losses at your pre-defined maximum. You are also allowing your winners to win more. And, you are taking your stops. Even if your system then gives you a 55:45 edge over Mrs. Market, you’re doing great. Over a large sample-size (many, many trades, or for that matter many, many poker hands), your stack will increase with a high level of probability. As it goes on increasing, you keep turning on the heat by increasing your position-size further and further.

What happens then? What do you see?

Something beautiful happens.

Your trading principal (what we’ve been calling stack-size all the time) starts to increase exponentially. Have you seen the progress of an exponential function as one travels from zero to the right on the x-axis (the x-axis here would stand for sample-size or the number of trades taken)? If not, check it out on the net.

A good system should give you a 60:40 market-edge. In the Zone, you’d probably trade at 70:30 or beyond. That’s 70 winning trades out of every 100 taken, and 30 losing ones. Imagine what that does to your trading principal over 1000 trades, if you adhere to position-sizing, let your winners ride and take your stop-losses.

The numbers will boggle your mind.

Go for it.

Survival Basics – Building a Baseline

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Who are you?

Do you really know that?

What’s your core reaction to stuff, let’s say market stuff?

How do you react to a crisis? Do you freak out? How much do you plan to avoid a crisis? How do you feel after hitting a home run? Do you get over-confident and start doing irresponsible things?

What happens to you when the scenario is dull? Do you get depressed? Can you take it?

If you’ve dealt with these and more of such questions, well, bully for you, because you’ve already gone about building your market baseline. And that’s a really proper / solid approach to Mrs. Market.

A baseline is a basic point of reference. It tells you how you normally react to a particular situation. It also lists the emotions you went through, and the consequences you had to suffer owing to your actions. As experience piles up, the number of situations you can refer for also increases.

So, let’s say something unusual happens in the markets. Hmmm, let’s say Greece officially goes bankrupt, and let’s say that you are net-net long, and have been caught unawares. What do you do with your positions? With all the mayhem around you, right, what do you do?

Basics of survival in the markets – in a crisis, refer to your baseline.

Your baseline takes you back to the Lehman default. You remember being net-net long, being caught unawares. You remember ignoring your stops, waiting for a rally. Futures wiped out your principal, didn’t they, because you answered margin calls and waited? You remember the long period of depression after that. Worth it? Naehhh.

So, after referring to your baseline, you don’t ignore your stops. Taking the immediate loss, you bail out of your positions. A large portion of your principal is still intact, living to fight another day.

What about euphoria? How do you deal with euphoria? A position turns into a winner, and you are sitting on a 25% profit in a few days. You are feeling really kicked, and are walking with a swagger. What do you do next?

Basics of prosperity in the markets – at the onset of euphoria, refer to your baseline.

Your baseline tells you, that your behaviour during your last big-winning trade was far from exemplary. In your euphoric state of mind, you were already imagining all the things you would buy with your notional profits. Then, you panicked at the thought of losing any of those notional profits, and you squared-off the trade, taking those profits home, only to see the scrip soar another 80%.

Right! You snap out of your euphoria because of your baseline memory. Then, you install a trigger-stop 8% below the scrip’s current market price. Good. In an effort to capture even more profits, you have put a small part of your existing profits at stake. That’s exemplary behaviour, because now there’s a good chance of capturing a part of the scrip’s further rise.

And boredom? What do you do when Mrs. Market bores you? As in, stops being hit both ways, going nowhere, no market strategy yielding profits? Happens, sometimes for many months in a row.

Basics of maturity in the markets – when Mrs. Market goes nowhere, refer to your baseline.

Oh how you wished you hadn’t ruined that family holiday, right, by continuing to take pot-shots at Mrs. Market the last time she went nowhere. That’s what your baseline is saying.

You switch off, go on another (this time enjoyable) family holiday, and come back refreshed to see that Mrs. Market is now trending, ready to take you for a drive in one set direction.

There’s no limit to baseline referrals.

Systematic players build a baseline, and keep referring to it.

Later, we remember them as successful players.