Category Archives: Technicals

“Don’t Turn Around – Der Kommissar’s in Town”

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There’s activity within our slow-poke government.

Yup, we just got a new finance minister. PC’s back. Or, as the newspaper said, PC reboots.

He’s probably reinforcing backdated taxation.

He’s hinted at interest-rate cuts.

He’s after more service-tax candidates.

He’s transferred lots of portfolios.

He’s trying to dish out motivational quotes, so that the economy revives.

“Alles klar, Herr Kommissar?”

The last time PC was in town, there was volatlity in the markets. First they went up and up and up, and then they went down and down and down. Mr. Chidambaram is a by-word for volatility.

How does he do it?

Frankly, I don’t care.

If I’m getting volatility, I’m taking it.

Not that India as a market lacks any volatility without PC.

We Indians are emotionally volatile people. When we are happy, we are sooooooo happy. When we are down and out, man, we are totally gone. No surprise that our markets reflect our topsy-turvy and dramatic emotional nature. Yes, the trader in India is blessed with a volatile trading scenario by default.

So, PC or no PC, volatile trades make themselves available to us in the Indian markets regularly. What PC does is, he gives the system’s volatility a turbo-boost. Our market’s “beta” goes up wth PC, and it goes up fast, quite fast.

Man, how does he do it?

You know, I still don’t care, but if I did, I think this would be the correct answer.

Der Kommissar seems to do it in two steps. First he creates carrots, lots of carrots. These are dangled before India Inc. Things start hotting up. Foreign investment wakes up – demand – buying pressure – our markets go up. Then, when the balloon is inflated, der Kommissar will appear on television and will let out comments (implementation of stick, like the backdated taxation thing) which the market takes exception to. Or, he might give some interview in the media which India Inc. interprets negatively. Well, down we come crashing. Frankly, I still couldn’t care less. Upwards or down, there’s a trade to be found.

Just a few days in his seat, and pivot points are leading to bounce-backs, supports are holding, resistances cracking (it’s the carrots), and technicals are very, very initially changing from “range-bound” to “trending”.

Fine, let’s just trade the Kommissar while he’s in town.

I’ve quoted Falco above and I’m quoting him again : “Alles klar, Herr Kommissar!”

So, When Does One Attack Here?

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Ammunition.

Your game revolves around it.

We’re not talking war over here.

Or are we?

The marketplace is a war-zone, come to think of it.

Question is, how do you use you ammo?

Do you fire the bulk right away?

Who are you trying to scare?

This is the marketplace, people, overall, it’s not scared of your few rounds. There are just too many players, with varied interests and ideologies. Your few rounds might cause a mini-spike in the underlying concerned, but that’s about it. That mini-spike is not going to make it to tomorrow’s paper.

So, why bother? You don’t need to attack here. Straight away, that is. You can attack when the time is ripe, and when you are ripe too.

What does being ripe for an attack mean?

It means that your defences are fully in place and on auto-pilot. Your basic income is taken care of and suffices your family’s needs. Actually, let’s go a little further and say that your family is able to live comfortably on income generated by you which is independent from any of your speculative / risky activities. This is the first step. You need to work yourself into such a position, even if it takes you a long time. Without knowing that your family is safe, no matter how you fare in the marketplace, you will not be able to trade freely.

Then comes the second step in setting up your best defence. You need to have access to an emergency fund. Meaning, this kind of a fund needs to be salted away first. It then needs to be made accessible when required, and otherwise, it is to remain unused. Don’t let your emergency fund’s miniscule return bother you. In lieu of that, you are getting safety. Your emergency fund needs to remain safe, sound, and there, when you need it. This way, if and when something happens, and funds are required, a). you won’t have to tap into your family’s basic income, and b). you won’t have to tap into your trading corpus. You’ll access your emergency fund. Your family will remain financially undisturbed, and so will your trading, despite the emergency.

Now comes the final step, before you can get on with your trading, yes, even aggressively. In this step, the focus is on you. While setting up your family’s basic income and your emergency fund, you have struggled. Your health could have taken a knock. Your mind could be in a whirl. Normalize, my friend. Take time off. Stare at the wall. Get your body-chemistry back to equilibrium. Take a vacation. Take many vacations. Finally, when you are in shape, go for it.

Ok, so you’re in shape, and ripe for attack.

Now, the time needs to be ripe for attack too.

Mrs. Market has three basic modes of movement. She trends, moves in a range and then, she just plain goes nowhere, i.e. she’s flat.

Your aggression needs to be implemented only when she’s trending. Period.

That’s when it’ll yield mind-blowing returns.

Fire away when she’s flat or moving in a range, and you’ll keep getting stopped out.

How can you tell when she’s trending?

Through technical analysis.

So, study. Learn to differentiate between her three basic modes of movement.

Then, when she trends, and only then, use your ammo aggressively.

Learning to Draw

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Life’s about reaching out.

There’s not a single bridge that’s been built without someone having to reach out first.

A child connects the dots of life to find that it’s looking at a roadmap. Walking on a known parameter is then easy. One knows where to tread.

Mrs. Market is a conceited lady.

She needs you to reach out to her.

Till you don’t, she doesn’t care about your existence either.

When you do, she starts concerning herself with you, but only after you make the first move towards her.

You have to take the first step. You have to build the bridge.

In the world of trading, you do that by putting on a trade.

Given that you don’t want to lose your pants to a tough cookie like Mrs. M, you need to first look at the stuff that’s working in your favour. Before reaching out, that is.

You are able to connect to her with hardware. As long as the hardware functions, there are no further issues there.

The approach with which you connect is your strategy. It has been developed upon observing the behaviour of Mrs. M, and as her behaviour has changed from time to time, so has your strategy reinvented itself in tandem. The software with which you programme your strategy has highly maneuverable algorithms that are able to alert you instantly upon any of Mrs. M’s behavioural changes. Once you’ve identified her pace and style of movement, you know what kind of a bridge you need, to connect with. You know what kind of a trade you need to put on.

Putting on the proper trade at the proper time is the name of the game. When Mrs. M is trending, your trade time-frame, trade-size and stop are all different from when she is moving in a range. When she is falling, the pace of your trade needs to be fast, real fast. Your instrument needs to be options, not pure equity, since the latter is tougher to move through. When she is flat, take a break, don’t build any more bridges for a while.

Each bridge, that you are capable of building, should give you an edge over Mrs. M. If that’s not the case, then the bridge is faulty, for even a coin-flip is giving you an even-steven 50:50 shot at Mrs. M. Therefore, your bridges need to be in the 60:40 plus category. Bridges take time and effort to build. Thus, they must yield you ample profit once they have been built.

After a while, she gets bored with your approach, and changes her pattern. Your bridge is not able to connect well. You notice this when your trades start going awry. Your systems need to adapt, and new bridges need to be built to account for her new avatar.

And what is this whole exercise?

Just like the child who connects the dots, you are learning to draw at Mrs. M.

And you’re doing it well.

You’re drawing at her with systems that give you a good edge as long as they work. When they falter, you tweak them to adapt to her, so that they continue to allow you to draw at her with an edge.

You don’t draw at Mrs. M without an edge. Period.

If you can learn this one basic fact, you’ve learnt a lot.

Going All-in Against Mrs. Market

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Yeah, yeah, I’ve been there.

And it backfired.

Luckily, my stack-size in those days was small. That’s the good part. The shocking bit was, that back then, I had defined my stack-size as my networth. Biggest mistake I’ve made till date in my market-career, and I was very lucky to escape relatively unhurt.

Wait a minute, why is all this poker terminology being used here, to describe action in the world of applied finance?

Well, poker and market action have so much in common. Specifically, No-Limit Hold-’em is deeply related to Mrs. Market. We’re talking about the cash-game, not tournament poker. It’s as if Hold-’em is telling Mrs. Market (with due respect to Madonna):

i’ve got the moves baby
u got the motion
if we got together
we’d be causing a commotion

A no-limit hold-’em hand is like one trade. Playing 20-50 hands a day is excellent market practice. You’ve got thousands of games available to you online, round the clock, and most of these are with play money. Even though the “line” is missing here because of no money on the line, this is a no-cost avenue for trade practice, and it’s entertaining to boot.

Back to stack-size? What is stack-size, exactly?

Well, your stack size is the sum of all your chips on the table. You play the game with your stack, and on the basis of your stack-size. The first thing you need to do before there’s any market action is to define your stack-size.

A healthy stack-size is one that allows you to play your game in a tension-free manner. My definition, you ask? Well, I’d start the game with a stack-size that’s no more than 5% of my networth. Segregate this amount in an account which is separate from the rest of your networth, and trade from this segregated account. That’s the wiser version of me speaking. Don’t be like the stupid version of yours truly by defining your entire networth as your stack-size.

In this 5% scenario, you have 20 opportunities to reload. It’s not going to come to that, because even if a couple of your all-in bets go bust, you will eventually catch some big market moves if your technical research is sound and if you move all-in when chances of winning are high.

Wait patiently for a good hand. Then move. One doesn’t just move all-in upon seeing one’s hole-cards. If these are strong, like pocket aces, or picture pocket pairs, one bets out a decent amount to build up the pot. Similarly, if a promising trade appears, and the underlying scrip breaks past a crucial resistance, pick up a decent portion of the scrip. Next, wait for the flop (further market action) to give you more information. Have you made a set on the flop? Right, then bet more, another decent amount, but not enough to commit you fully to the pot. Then comes the turn. The scrip continues to move in your direction. You’ve made quads, and you’re holding the nuts. Now you can commit yourself fully to the pot and move all-in. Or, you can do so on the river, checking on the turn to disguise your hand and to allow others to catch up with your nuts somewhat, so that they are able to fire some more bets into the pot on the river. Your quads win you a big pot. You fired all-in when the scrip had shown its true colours, when winning percentages were high. You exhibited patience before pot-commitment. You allowed others to fire up the pot (scrip) further, and you deservedly caught a big market move. Just get the exit right, i.e. somewhere around the peak, and you’re looking at an ideal trade strategy already, from entry to trade management to exit.

Fold your weak hands. If something’s not working out, give it up cheaply. Ten small losses against a mega-win is enough to cover you and then some.

Often, a promising trade just doesn’t take off after you enter. The underlying might even start to move below your entry price after having been up substantially. You had great hole cards, but didn’t catch a piece of the flop, and now there are two over-cards staring at you from the flop. Give up your trade. Muck your hand.

At other times, you move all-in and the underlying scrip tanks big against you in a matter of hours. Before you can let your trade go, you’re already down big. You’ve suffered a bad beat, where the percentages to win were in your favour, but the turn-out of events still caused the trade to go against you. Happens. That’s poker.

Welcome to the world of trading. Pick yourself up. Dig out another stack from your networth. Don’t allow the bad beat to affect your future trades. If you are thinking about your bad beat, leave the table till you are fresh and can focus on the current trade at hand.

And then, give the current trade at hand the best you’ve got.

Elephant in a China Shop

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Mr. Cool just plugged his trading exam.

Big time, and for the umpteenth time.

It all started out like this. He partied late night. Had one too many, of course. Slept till late morning. Woke up with a headache.

Then he made his first mistake of the new day. He decided to trade.

Why was this a mistake, you ask? After all, trading is his profession.

Two mistakes here, I’d say. Firstly, there was no market preparation. Secondly, health was not up to the mark. Deciding to trade after this backdrop – hmmm – bad call.

The next set of mistakes came right after that. Coolers asked his broker Mr. Ever So Clever the wrong question, this being “What’s moving, mate?”

True to his form was Mr. Cool-i-o. Two mistakes here again. Firstly, you don’t ask your broker technical questions. You tell your broker what to do. You instruct him or her. Asking your broker to instruct you is like asking the second hand car dealer to start ripping you off.

Next, if you are asking Mr. Ever So Clever anything at all, it can be about your funds in transit, or your equity in transit or basically something mechanical. You are not in this business to give Mr. Clever even an inch more of space by asking market questions like what’s moving or what’s going to move.

If you still do, as Mr. Coolovsky obviously proved, then of course Mr. Ever So Clever is going to tout to you what his other clients are squaring off. Specifically illiquid scrips. These need buyers, and if you’ve just announced yourself as a buyer and are asking what to buy, illiquid scrips that others are selling will definitely be touted to you for buying.

Also, a scrip doesn’t have to be illiquid to be touted. One can even be dealing with a very large order which a big player is looking to off-load at a relative peak. A whole set of brokers then does the rounds to get buyers interested.

The bottom-line is this – you are not giving your broker any kind of leeway with regards to what you are buying or selling. You need to do your own technicals, or fundamentals or whatever it is that you do, to gauge what is moving. You don’t ask what is moving.

On many occasions, rallies wind up soon after big players square off. This time was no different. Coolster had loaded himself with a scrip which had already peaked. With no buying pressure to push it up any further, its price started to sink.

Next set of mistakes.

He’d marked a vague stop-loss in his head because everyone had been ticking him off for not applying stops. Specifically our friend Mr. System Addict, remember him? He had been very vocal about it. Because the stop was vague, Mr. Cool wasn’t motivated enough to feed it into his trade as the price neared his stop.

Not feeding in a mental stop – mistake.

As the scrip’s price undershot his mental stop, Coolins did nothing except to hope it would climb back to his buy level, which is when he would exit.

Hoping in a trade – big mistake.

Not taking your loss once stop is undershot – even bigger mistake.

What happened after that can’t be called a mistake anymore (on humanitarian grounds), because Coolinsky had gone into freeze mode. The reason was the sinking scrip. Huge losses were piling up. Coolitzer answered two back to back margin calls in this frozen state of body and mind. He was frozen. Didn’t know what he was doing. Scrip didn’t turn back up before Mr. Cool was cleaned out.

This chronology of events is a kind of worst-case scenario. A grade F minus in an exam.

Every trade is an exam. One needs to tread carefully from step to step, from pre-trade preparation to actual trade to after-trade emotional wind-down.

Remember that, so you fare much, much … much, much better than our F minus candidate. And don’t worry about him, Mr. Cool-Dude will be back. He’s always able to get back, you’ve gotta give credit to Mr. Cool for that.

Game-Changers

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Change.

The one factor that keeps us evolving.

Adapt or get left behind. Seems to be the Mantra of the times.

The management of money has seen some big game-changers over the last few decades. We want to speak about them today.

In the ’90s, Bill Gates wrote about business at the speed of thought. We’re kinda there, you know. Let’s say you have an idea. From idea to framework, it’s mostly about a few button-clicks, with the web being full of idea-realizing resources. See, we’re already discussing the biggest game-changer, which is the flow of information. Today, we live in a sea of information. It’s yours to tap. Delivered to you on a platter. Such information flow changes everything, from lead-time to middle-men. Best part is, almost all of the information available is free!

Then there’s technology. Cutting-edge software, everywhere. Now, there’s even a software to smoothly organize your contract notes and calculate profit or loss, and taxes due. It’ll give you the appropriate print-out, whichever way you want it. You don’t need to hire an accountant to audit your market play. You just click the contract note and the software extracts all relevant information from it, organizing it beautifully. Actually, that’s nothing. Market-play software is what we should be speaking about. Cut to the movie “A Good Year”. Just picture Russell Crowe motivating his “lab-rats” to go for the kill and short an underlying, only to short-cover a few points below. The technical software follow-up of the underlying’s price on the wall-panels is the image embedded in my mind, as the price gets beaten down, and then starts to rise again.

Market software allows you to run scans too. A common exercise I do at the beginning of a trading day is to narrow down the 4,537 active stocks on the BSE and the NSE to about 10 tradable ones. I do this with 2 back to back scans. Each scan takes a minute. Then, I study the charts of the tradable stocks and select two or three to follow. That’s another 5 minutes. Putting on trigger buys or sells for these stocks takes 2 minutes. So, assuming that a trade gets triggered in the first minute, I have arrived from scratch to active trade in 10 bare minutes, with no prior market preparation. That’s what technology can do for you, and more. Software is expensive. It’s mostly a one-time cost with a life-time of benefit. Worth it. The management of money is a business, and each business needs initial investment.

Numbers have changed the game. Volumes have grown for many underlying entities that were illiquid earlier. When volumes are healthy, the bid-ask spread is very tradable. Thus, today, you can choose to trade in almost any avenue of your choice and you are almost certainly going to get a liquid trade.

Our attitudes and lifestyles have changed too. Today, we want more. No one is satisfied with mediocricity or being average. We have tasted the fruit that’s to be had, and are willing to get there at any cost, because we are hungry. Luxurious lifestyles lure us to rush into the game, which we play with everything we’ve got, because as I said, we’ve tasted the fruit, and we want more. Our approach has made the stakes go up. We need to adapt to the high stakes with proper risk-management.

It’s never been easier to access funds, even if you don’t have them. Leverage is the order of the day. Of course that changes the game, leading to higher volumes and increasing the frequency of trading. We need to keep debt-levels under control. It’s never been easier to go bust. Just takes a few button-clicks and a few missed stops. The leverage levels take care of the rest.

Game-changers will keep coming our way. As long as we keep adapting and evolving, our game will not only survive, but also blossom.

As Ponzi as it Gets

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Charles Ponzi didn’t dream that he’d become one of the most copied villains in the History of mankind.

Ponzi was a financial villain. His ideology was so simple, that it was brilliant.

Lure the first set of investors with promises of huge returns. Transfer the first few return payouts. Lure more and more investors as the news spreads about the scheme with great returns. Transfer few more return payouts to old investors from the investment principal of new investors. Lure a peak level of investors ultimately. Then vanish with all the collections.

As Ponzi as it gets.

I hardly read the financial newspapers. Technical trading finds news to be more of a burden. Earlier, I used to gauge sentiment from the news. Now, my Twitter-feed is an excellent gauge for sentiment. Also, with time, one starts to gauge sentiment in the technicals. Candlesticks are a great help here.

Yesterday, in a loose moment, I picked up the Economic Times. Normally, it’s not delivered to our house. Yesterday, a supplement of the ET was included in our normal newspaper. Probably a sales gimmick. Anyways, I glanced through it. Was shocked to find that 25 recent Ponzi schemes had been unearthed in India alone.

What is it about us? Can we not understand what greed means?

The sad fact was that all the investors who were trapped were retail small timers.

Education, people, education. Are you financially literate? If not, please don’t enter the markets. No amount of regulation can save you from being duped if you are financially illiterate.

When you’re putting your money on the line for the long term, you’re looking for quality of management. A track record is something you want to see. Average returns are great returns if they promise safety of the principal.

Where there’s promise of huge rewards, there are also proportionate risks. If you really want the thrill of very high returns, all right, fine, go ahead and risk a miniscule percentage of your portfolio size in a risky, high yielding scheme. Tell yourself that the principal might or might not come back, and for heavens sake, don’t bet the farm here.

These financial times are as Ponzi as it gets, people, so TREAD CAREFULLY.

An Elliott-Wave Cross-Section through a Crowd Build-Up

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At first, there’s smart money.

Behind this white-collared term are pioneering investors who believe in thorough research, and who are willing to take risks.

Smart money goes into an underlying, and the price of this underlying moves up. Wave 1.

At the sidelines, there are those who have been stuck in this underlying. As the price moves above their entry level, they begin to off-load. There’s a small correction. Wave 2.

By now, news of the smart money has perforated through the markets. Where is it moving? What did it pick up? Who is behind it? Thus, more investors following news or fundamentals (or both) enter. The price moves past the very recent short-term high of Wave 1, accompanied by a surge in volume.

This is picked up on the charts by those following technicals, who enter too. By now, there are analysts speaking in the media about the turn-around in company so and so, and a large chunk of people following the media do the honours by entering. Wave 3 is under way.

Technical trend-followers latch on, and soon, we are at the meat of Wave 3, i.e. the middle off the trend.

Analysts on the media then speak about buying on dips. All dips are cut short by a surge of entrants seeking to be part of the crowd.

The first feelings of missing the bus register. The pangs of these cause more people to enter.

Meanwhile, the short community has been getting active. Large short positions have been in place for a while, and they are bleeding. Eventually, the short community throws in the towel, and there’s massive short-covering, causing a further surge in price.

Short-covering is sensed by gauging buying pressure despite very high price levels. It is the ideal time for smart money to exit. That’s exactly what it does, without any dip in the price of the underlying whatsoever.

Short-covering is over. Smart money starts boasting about its returns of X% in Y days, openly, at parties, in the media, everywhere. This causes pangs of jealousy and intense feelings of missing the bus in those still left out. Some enter, throwing caution to the wind.

The price has reached a level at which no one has the guts to enter. Demand dries up. With no buying pressure, the price dips automatically. Bargain hunters emerge, and so do shorters. The shorters sell to the bargain hunters right through a sizable dip. This dip happens so fast, that most of the crowd still remains trapped. Wave 3 has ended, and we are now looking at the correcting Wave 4 in progress.

At this stage, technical analysts start advising reentry upon Fibonacci correction levels. Position traders buying upon dips with margin of safety enter, and so does the second-last chunk of those feeling they’d missed the bus. The price edges up to the peak of Wave 3 and past it. That’s the trigger for technical traders to enter.

We now see a mini-repeat of Wave 3. This is called Wave 5. Once Wave 5 crosses its meat, the last chunk of those still feeling they’d missed the bus makes a grand entry with a sharp spike in the price. These are your Uncle Georges, Aunt Marthas and Mr. Cools who know nothing about the underlying. They cannot discern a price to earnings ratio from an orangutan. They desperately want to be a part of the action, since everyone is, at whatever the price. And these are the very people that traders sell to as they exit. With that, the crowd is at its peak, and so is the price. There are no more buyers.

What’s now required is a pin-prick to burst the bubble. It can be bad news in the media, the emergence of a scandal, a negative earnings report, anything.

The rest, they say, is History.

A Fall to Remember (Part 2)

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Part 1 was when Silver fell almost 20 $ an ounce within a week. Like, 40%. Swoosh. Remember? Happened very recently.

And now, Gold does a Silver, and falls 20 % in a few days. These are the signs of the times. “Quick volatility” is the new “rangebound move”. Put that in your pipe and smoke it.

The wrong question here is “What’s a good entry level in general?” Why is this question wrong?

When something new becomes the norm, there is too little precedence to adhere to. It becomes dangerous to use entry rules which were established using older conditions as a standard.

I believe there is one way to go here. The correct question for me, were I seeking entry into Gold or Silver, would be “Is this entry level good enough FOR ME?” or perhaps “What’s a good enough entry level FOR ME?”

Let’s define “good” for ourselves. Here, “good” is a level at which entry doesn’t bother YOU. It doesn’t bother you, because you are comfortable with the level and with the amount you are entering. You don’t need this sum for a while. It is a small percentage of what you’ve got pickled in debt, yielding very decent returns. If the underlying slides further after your entry, your “good” level of entry still remains “good” till it starts bothering you. You can widen the gap between “not-bothering” and “bothering” by going ahead with a small entry at your “good” level, and postponing further entry for an “even better” level which might or might not come.

If the”even better” level arrives, you go ahead as planned, and enter with a little more. If, however, your “good” level was the bottom, and prices zoom after that, you stick to your plan and do not enter after that. This would be an investment entry strategy, which sigularly looks for a margin of safety. Entry is all-important while investing, as opposed to when one is trading (while trading, trade-management and exit are more important than entry).

Trading entry strategies are totally different. Here, one looks to latch on after the bottom is made and the underlying is on the rise. Small entries can be made as each resistance is broken. It’s called pyramiding. Trading strategies are mostly the complete opposite of investing strategies. Please DO NOT mix the two.

Sort yourself out. What do you want to do? Do you want to invest in Gold and Silver, or do you want to trade in them? ANSWER this question for yourself. Once you have the answer, formulate your strategy accordingly. U – good level – how much here? U – even better level – how much there? U – no more entry – after which level?

Life is so much simpler when one has sorted oneself out and then treads the path.

Blowing up Big

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Derivatives are to be traded with stops. Period.

Stops allow you to get out when the loss is small.

Common sense?

Apparently not.

Who has common sense these days?

Also, the human being has embraced leverage as if it were like taking the daily shower. Bankers and high-profile brokers have free flowing and uncontrolled access to humongous amounts of leverage.

Apart from that, the human being is greedy. There’s nothing as tempting as making quick and big bucks.

Combine humongous amounts of leverage with large amounts of greed and brew this mix together with lack of common sense. That’s the recipe for blowing up big.

Every now and then, a banker or a high-profile broker blows up big, and in the process, at times, brings down the brokerage or the bank in question. In the current case at hand, UBS won’t be going bust, but its credibility has taken a sizable hit.

Bankers are to finance what doctors are to medicine. Where doctors manage physical and perhaps mental health, bankers are supposed to manage financial health. Bankers are taught how to manage risk. Something’s going wrong. Either the teaching is faulty, or the world’s banking systems are faulty. I think both are faulty. There exists a huge lack of awareness about the definition of risk, let alone its management.

Trained professionals lose respect when one of them blows up big. Such an event brings dark disrepute to the whole industry. Most or all of the good work to restore faith in the banking industry thus gets nullified to zilch.

A doctor or an engineer is expected to adhere to basics. I mean, the basics must be guaranteed before one allows a surgeon to perform surgery upon oneself. A surgeon must wash hands, and not leave surgical instruments in the body before stitching up. Similarly, an construction engineer must guarantee the water-tightness or perfection of a foundation before proceeding further with the project.

Similarly, a banker who trades is expected to apply stops. He or she is expected to manage risk by the implementation of position-sizing and by controlling levels of leverage and greed. Responsibility towards society must reflect in his or her actions. A banker needs to realize that he or she is a role model.

All this doesn’t seem to be happening, because every few years, someone from the financial industry blows up big, causing havoc and collateral damage.

Where does that leave you?

I believe that should make your position very clear. You need to manage your assets ON YOUR OWN. Getting a banker into the picture to manage them for you exposes your assets to additional and unnecessary stress cum risk.

In today’s day and age, the face of the financial industry has changed. If you want to manage your own assets, nothing can stop you. There exist wide-spread systems to manage your assets, right from your laptop. All you need to do is plunge in and put in about one hour a day to study this area. Then, with time, you can create your own management network, fully on your laptop.

Your assets are yours. You are extra careful with them. You minimize their risk. That’s an automatic given. Not the case when a third party manages them for you. Commissions and kick-backs blind the third party. Your interests become secondary. Second- or third-rate investments are proposed and implemented, because of your lack of interest, or lack of time, or both.

Do you really want all that? No, right?

So come one, take the plunge. Manage your stuff on your own. I’m sure you’ll enjoy it, and it will definitely teach you a lot, simultaneously building up confidence inside of you. Go ahead, you can do it.

Just 40 $ Away…

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The first signs of greed can be sensed.

We’re talking about Gold.

A few months ago, serious players in Gold had identified Rs. 28,000 / 10 grams as their target for Gold.

This target has been achieved for a while now. Nobody’s booked their Gold.

Instead, the target has been revised to Rs. 30,000 / 10 grams, which is just another 40 $ an ounce away.

Please don’t tell me that nobody is going to book (meaning sell, as in booking profits) their Gold @ Rs. 30,000 / 10 grams. I’ve got this nagging feeling that they’re not.

Hmmm, greed is setting in. Nothing unusual. That’s how a bubble progresses.

Yesterday, an update from Reliance alerted me to the hypothesis that Rs. 40,000 / 10 grams was a real possibility in Gold.

Maybe, maybe not. As of now, Reliance is sounding like that fellow who predicted a Dow level of 36,000 some years ago. Today, 36k on the Dow seems impossible, even in one’s dreams.

Does it matter to you how high Gold can go? Or is your target more important? Both are valid questions.

If your target has been achieved, here’s one scenario. Book the Gold and put the released funds into debt. Debt in India is safe, and is giving excellent returns, especially to the retail investor.

If your stomach is full, do you dream about more food?

Seriously people, playing this by targets is a serious option.

It’s also ok if you wanna play it in a “let’s see how high this can go” manner. That’s just another way of playing it. Fine. In this case, you need to set trailing stops, and you need to stick to these if they get hit.

Either way, identify a booking strategy for Gold and stick to it.

Take greed out of the equation. There’s no room for greed in the career of a market player. There’s no room for fear either.

We’ll talk about taking fear out of the equation some other day, if and when unprecedented gloom and doom abounds.

Bumping into the Law of Conservation of Energy

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Back in the ’90s, I used to analyze spectra in the Chemistry lab. A spectrum is a piece of scientific information plotted in 2, 3 or perhaps more dimensions. In a nutshell here, one is trying to analyze a chart in an attempt to understand the underlying chemical structure, or the results of an experiment.

In the new millenium, I moved on to Astrology charts. Here, the underlying were human beings, and one was trying to understand their destinies plotted versus time. Again it boiled down to analyzing charts.

Over the last eight years, I’ve been analyzing market charts. As in, you know, the price of an underlying equity scrip, or of a commodity, or a currency pair, plotted versus time.

Over the years, it has been pointed out to me many times (by lesser minds) that I “wasted” a good part of my professional life in the wrong line.

To be really honest, the chart-reading acumen that started developing in the Chemistry lab only became stronger with the shift to Astrology, and grows from strength to strength with its current shift to the markets. Nothing has been lost. The law of conservation of energy has proven itself to me.

I’m writing this piece for traders who are suffering or have suffered a big loss.

Your first big loss consumes you. Let it do so for a bit, but then you need to pick yourself up.

Why do I say “let it do so”?

You need to know what a big loss feels and tastes like, preferably early in your career with the stakes still small.

At this stage, believe me, nothing is lost in the loss, because there is a tremendous learning experience. Open yourself to learn from the loss. Fine-tune your emotional sensors to detect the onset of loss-triggering emotions when they happen again, so that you can take early evasive action next time around.

If you learn from your loss, you will save yourself when the stakes are high. You might even go on to make a killing for all you know, because early evasive action boosts your confidence tremendously.

The law of conservation of energy bumps into every trader, even you. It’s telling you to start viewing your big loss as a learning experience, and to take it from there. How about listening to what it is saying?

And Gold Overshoots Platinum

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For me, this is a pivotal event.

It signals to me the beginning of the last stage of the bubble in Gold.

The last stages of bubbles are the most eventful.

The basic message being broadcast here is that the ornamental value of the yellow metal is no longer a consideration during its purchase. The whole-hearted focus of Gold-purchase now is its safe-haven value. There is absolutely no question about it anymore.

For the sticklers, I believe we are well on our way to reaching the pinnacle of Wave 3 with the last burst to come in the coming weeks. Wave 3s are normally followed by a correcting Wave 4, and then those who missed Wave 3 latch on to make Wave 5. I also believe that it will be a subdued Wave 4, with perhaps a 23.6% or a 38.2% Fibonacci level correction, before Wave 5 takes over.

For heaven’s sake, if you are entering Gold now, do so only to trade. There is no question of investing in Gold at this level. Where are you seeing the margin of safety to be making such an investment decision?

So, it’s passing the hot-plate from this level onwards. The last donkey standing with the hot-plate still in hand will get burnt, whenever that happens. Just forget about time-frames and focus on the tape.

As someone said, the “devil takes the hind-most”.

Crowds Eventually Start Behaving in a Deluded Manner

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We’re human beings.

The majority of us likes forming a crowd.

Our crowd-behaviour eventually goes warped. History has shown this time and again.

In the market-place, I make it a point to identify crowds. The biggest money is to be made by capitalizing upon the folly of a crowd. That’s why.

So first let’s gauge very broadly, what the main aspects of market-study are, and then let’s see where crowd-behaviour fits in.

Market-study encompasses three broad areas. These are:

1). Fundamentals,
2). Technicals and
3). Sentiment.

You guessed it, crowd behaviour falls under “Sentiment”. Well, sentiment can knock the living daylights out of the best of “Fundamentals”. And, sentiment makes “Technicals”. Thus, for me, the most important factor while understanding market moves is sentiment.

A stock can exhibit the choiciest of fundamentals. Yet, if a crowd goes delusional, it can drive down the price of even such a stock for longer than we can remain solvent. Let’s write this across our foreheads: Delusional Crowds can Maraude Fundamentals.

Since we are now writing on our foreheads, let’s write another thing: Delusional Crowds can cause Over-Bought or Over-Sold conditions to Exist for longer than we can remain Solvent. There go the technicals.

A crowd thinks in a collective. All that’s required is a virus to infect the collective. A virus doesn’t have to be something physical. It can even be an idea. The space that we exist in is laden with disease-causing energies. Once a crowd latches on to a virus-like idea, its behaviour goes delusional.

Here are some examples of such behaviour. At the peak of the dot-com boom, in March 2000, a crowd of rich farmers from the surrounding villages walks into a friend’s office. They are carrying bags of cash. They tell my friend that they want to buy something called “shares”. They ask where these can be purchased, and if they are heavy (!). Since they are carrying their life-savings with them in cash, and plan to spend everything on this purchase of “shares”, they want to also effetively organize the transport of the “shares” to their homes in the villages. Thus they want to know if “shares” are heavy to transport!

In the aftermath of the dot-com bust, Pentasoft is down more than 90% from its peak. I think this legend is from 2001. A crowd of rich businessmen collects the equivalent of 20 million USD and buys the down-trodden shares with all of the money. The scrip goes down to zilch and today, one’s not even able to find a quote for it.

In the 17th century, people actually spend more than the price of a house for the purchase of one TULIP, for God’s sake.

You get the drift.

The current crowd is building around Gold. It’s behaviour as of now is still rational. In due course, it has high chances of going irrational.

Whenever that happens, we’ll definitely be able to see the signs, because both our eyes are OPEN.

And what was Mr. Fibonacci thinking?

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0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377… , … , …

What’s this?

A random set of numbers?

Nope.

It’s the Fibonacci series.

How is it derived?

Start with 0 and 1, and just keep adding a number to the one on its right to get the next number, and so on and so forth.

What’s so peculiar about this series?

As we keep moving from left to right, the result of dividing any number by the one on it’s immediate right starts converging towards 0.62.

Also, as we keep moving from left to right, the result of dividing any number by the second number on its right starts converging towards 0.38.

The series starts with a 0.

Another number to note is 0.5.

So, in a nutshell, these are the important figures to note, which this series generates: 0, 0.38, 0.5, 0.62. There are more, but these are the most important ones.

I’ve always wondered why the 0.5 is important. Actually, “half-way” is big with mankind.

What’s the significance of this series?

In any activity involving a large number of units, these Fibonacci ratios are said to be observed.

It is said that crowds behave as per these ratios.

It is said, that for example when many leaves fall from a tree over a long period of time, a Fibonacci pattern can be determined in their falling.

It is said that these ratios are ingrained in nature.

True or false?

Don’t know.

What I do know is that the trading fraternity has taken these numbers to heart, and looks for Fibonacci levels in anything and everything. Most commonly, entry into a sizzling stock is planned after the stock has corrected past a Fibonacci level and has once again started to rise.

In simpler terms, aggressive traders who buy on dips will look for a 38% correction of pivot to peak before entering.

Less aggressive traders will wait for a 50% correction and then enter upon the rise of the underlying.

Traders who like to value-buy will wait for a 62% correction, which might or might not come.

If the underlying goes on correcting past 62%, it is best left alone, because the correction can well continue beyond 0, the starting point of the prior rise.

A current example where you’ll most definitely see Fibonacci ratios in action is with Gold.

The million dollar question I have been hearing around me today is when to enter Gold now, especially because it is correcting heavily.

The immediate answer for me would be to enter at a Fibonacci level of correction.

Which level?

That depends upon your risk profile.

The Funny Things about Technicals

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There’s something uncanny about technical analysis.

More often than not, just before an apparent market turning point, technical analysis tends to position the trader appropriately.

Now that’s saying a lot.

Why could this be so?

At the base of every big move in the market, there are always “insiders”. These are people “in the know”, i.e. the smart money. These people pre-empt a market move with their smart money, because they possess certain market-moving information that most others don’t have.

Fortunately for us, their market behaviour registers on our charts. Today our data-feed is as good as any institution’s data-feed, and with that the face of this whole game has changed. I would go on to say that today our personal data-feed with all its paraphernalia (including social-networking sites) is so fine-tuned to the individual it is servicing, that it is better for that individual than any institution’s data-feed.

And that’s saying everything. When a big trend starts out, its seeds first register on a Twitter timeline. Simultaneously, its initial behaviour registers on one’s laptop in the form of charts. This enables one to position oneself as per the move. Also, even the potential intensity of an upcoming move can be indicated in the charts, so that one can decide the trade size based upon this if one wishes.

Thus, by the time the public latches on to the information, the technical analyst has already entered the trend.

Same goes for exits. As smart-money exits, technicals push one to enter exit orders that are to be triggered by a falling market. If the market then actually falls, the trading platform pushes one out of the market automatically.

In a choppy market, technicals stop you out a couple of times, and then you need to read the cue and take a break. Go on a holiday or read a book. Yes, technicals are telling you here to lay off the market for a while.

The bottom-line here is that a serious market player cannot afford to ignore technicals.

So give it a shot. Learn technicals. All resources are available on the web, and most of them are free of cost.