Category Archives: The Zone

Coin-Flipping in the Marketplace

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Are you good at darts?

Actually, I’m not.

I’ve even removed all darts from our home. Hazard. Children might hurt themselves. Yeah, yeah, I know, I’m paranoid. Tell me something new.

Well, just in case you fancy playing darts, here’s a market exercise for your consideration.

Take a newspaper section, and pin it on the wall.

I know, I know, you’d love to take pot shots at your favourite corrupt politician’s picture. Please feel free to do so, let out all your venom. When you’re done, we can resume with the market exercise.

Now substitute whatever picture you’re shooting darts at with the equity portion of your newspaper’s market segment.

Take a dart. Shoot.

You hit some stock or the other. Let’s say you hit XLME Systems.

Now take a coin. Flip it.

Go long XLME Systems if you flip heads. Short it if you flip tails.

You have a 50:50 chance of choosing the correct trade direction here.

This is still a winning system, if you manage your trades with common-sense.

Cut your losers short, quite short, yeah, nip them in the bud. Let your winners ride for as long as you’re comfortable.

These two sentences will turn your little darts cum coin exercise into a winning market system.

Try out a 100 such trades, coupled with proper, common-sensical trade management. You’ll see that you are in the money.

Now, whoever turns towards me and starts to talk about trading systems, well, that person needs to be very crystal clear about one thing.

He or she needn’t bother discussing any trading system with worse results than the above-described trading system.

I mean, come on, people, here’s nature, already presenting something to us which doesn’t require any formal education, just an average ability to aim, fire, flip, trade, and manage with common-sense. This small and natural system is enough to keep us in the money.

So, if we want to spend any time discussing trading systems with an edge, we need to be sure that these systems are functioning at beyond 50:50. At par or below is a waste of time.

Good trading systems with a market-edge function at 60:40.

In the Zone, you maneuver your evolving edge to function at 70:30 and beyond.

Frankly, you don’t need more. You don’t need to function at 80:20 or 90:10. Life at 70:30 is good enough to yield you a fortune.

Getting to 70:30 is not as difficult as it sounds. First, get to a 60:40 trading system. Out of every 100 trades, get the trade direction of 60 right. Comes, takes a bit, but comes eventually.

Now you’ve got your good trading system with a decent edge, it’s working at 60:40, what next? How do you extract that extra edge.

Well, tweak. Adapt. Fine-tune. Till your edge becomes that something extra.

Still want more?

If yes, the game becomes a story about you. How disciplined are you? Are you with the markets regularly, as a matter of routine? Are you with the flow? Can you sense the next move? Are you slipping into the Zone? Can you stay in the Zone for long periods? Once you slip out, can you get back into the Zone soon?

The answers to these questions lead you to 70:30 and beyond.

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.

The Concept of “Sprachgefuehl”

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That’s a German word. And it’s deep.

Literally translated, “Sprachgefuehl” means “feeling for language”. In practical terms it would mean / entail achieving fluency in any language by getting a feel for its structure.

Life has a language.

Everything that makes up life has its own micro-language. All the micros add up to the macro.

Most of the time, we are stuck in the micro. We learn many micro-languages. With some, we experience difficulty. Ultimately, either we swim or we abandon the micro-cause.

Learning and expertise of these micro-languages makes up life for us as a whole. In our current multi-tasking scenario, flexibility and efficiency is required. To tackle this, there’s no better concept to implement than the concept of “Sprachgefuehl”.

Sprachgefuehl involves plunging in, as in immersing oneself into the thick of things without bothering about formal training. For a limited period, one takes in an overdoze of the micro-language. The idea is to allow one’s system to start speaking the language on auto-pilot. If there’s danger of sinking, one can always abort, but, as another German saying goes, “what doesn’t kill only toughens u up”.

The learning process is enhanced by one’s mistakes. Because of not adhering to boring, attention-deficit causing formal rules, many mistakes are made. Believe me, these very mistakes are your best teachers. The learning they impart is priceless and irreplaceable.

Why am I going on and on about this?

What does this have to do with the markets?

In fact, everything.

Sprachgefuehl involves getting into the Zone to be able to anticipate the movement and structure of a language.

Getting into the Zone is what its all about. We are able to reap profits from Mrs. Market because we are able to get into the Zone. If we lose that ability, Mrs. Market manhandles us. Period.

Sprachgefuehl keeps our instincts sharp. It’s great Zone-practice. Whatever you are doing in life, you can use this concept for entry into and proficiency at life in the Zone.

With that, any kind of market-play will also come naturally to you.

The Sweetest Spot

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In the markets, we often lose our balance.

Then we find it. Only to lose it again.

The key is maintaining this balance over long periods of time.

There’s a spot, where everything, suddenly, goes into balance. I like to call it the sweetest spot. What are its characteristics?

Firstly, at the sweetest spot, health is intact, on the physical as well as on the mental level. Then, one has identified a trade, entered it, and the trade is in the money. At this spot, the spouse respects you and your profession, because neither you nor your profession are bothering him or her for space. Relationship with him or her is harmonious. At the sweetest spot, you find time for your children. You’ve got a rapport going. Your off-spring learns from your every word and action.

Phew, sounds amazing!

Wait, there’s more!

At the sweetest spot, one is debt-free. Neither is one under-trading, nor is one over-trading. Reactions to market events are sharp, and one turns with the market, i.e. one is in the Zone. As profit levels increase, so does position-size, proportionately. You are getting your strategy basics right, one after the other.

At the sweetest spot, goodness wells inside the human being, and he or she does an extra bit for the benefit of society.

Life, profession, existence…it’s all one smooth, harmonious, automatic flow.

Then, in a flash, the spot is gone. One or more of the many factors mentioned tend to go haywire. That’s quite normal.

Which only means, that you start looking for the sweetest spot again.

Whenever you find it once more, your primary goal is to maintain it as long as possible, again, and again and again (to the power of n, with n > 1).

Before you realize it, you are then staring at financial freedom. You are there, financially independent of any other factor or being. You have arrived.

Some things in life are really sweet, and worth striving for.

Taking Compulsion Out of One’s Trading Equation

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Mr. Cool’s next trading cameo starts a few months after his last blow-up. He keeps coming back, you’ve gotta give him that.

This time around, his girl-friend wants a fur coat. Cool is determined to buy a fur coat for her from his trading profits.

Thus, Mr. Cool has put himself in a position where he is compelled to trade. Compulsion adds pressure. A trader under pressure commits basic blunders. There’s no question of getting into the Zone while pressure mounts.

Sure enough, Cool overtrades. Apart from that, he fails to cut his position-size after the first run of losses. These are two basic mistakes. They are being caused by compulsion. Mrs. Market is ruthless with players who commit basic blunders. As usual, Cool blows up, yet again. The fur coat is not happening. In fact, there’s no girl-friend anymore.

Meanwhile, Mr. System Addict has been evolving. He’s achieved a large-sized fixed income by ploughing previous profits into safe fixed-income products. He’s under no compulsion to trade. His fixed income allows him to live well, even without trading. He has a lot of time to think. Often, he gets into the Zone, where he’s moving in tandem with the market, and is able to swing with the market’s turn. What makes him get into the Zone so often?

It’s the lack of pressure. He’s comfortable. A free mind performs uniquely. There’s no question of making basic mistakes, because full focus is there. Addict is a human being who is aware. He knows when he is in the Zone. That’s when he doubles up his position-size and logs his trade. His win : loss ratio is 70:30 by now. His trading income surpasses his fixed income for the year.

Putting it all Together – The View from the Mountain-Top

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Remember getting into the driver’s seat for the first time?

It all seemed so difficult. You got the brake-clutch-accelerator coordination all wrong. Proper gear changes were a far cry. There was no question of looking into the rear-view or the side-view mirrors, since you were looking straight. And the shoulder-glance – just forget about it, you said to the instructor.

Slowly, it all came together, perhaps after a 1,50,000 km behind the wheel. Now, driving is a piece of cake. It’s all there in your reflexes. It’s as if the car is connected to your brain, and is an extension of your limbs.

It took time and effort, didn’t it? And why would it be any different in the markets?

Flash-back to 1988 – high school – our Chemistry teacher Frau Boetticher used to teach us to strive for the “Ueberblick”. Roughly and applicably translated, this analogical German word means “the view from the mountain-top”. In Street lingo, the Ueberblick is about life in the Zone. Frau Boetticher used to push us to get into the Zone. She knew that then, our reflexes would take over. She passed away before our A-levels, after a very fulfilling and successful lifetime of teaching. She was the best teacher to ever have taught me.

When your reflexes make you enter a market, or exit it, or decide on the level of a stop, or a target etc. etc., you’ve managed to put it all together. Doesn’t happen overnight, though. The ball-park figure of 1,50,000 km behind the wheel changes to roughly 7 years of market experience, before one can expect to put it all together on the Street.

Where does that leave you?

As a thumb rule, money-levels at stake in the first 7 years on the Street need to be low. When you’re getting the hang of things, you just don’t bet the farm. That’s common sense, a rare commodity, so I’m underlining it for you.

On the Street, you only learn from mistakes. They are your teachers, and they prepare you to deal with Mrs. Market. No books, or professors or college will make you fit enough to tackle Mrs. Market, only mistakes will. Make mistakes in your first seven years on the Street – make big mistakes. Learn from them. Don’t make them again. Get the big blunders out of the way while the stakes are small. Round up your learning before the stakes get big.

Once your reflexes all come together, you can start risking larger sums of money, not before. Also, in today’s neon age, it’s difficult to stay in the Zone for prolonged periods of time. Something or the other manages to distract us out of the Zone, whether it is internal health or external affairs. When you feel you’re out of the Zone, just cut back your position-size. When you feel you’re back in, you can scale up your position-size again.

It’s as simple as that. Useful ideas have one characteristic in common – they are simple.

The Towering Value of Decisive Action

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Decisive action can’t just come outta nowhere.

There has to be a build-up to it, a kinda revving up of engines and stuff.

Point is, this category of action generates a lot of force, and is required to do away with situations that cause panic. As in not let a situation become panic-causing to you. As in the current situation. As in the Dow falling 512 points last night. Will they have a name for it, Black Thursday perhaps? I don’t think so. Because I don’t think we’re done just yet. Situation might get blacker.

Back in December 2007, there were those who were taking decisive action, i.e. they were booking profits. These were people who had been taught by the market to do so. Unfortunately, I didn’t belong to this category at that time. On the contrary, I was busy topping up my portfolio with more investments at the time.

Mayhem in the market should teach you for the next time. If it doesn’t, there’s something wrong with you.

By the fall of 2008, the new market players of the millenium had gone through with their first piece of decisive action – an oath to never be in a situation again that causes them to panic or to spend another sleepless night. The events of the first nine months of 2008 were more that enough to drive them to this.

An important part of peace in the market is hedging. Serious players chose Gold as their hedge, and started building up large positions in Gold. The world around them was screaming “how could they?” Gold was already touching a high back then. They possessed the spine to take this decisive action, because 2008 had taught them to hedge. That’s how they could.

Many worked their way towards zero US exposure. When the cracks in the Euro appeared in 2009-2010, they worked their way towards zero Europe exposure. People around them were screaming that the USD would continue forever as the world currency, and that Europe was under-valued and thus a screaming buy. All to no avail. These decisive players had started to mistrust Alan Greenspan from the moment he started urging his people to take loans against their homes and to put the borrowed money in the market. For me, the icing on the cake or the snapping moment was when Ben Bernanke had the cheek to announce more stimulus one day after the “debt deal”. That’s when I gave up on the US market. Very late, I admit. Yeah, yeah, I’m a real slow learner.

Then, serious new players started to buy on lows. And they got some big-time lows, especially the ones of October 2008 and March 2009. The world around them was screaming “how could they?” and that “we weren’t done yet” and that “economies would get bleaker”. They had the courage to buy. The market had taught them to.

And, finally, they started succumbing lesser and lesser to greed. They would finally book profits. They learnt to sit on cash for long periods of time. They learnt not to listen to tips. They learnt to have their own market outlook and to be self-reliant as far as the chalking of their own path was concerned. They decoupled themselves from their bankers and their market advisors. They got tech-savvy to a point when they could control their entire market operation from their laptops. Basically, they took control.

And, they slept peacefully last night.

Zoning in on the Zone

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What’s your favourite sport?

Baseball?

Ok, let’s say we were watching Babe Ruth hitting a home run. I know, I’ve got this habit of running up and down the axis of time. A little annoying, but please bear with it.

To hit home runs like a Babe Ruth, or for that matter to paddle sweep like Sachin Tendulkar, or to serve an ace like Roger Federer, a player needs to be in the Zone.

So what is this “Zone”?

Imagine a space where you are one with your environment. From within this space, your heightened senses are able to engulf any stimulus and respond appropriately to it as if on auto-pilot. Your reactions to your situation are “ideal”. If a ball is thrown at you, your nervous system motors your bat with perfect angle and speed to respond to the ball in a winning fashion. It’s as if your system is one with the trajectory of the ball and is anticipating its angle and speed. Such a mind-body space is called the Zone.

The Zone is multi-dimensional in nature. Beyond length, breadth and height, the Zone spans the dimension of potential. The Zone is capable of whizzing your mind-body continuum up and down the axis of time in a flash to select the best possible response to any and every given stimulus.

So how does one get into this Zone? If it were that easy, each one of us would be a Babe Ruth, or a Sachin Tendulkar, or a Roger Federer or for that matter a Warren Buffett. Obviously, getting into the Zone is privileged.

Practice helps. Immense practice. Of course talent has to be there. But what is talent? Nothing but the expression of latent potential accumulated by the mind-body continuum at an earlier point in its existence. And when the mind-body continuum accumulates potential, it has to work very hard for it. Nothing comes for free.

And is someone who has entered the Zone able to stay in it forever? Nope. Entering the Zone takes a build-up. Then in a flash one is in till external circumstances disturb one’s focus, which is when one is out of the Zone.

So what’s this got to do with the markets?

Well, try trading the markets from inside the Zone and you’ll see.

That Secret Ingredient called Gut-Feel

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Birds fly. And, they fly in flocks. When a flock turns, it does so in unison. There seems to be a connection between each bird in the flock. It’s as if each can feel the others in its gut. Each bird is in the “Zone”.

Heard one about a famous artist. He was asked by a rich businessman to paint a rooster for a hefty fee. A year passed. Upon no word from the artist, the businessman got fed up and went to collect the painting. Seeing the artist basking in his lawn with not a care in this world, the businessman enquired about the painting. “Oh, you’ve come to collect your rooster, is it?” asked the artist casually. He then lay out his canvas, painted the perfect rooster, and handed the painting to the businessman, who was stunned and demanded an explanation. Which is when the artist took the businessman into his huge study, the walls of which were laden with hundreds of paintings of roosters, some not so perfect, some nearing perfection, and then, some perfect. In one year’s time, the artist had ingrained the rooster to such a degree into his brush-strokes, that he could dish out the perfect rooster at will.

Remember seeing the opening ceremony of the Beijing olympics. The performing masses were one unit. Such unison was drubbed into each cell of their bodies and minds. It came from practice, practice and more practice. Mind over body.

There’s a particular order of the Samurai where one passes the Master’s final test by first being blind-folded. The Master then stands behind the disciple with a sharp dagger, which he will bring down in a swoop upon the neck of the disciple when he (the Master) pleases. The disciple has to sense his movements, whenever they happen, and has to move out of danger in time. If the disciple succeeds in doing this without injury, he or she passes this ultimate test. And, if my information is correct, all those who have been allowed to take this test by the master have passed till date.

These are a few examples of gut feel. Although logically inexplicible, there’s a mechanism common in all the examples. It is the mechanism of how gut-feel functions at levels of perfection. First, there is repeated failure, whereby there is constant practice going on. Then there is practice, and further practice. Ultimately, the process gets ingrained, and comes naturally. By intuition. That’s gut-feel.

Knowledge is mud if it is not utilized. The battle-hardened market player has been through this process. He or she has seen repeated failure. By hanging on, and learning from mistakes, ultimately, market movements start striking a chord. The overall picture emerges as a whole. After even more practice and experience of market ups and downs, the player enters into the “Zone”, where he or she feels market movements in the gut. The player in the Zone has the capacity to turn with the market.

It’s true. It happens. As surely as the above stories. I’ve seen it happening.

So, be in the market. Fail, fail, and fail again. But do so with small amounts. Then pick yourselves up. Keep hanging on, till you get the hang of things and enter the Zone. And, after you’ve entered the Zone, there’s no better time and place to up your stake.