Category Archives: Trading

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. 

🙂

Dynamics of a Long-Long System

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What if your system doesn’t allow you to second-guess yourself?

Wouldn’t that be a wonderful situation?

And you’d be right there, in the middle of it all.

What would such a system look like?

Right, it would only go one way.

Long-long. “A-la-la-la-la-long”, to quote Inner Circle!

Why aren’t we talking about a short-short system?

Theoretically, we could. Theoretically, everything is possible.

Well, a short-short system would have no limits on your potential loss, if the trade went against you. That’s the fundametal problem I have against a short-short system, without even having gone into the whole leverage discussion.

You could bring the stop argument.

Fine.

Just take a deep breath.

Think clearly.

Take a look at the average price-speeds of both directions, long and short.

The average price-speed in the short direction is far higher. Price-jumps are greater. The probability of your stop getting high-jumped over is much higher in the short direction. Frankly, that doesn’t work for me.

Also, which market allows you to set an overnight stop, barring the international forex market?. None that I know of, at least in India. No stops overnight means potential exposure to a large drawdown upon next market-opening, and here I’d like to be in a long-situation, because loss is capped.

Therefore, when we’re discussing a system that doesn’t allow us to second-guess ourselves, I will only discuss a long-long system.

What does long-long mean?

Yeah, we’re talking about a system, where you’re looking for long trades all the time. You don’t look for trades to go short in-between. There’s no shorting in the equation whatsoever. The moment you start thinking about shorting, you start second-guessing your long-approach.

What does that mean for someone applying such a system?

It means that the whole world might be crumbling apart, and one is still looking for long-trades. Yes, one could take some hits here. One just needs to make sure, that one’s consecutive drawdown doesn’t exceed a bearable level. Also, as losses might pile up, one position-sizes one’s way through. The concept ot position-sizing has been pioneered and elucidated by Dr. Van K. Tharp @ www.iitm.com.

It also means that when your underlyings start to run, you’ll be piling up winning trade upon winning trade.

The thing is, nobody knows when what is going to run. If you’ve taken all second-guessing out of your equation, you’re aligning yourself with the correct direction once things start to run. Going the other way now would mean further losses.

Then, it further means that if you lock in a big winner in a running market, your paper profits can now be used to harness even greater profits in the same trade. Such big winners provide a big boost to your trading corpus, and, in my opinion, are the difference between winning and losing in the markets. One needs to keep oneself aligned correctly when such opportunities come along. A long-long system will keep you aligned, no matter what.

You could argue about dry spells.

In any dry spell, or when markets are tanking, there are still underlyings that are going up. You just have to identify them. Today, such identification is not difficult at all.

For such identification, you need market software, a data feed, and an algorithm which defines what you are looking for. Your software then scans the entire breadth of the market you’re in to try and find what you’re looking for, and opens corresponding charts for you for underlyings that are still going up, or where there is buying interest, buying pressure, unusual increment in volume or what have you.

Don’t let the word algorithm scare you. You don’t have to learn a new programming language to put an algorithm together. Common-sense is enough. You know what you’re looking for. Let’s say what you’re looking for involves volume and price. You look inside your market software. Then you couple two algorithms together into a new algorithm which defines what you are looking for. You see, a typical market software like Metastock already uses algorithms for volume moving average, price etc., and these are visible to you. Just copy-paste and make a new algorithm that suits your purpose.

Lastly for today, decouple yourself from the market during trading hours, except when you’re feeding in the trade. Analyze your current trades when the market is closed. Intuitively, you will probably feel that your decisions during off-market hours will be better than when you’re coupled to a live market. Find out for yourself. More on this some other day.

Emotion in the Marketplace – Enemy or Ally?

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Either or…

… choice is yours baby.

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

We do.

We need to make these work for us.

Everyone feels exhilaration upon winning.

We’re down after a loss. 

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

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

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

Arghhhhhhhhhhh@#$%^!

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

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

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

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

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

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

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

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

How does one nullify this particular emotion? 

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

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

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

Otherwise, they become your enemy. 

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

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

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!

Am I Taking Bitcoin Seriously?

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Yeah.

Bitcoin is a serious new kid on the block.

Am I getting into it? That’s the more important question, isn’t it?

Well, not yet.

First up, I know very little about it. I’m not going to get into something because of the smoke. Gone are the days.

So, I’m educating myself.

The Web tells me that Bitcoin is not alone. Numerous Crypto-currencies have emerged. Confusing.

Many of these have their main servers or their secondary addresses located in ex-Soviet / ex-iron-curtain nations. Intimidating. I’m afraid.

Then I look at the bid-ask spread for Bitcoin. There’s typically a 1% difference between buying and selling price. That is huge. In fact, it’s outrageous.

After that I look at the Bitcoin price vs time chart.  I can see the panic in the chart. I don’t like panic. I generally stay away from panic markets. If I’m entering a long-term market, I like entering on a solid base foundation. The panic dust hasn’t settled yet. Technical bases build after panic settles, and only if the underlying has long-term mettle. They’re visible on the chart as horizontal stretches. Not happening as yet on the Bitcoin price vs time chart. Means I’m not entering yet.

Then there’s this mining stuff. Like, virtual mining. I don’t understand it. Yet. Looks silly, off-hand. Could this be connected to currency-backing? Or, is this just a hype-creating gimmick that doesn’t make economic sense? I’m not sure, I tell myself.

Last point I’m making against current Bitcoin entry – theft and loss. If I store Bitcoin on my computer, it becomes a potential target. I don’t wish to have the 5 million odd extremely sharp ex-Soviet ex-chess wizard brains targeting my computer. Period.

So, where do we stand?

Meaning, why am I taking Bitcoin seriously?

The USD has nothing backing it. The US seems to be following a fiscal policy with high risk of implosion due to escalating debt. They’ve got no reserves left. Savings are nil. The USD will probably maintain its hierarchy till the world has another alternative.

A few years ago, I thought that Gold could be this alternative. Today, I think Bitcoin is a more serious contender.

First, I need to convince myself that Bitcoin is backed. Meanwhile, the noise will even out, and only the most solid crypto-currencies shall live on. I’d like Bitcoin to still be at the top of all crypto-charts once the noise settles. By then, there’ll be someone reliable in my own country offering Bitcoin investment and trading, someone I know, like an HDFC Bank, or a Kotak Securities. Volumes will escalate. Slippage will be down to a bearable 0.1% or less. Bitcoin’s chart will show a base foundation. I’ll have understood the virtual mining stuff, and hopefully it’ll be connected to currency-backing. Banks will store Bitcoin as an e-holding, which will reflect in one’s Netbanking.

That’s when I’ll enter Bitcoin.

The Art of Emotional Recycling

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Taken a hit?

If yes, at least admit it… to yourself and for your own sake.

People take hits at various times in their lives.
That’s the way of the market.

That’s how it teaches us to make money next time.

Think of your loss as tuition fees.

In my opinion, the best way forward is to take lots of small hits in the first seven years.

Then, in nine cases out of ten, you won’t fall for the big ones.

Big hits can decapacitate a player, especially when they come late, since there is no time for full recovery. Besides, emotional breakdown at a late stage is very difficult to get out of.

Make it a point never to take a big hit.

That’s only possible, if at any given time, the capital that is risked is within reasonable limits.

Let’s say you risk not more than 1% of your networth at any given time. What’s the maximum hit you will take at one time? Right, 1%.

That’s bearable.

That’s something you can shake yourself out of, and move on.

Moving on is a huge quality to possess in the markets.

Taken a hit?

Move on and make your next trade.

All this while, you are putting any remnant emotional hurt in cold storage.

Yeah, there’s a certain portion of emotional hurt that won’t be nullified by family time, vacations, hobbies etc. We’re talking about the hurt to your ego. Only a big win will wash that away. Only then is your emotional recycling complete.

Put yourself in line for that win.

After a hit, rest, recuperate, grab your wits, focus, and…

… put on the next trade.

Where to, Mr. Nath?

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Last month, I scrapped my market-play system.

Happens.

Systems are made to be scrapped later.

One can always come up with a new system.

I love working on a new system.

It’s challenging.

What I want to talk to you about is why I scrapped my last system.

I found four accounting frauds, as I did my market research, all online.

You see, my last system worked well with honest accounting.

It had no answer to accounting frauds.

Also, I got disillusioned.

Are we a nation of frauds?

How does one deal with a nation of frauds?

More importantly, how does one play such a nation?

Does one invest in it? Or, does one sheer trade it?

Questions, questions and more questions. These encircle my mind as I work to put my new system together.

I am in no hurry to come up with an answer. A country like India deserves a befitting answer, and that it will get, even if the sky comes down on me while I put my system together.

Slowly, I started to think. How many systems had I scrapped before?

Hmmm, four or five, give or take one or two.

I have an uncompromising market rule of going fully liquid when I scrap a system.

Full liquidity is a tension-tree state. It allows one to think freely and in an unbiased manner. Being invested during volatility impedes one’s ability to think clearly and put a new system together.

Ok, so what answer would my new system have towards fraud?

All along, it was very clear to me that future market activity would be in India itself. Where else does one get such volatility? I am learning to embrace volatility. It is the trader’s best friend.

Right, so, what’s the answer to fraud?

Trading oriented market play – good. Not much investing, really. First thoughts that come to mind.

Buying above supports. Selling below resistances. Only buying above highs in rare cases, and trailing such buys with strict stops. Similarly , only selling below lows in even rarer cases, and again, trailing such sells with strict stops.

Trading light at all times.

Fully deploying the bulk of one’s corpus into secure market avenues like bonds and arbitrage. You see, bonds in India are not toxic. Well, not yet, and with hawks like the RBI and SEBI watching over us, it might take a while before they turn toxic. If and when they do start turning toxic, we’ll be getting out of them, there’s no doubt about that. Till they’re clean, we want their excellent returns, especially as interest rates head downwards. In India, one can get out of bond mutual funds within 24 hrs, with a penalty of a maximum of 1 % of the amount invested. Bearable. The top bond funds have yielded about 13 – 15% over the last 12 months. So, that 1% penalty is fully digestible, believe me.

With the bulk of one’s returns coming from secure avenues, small amounts can be traded. Trade entries are to be made when the odds are really in one’s favour. When risk is high, entry is to be refrained from. A pure and simple answer to fraud? Yes!

You see, after a certain drop, the price has discounted all fraud and then some. That’s one’s entry price for the long side. On the short side, after a phenomenal rise, there comes a price which no amount of goodness in a company can justify and then some. That’s the price we short the company at.

Of course it’s all easier said than done, but at least one thing’s sorted. My outlook has changed. Earlier, I used to fearlessly buy above highs and short below lows. I am going to be more cautious about that now. With fraud in the equation, I want the odds in my favour at all times.

These are the thoughts going on in my mind just now. Talking about them helps them get organized.

You don’t have to listen to my stuff.

I’m quite happy talking to the wall.

Once these words leave me, there’s more space in my system – a kind of a vacuum.

A vacuum attracts flow from elsewhere.

What kind of a flow will my vacuum attract?

Answers will flow in from the ether.

Answers to my burning questions.

Shaken, and not Stirred, Mr. Trader…

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Trading models crumble. Happens often.

Does this shake you?

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

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

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

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

What allows you to do so?

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

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

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

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

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

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

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

All the best! 🙂

Can Anyone Match Our Financial Sentinels?

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It was the aftermath of ’08.

There was blood everywhere.

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

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

The pitch was fantastic.

I got sucked in.

Access to more than 150 mutual funds world wide…

No switching fee…

Switch as many times as you want…

Joining bonus…

Premium holiday after 18 months…

I quickly signed the documents.

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

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

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

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

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

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

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

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

In India, customer was king.

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

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

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

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

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

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

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

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

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

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

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

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

Yeah, sometimes a win comes disguised as a loss.

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

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

I know this from first-hand experience.

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

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

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

A Chronology of Exuberance

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

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

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

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

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

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

What is the root of this emotion?

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

Now comes the warp.

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

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

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

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

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

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

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

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

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

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

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

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

Formulate your own strategy to deal with exuberance.

First learn to recognize it.

Then learn to deal with it.

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

Best of luck!

Three Ways to Double Down

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

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

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

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

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

Yeah, how could such traders position-size properly?

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

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

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

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

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

Question is, how much do you go in with?

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

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

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

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

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

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

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

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

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

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

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.

And How Are You This 20k?

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20k’s knocking on our sensory index.

How are you feeling, this 20k?

I remember my trading screen, the first time 20k came. Lots of blue till it came, and when it came, the screen just turned into a sea of red.

Sell orders hit their auto-triggers, as if it were raining sell orders along with cats and dogs.

What is it about round numbers?

Why do they engulf us in their roundness?

I don’t think I am making a mistake in stating that the first person to recognize the significance of round numbers in the game was Jesse Livermore, the legendary trader. Jesse developed a round number strategy that he pulled off repeatedly, with enormous success. It is because of Jesse Livermore that a trader takes round numbers … seriously.

So, what is it about the roundness of 20k?

Plain and simple. The 0s engulf the 2. You don’t see the 2 anymore, and the 0s scare you. Or, they might excite you. Round numbers make the human being emotional.

Big question for me, to understand my own mindset – how am I reacting to 20k?

I would like to share my reaction with you, because it could help you understand your own reaction.

Also, writing about it makes me understand my own reaction better. Thoughts get assimilated.

Yeah, it’s not all social service here, there’s some selfish element involved too.

Besides, I have a bit of a guilty conscience about the amount of research the internet allows me to do, free of cost. I mean, I can get into the skin of any listed company with a few button-clicks. All this writing – is a give-back. You’ll get your calling soon enough. Nature will tell you where you need to give back. When that happens, don’t hold back – give freely. It’s a million dollar feeling!

Back to the topic.

I’ve seen 20k twice before, I think, perhaps thrice. Oh right, between late September and December ’10, it came, was broken, then it came back, to be again broken on the downside, all within a few months.

The aftermath of the first time I saw it (in November ’07) hammered me, though, and taught me my biggest market lessons. I’m glad all this happened in my early market years, because one doesn’t normally recover from huge hammerings at an advanced stage in one’s market career.

The second / third time I saw 20k, I was profiting from it to a small extent. A vague kind of strategy was developing in my mind, and I was trying all kinds of new trading ideas so as to formulate a general strategy for big round numbers.

This morning, I saw 20k for the fourth time, for a few minutes.

By now, I was on auto-pilot.

A human being will have emotions. A successful market player will know how to deal with these emotions.

I bifurcated my emotions into two streams.

One was the fear stream.

The other was the exuberance stream.

The former helped me decide my future investment strategy.

The latter helped me decide my future trading strategy.

In my opinion, a good investment strategy in times of market exuberance would be to not look for fresh investments anymore. This morning, I decided to stop looking for fresh investments, till further notice.

Sometimes, when you’re not looking for an investment, you might still chance upon a company that sparks your investment interest.

If that happened, I would still scrutinize such a company very, very thoroughly, before going ahead. After all, these were times of exuberance.

Yeah, fresh investments would be on the backburner till margins of safety were restored.

Now let’s speak about the exuberance stream.

Market looked ripe for trading. Fresh market activity would take the shape of trading.

Trading is far more active an activity, when compared to investing. We’ve spoken a lot about the difference between trading and investing, in previous posts. Investors enter the market when stocks are undervalued, because the general market is unable to see their intrinsic value. Traders take centre-stage when stocks are overvalued, because the general market is repeatedly attributing more and more value to stocks, much more than should be there. Traders ride the market up, and then short it to ride it down.

Yeah, till further notice, I would be spending my energies trading. After a while, I would re-evaluate market conditions.

That’s what I thought to myself this morning.

Can We Please Get This One Basic Thing Right? (Part III)

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Yeah, we’re digging deeper.

How does an investor arrive at an investment decision?

It’s pretty obvious to us by now that traders and investors have their own rationales for entry and exit, and that these rationales are pretty much diametrically opposite to each other.

So, what’s the exact story here?

The seasoned investor will look at FUNDAMENTALS, and will exhibit PATIENCE before entering into an investment.

The versatile trader will look at TECHNICALS, and will NOT BE AFRAID of entry or exit, any time, any place. He or she will be in a hurry to cut a loss, and will allow a profit to blossom with patience.

What are fundamentals?

Well, fundamentals are vital pieces of information about a company. When one checks them out, one gets a fair idea about the valuation and the functioning of the company, and whether it would be a good idea to be part of the story or not.

A good portion of a company’s fundamental information is propagated in terms of key ratios, like the Price to Earnings Ratio, or the Debt to Equity Ratio, the Price to Book Value ratio, the Enterprise Value to EBITDA Ratio, the Price to Cash-flow Ratio, the Price to Sales ratio, etc. etc. etc.

What a ratio does for you is that in one shot, it delivers vital info to you about the company’s performance over the past one year. If it’s not a trailing ratio, but a projected one, then the info being given to you is a projection into the future.

What kind of a promotership / management does a company have? Are these people share-holder friendly, or are they crooks? Do they create value for their investors? Do they give decent dividend payouts? Do they like to borrow big, and not pay back on time? Do they juggle their finances, and tweak them around, to make them look good? Do they use company funds for their personal purposes? Researching the management is a paramount fundamental exercise.

Then, the company’s product profile needs to be looked into. The multibagger-seeking investor looks to avoid a cyclical product, like steel, or automobiles. For a long-term investment to pan out into a multibagger, the product of a company needs to have non-cyclical scalability.

After that, one needs to see if one is able to pick up stock of the particular company at a decent discount to its actual value. If not, then the investor earmarks the company as a prospective investment candidate, and waits for circumstances to allow him or her to pick up the stock at a discount.

There are number-crunching investors too, who use cash-flow, cash allocation and other balance-sheet details to gauge whether a coveted company with an expensive earnings multiple can still be picked up. For example, such growth-based investors would not have problems picking up a company like Tata Global Beverages at an earnings multiple of 28, because for them, Tata Global’s balance-sheet projects future earnings that will soon lessen the current multiple to below sector average, for example.

Value-based investors like to buy really cheap. Growth-based investors don’t mind spending an extra buck where they see growth. Value-based investors buy upon the prospect of growth. Growth-based investors buy upon actual growth.

The trader doesn’t bother with fundamentals. He or she wants a management to be flashy, with lots of media hype. That’s how the trader will get volatility. The scrips that the trader tracks will rise and fall big, and that’s sugar and honey for the trader, because he or she will trade them both ways, up and down. Most of the scrips that the trader tracks have lousy fundamentals. They’ve caught the public’s attention, and the masses have sprung upon them, causing them to generate large spikes and crashes. That’s exactly what the trader needs.

So, how does a trader track these scrips? Well, he or she uses charts. Specifically, price versus time charts. The trader doesn’t need to do much here. There’s no manual plotting involved. I mean, this is 2012, almost 2013, and we stand upon the shoulders of giants, if I’m allowed to borrow that quote. Market data is downloaded from the data-provider, via the internet and onto one’s computer, and one’s charting software uses the data to spit out charts. These charts can be modified to the nth degree, and transformed into that particular form which one finds convenient for viewing. Modern charting software is very versatile. What exactly is the trader looking for in these charts?

Technicals – the nitty-gritty that emerges upon close chart scrutiny.

How does price behave with regard to time?

What is the slope of a fall, or the gradient of a rise? What’s the momentum like?

What patterns are emerging?

How many people are latching on? What’s the volume like?

There are hundreds of chart-studies that can be performed on a chart. Some are named after their creators, like Bollinger bands. Others have a mathematical name, like stochastics. Names get sophisticated too, like Williams %R, Parabolic SAR and Andrew’s Pitchfork. There’s no end to chart  studies. One can look for and at Elliott Waves. Or, one can gauge a fall, using Fibonacci Retracement. One can use momentum to set targets. One can see where the public supports a stock, or where it supplies the stock, causing resistance. One can join points on a chart to form a trendline. The chart’s bars / candle-sticks will give an idea about existing volatility. Trading strategy can be formulated after studying these and many more factors.

Where do stops need to be set? Where does one enter? Exit? All these questions and more are answered after going through the technicals that a chart is exhibiting.

One needs to adhere to a couple of logical studies, and then move on. One shouldn’t get too caught up in the world of studies, since the scrip will still manage to behave in a peculiar fashion, despite all the studies in the world. If the markets were predictable, we’d all be millionaires.

How does the trader decide upon which scrips to trade? I mean, today’s exchanges have five to ten thousand scrips that quote.

Simple. Scans.

The trader has a set of scan criteria. He or she feeds these into the charting software, and starts the scan. Within five minutes, the software spits out fifty odd tradable scrips as per the scan criteria. The trader quickly goes through all fifty charts, and selects five to six scrips that he or she finds best to trade on a particular day. Within all of fifteen minutes, the trader has singled out his or her trading scrips.

Do you now see how different both games are?

I’m glad you do!

🙂

Can We Please Get This One Basic Thing Right?

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Pop-quiz, people – how many of us know the basic difference between investing and trading?

The logical follow-up question would be – why is it so important that one is aware of this difference?

When you buy into deep value cheaply, you are investing. Your idea is to sell high, after everyone else discovers the value which you saw, and acted upon, before everyone.

When you’re not getting deep value, and you still buy – high – you are trading. Your idea is to sell even higher, to the next idiot standing, and to get out before becoming the last pig holding the red-hot scrip, which would by now have become so hot, that no one else would want to take it off you.

The above two paras need to be understood thoroughly.

Why?

So that you don’t get confused while managing a long-term portfolio. Many of us actually start trading with it. Mistake.

Also, so that you don’t start treating your trades as investments. Even bigger mistake.

You see, investing and trading both involve diametrically opposite strategies. What’s good for the goose is poison for the gander. And vice-versa.

For example, while trading, you do not average down. Period. Averaging down in a trade is like committing hara-kiri. What if the scrip goes down further? How big a notional loss will you sit upon, as a trader? Don’t ignore the mental tension being caused. The thumb rule is, that a scrip can refuse to turn in your direction longer than you can remain solvent, so if you’re leveraged, get the hell out even faster. If you’re not leveraged, still get the hell out and put the money pulled out into a new trade. Have some stamina left for the new trade. Don’t subject yourself to anguish by sitting on a huge notional loss. Just move to the next trade. Something or the other will move in your direction.

On the other hand, a seasoned investor has no problems averaging down. He or she has researched his or her scrip well, is seeing  deep-value as clearly as anything, is acting with long-term conviction, and is following a staggered buying strategy. If on the second, third or fourth buy the stock is available cheaper, the seasoned investor will feel that he or she is getting the stock at an even bigger discount, and will go for it.

Then, you invest with money you don’t need for the next two to three years. If you don’t have funds to spare for so long, you don’t invest …

… but nobody’s going to stop you from trading with funds you don’t need for the next two to three months. Of course you’re trading with a strict stop-loss with a clear-cut numerical value. Furthermore, you’ve also set your bail-out level. If your total loss exceeds a certain percentage, you’re absolutely gonna stop trading for the next two to three months, and are probably gonna get an extra part-time job to earn back the lost funds, so that your financial planning for the coming months doesn’t go awry. Yeah, while trading, you’ve got your worst-case strategies sorted out.

The investor doesn’t look at a stop-loss number. He or she is happy if he or she continues to see deep-value, or even value. When the investor fails to see value, it’s like a bail-out signal, and the investor exits. For example, Mr. Rakesh Jhunjhunwala continues to see growth-based value in Titan Industries at 42 times earnings, and Titan constitutes about 30% of his billion dollar portfolio. On the other hand, Mr. Warren Buffett could well decide to dump Goldman Sachs at 11 – 12 times earnings if he were to consider it over-valued.

Then there’s taxes.

In India, short-term capital gains tax amounts to 15%  of the profits. Losses can be carried forward for eight years, and within that time, they must be written off against profits. As a trader, if you buy stock and then sell it within one year, you must pay short term capital gains tax. Investors have it good here. Long-term capital gains tax is nil (!!). Also, all the dividends you receive are tax-free for you.

Of course we are not going to forget brokerage.

Traders are brokerage-generating dynamos. Investors hardly take a hit here.

What about the paper-work?

An active trader generates lots of paper-work, which means head-aches for the accountant. Of course the accountant must be hired and paid for, and is not going to suffer the headaches for free.

Investing involves much lesser action, and its paper-work can easily be managed on your own, without any head-aches.

Lastly, we come to frame of mind.

Sheer activity knocks the wind out of the average trader. He or she has problems enjoying other portions of life, because stamina is invariably low. Tomorrow is another trading day, and one needs to prepare for it. Mind is full of tension. Sleep is bad. These are some of the pitfalls that the trader has to iron out of his or her life. It is very possible to do so. One can trade and lead a happy family life. This status is not easy to achieve, though, and involves mental training and discipline.

The average investor who is heavily invested can barely sleep too, during a market down-turn. The mind constantly wanders towards the mayhem being inflicted upon the portfolio. An investor needs to learn to buy with margin of safety, which makes sitting possible. An investor needs to learn to sit. The investor should not be more heavily invested than his or her sleep-threshold. The investor’s portfolio should not be on the investor’s mind all day. It is ideal if the investor does not follow the market in real-time. One can be heavily invested and still lead a happy family life, even during a market down-turn, if one has bought with safety and has even saved buying power for such cheaper times. This status is not easy to achieve either. To have cash when cash is king – that’s the name of the game.

I’m not saying that investing is better than trading, or that trading is better than investing.

Discover what’s good for you.

Many do both. I certainly do both.

If you want to do both, make sure you have segregated portfolios.

Your software should be in a position to make you look at only your trading stocks, or only your investing stocks at one time, in one snapshot. You don’t even need separate holding accounts; your desktop software can sort out the segregation for you.

That’s all it takes to do both – proper segregation – on your computer and in your mind.

Satisfying One’s Video Game Urge

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We’re all kids on some level.

Do you remember when video game parlours hit your town?

We used to pretty much storm them, and blow up a lot of pocket money.

Do you remember the Gulf War (1991), and how it was portrayed on television like a video game?

Our life is about button-clicks.

If we don’t click a button for a day, we have an urge to click buttons. We get withdrawal symptoms.

Cut to the markets.

The marketplace today is at your fingertips. You can contol your interaction with a few button-clicks.

What’s the inherent danger?

More and more clicks, of course.

Your circumstances allow you to get as much action as you please. Play the markets to your heart’s content.

Is that good?

Depends.

What this does is satisfy your craving for action.

It also generates fat brokerage for your broker.

Volume does not necessarily translate into profits. So, it’s not a given that you’ve made more money by trading more.

The inherent danger is that your A-game is threatened by the extra action.

Never let anything threaten your A-game.

For example, if your A-game is investing, the extra trading action might confuse you, and you might start treating your investment portfolio like a trading portfolio.

Over a few months, your investment portfolio will then actually start looking like a trading portfolio. Does that solve your purpose?

No.

You’ve ruined your A-game.

Nobody’s asking you not to get your daily shot of button-clicks. It’s a free world. Go, get your daily dose. Fine.

However, anyone with common-sense will ask you to keep your A-game intact. Your reckless button-clicking, thus, needs to be channelized, and should not blow over to ruin your A-game.

Welcome to the world of options, as in the trading instruments called “options”. Fire away, satisfy your video game urge. There are cheap options, and there are expensive options. Move amongst the cheaper ones. Satisfy your video game urge. It doesn’t matter if you lose money. The sums in question will be small. At least you’ve gotten all your impulsiveness out of the way. Now, when you approach your long-term investment portfolio, you are not brash, but focused.

What happens when trading is your A-game, and not investing?

Ever heard of overtrading?

Can drain you. Life might become moody. Kids and family would then bear the brunt of your trading hangover.

Worth it? Naehhhh.

So what do you do?

If trading’s your A-game, satisfy your video-game urge on an actual playstation or something. Use your imagination. Play the keyboard. Write. Whatever it takes for you not to …

… overtrade. Do not overtrade at any cost. Save ample energy and your good mood phase for your family.

What’s the thin line between normal trading and overtrading? How do you notice that you are overtrading?

Energy reserves. You know it when energy you’ve reserved for something else is seeping into your trading. That’s when you are overtrading.

You see, so much in this field is not mathematical or formula-based, but feeling- and art-based. Discovering the thin line between normal trading and overtrading is an art.

Frankly, even stock-picking is an art. You can go on about numbers, and trendlines and blah, blah, blah, but fact remains that ultimately and in the end, picking a multibagger is more of a gut-feel thing.

While trading, you’re looking for spikes. When and where is the next spike going to happen? Ultimately and in the end, that’s also a gut-feel thing.

In the marketplace, apart from needing to be technically savvy, or needing to be a number-cruncher, one needs to be an artist too. Yeah, the artist’s touch binds the game together, and makes it enjoyable to play.

Why Emergency Fund?

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Why do you wear a seat-belt while driving?

Why do you purchase medical insurance?

Why does one carry two parachutes while jumping off a plane?

Why do you keep your spouse happy?

So you can live in peace, right?

Peace of mind – so important…

Without peace of mind, market decisions are warped. Disturbing factors cause you to take wrong decisions.

Once faced with a market decision, it is extremely easy to go wrong. There are many telling you what to do. Some have agendas, others speak wthout an agenda, for the sake of speaking. Topping that, Mrs. Market starts playing tricks on you. She’s almost always catching you on the wrong foot. You needs to be mentally alert to identify your initial error and correct it as per your outlined strategy. If your mind-control is compromised, you step deeper into the delusive web of Mrs. Market by not being able to identify your initial error, and then the error can get bigger, and bigger, and even bigger, till it has the capability to consume you.

That’s why emergency fund!

You are not bigger than Mrs. Market. No one is bigger than Mrs. Market. You might start thinking you are, because of a few successes. As a result, you might start to play bigger. Over-confidence will first cause you to make a small mistake. Because you will not have identified the mistake as a mistake, owing to delusional conditions, the small mistake might get bigger and bigger, till it becomes bigger than you, and your market career is over.

That day, your emergency fund will feed your family.

So, firstly, make sure that an emergency fund exists for you.

It needs to be accessible, i.e. liquid.

It needs to be sufficiently large.

Its contents should be safely parked.

If it is generating some income of itself, even better, but the emergency fund should not be locked-in. If it is locked-in, you should be able to access it in a maximum of 24 hours, even if you need to pay a small monetary penalty for full and irreversible access.

Your spouse, who you’ve kept happy, should know about the emergency fund, and how to access its contents. If you’ve not kept him or her happy, he or she might access this fund anyhow, and blow it up beforehand. So, keep him or her happy and in a responsible state of mind. It is possible that he or she is just not interested in finance, right, so then what do you do? Wait for your child to grow up, wishing that he or she has an interest in finance! Anyways, someone you trust should know how to access the emergency fund. If nothing else, write out all details in a file, and inform the person you trust of the file’s existence.

Why am I being so extreme about all this?

I’m big on safety. I don’t like seeing a market player blowing up, because I wouldn’t want that to happen to myself. Have you been to a circus?

The acrobats do have a safety line, don’t they? I mean, they practice all their lives, and pull of the most amazing stunts, again and again, day after day, but at the back of their mind, they know it’s over if they make just one mistake. Unless they have a safety line. If and when a mistake occurs, their safety line will save them. The existence of a safety line allows them to perform with peace of mind, and perform well.

It is exactly like that in the markets. One big mistake, and it’s all over.

Unless there’s an emergency fund.

It’ll allow you to survive, recuperate, and get back on track. When you’re back, you’ll most definitely not repeat the big mistake you made. Also, the first thing you’ll do is regenerate the emergency fund, before you get back to proper market action.

Here’s wishing that you never need to access your emergency fund, but also wishing that it exists in the first place.

Here’s wishing that its presence gives you the necessary peace of mind to perform better.

R&D Experimental Action – BHEL – Nov 30 2012

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Scrip – BHEL.

Currently Market Price – Rs. 232.10.

Experimental Action – Buy 240 Call Option (expiry Dec 27 2012) now.

Rationale – is explained in the chart given in this link : BHEL – PATTERN BUY – NOV 30 2012.

Disclaimer and Disclosure – Technicals are gauged and shown using Advanced GET 9.1 EoD Dashboard Edition. I entered this trade around 11:30 am today. Opinions given here are mine only. You are free to build your own view on the stock. I bear no responsibility for any resulting loss, should you choose to enter this trade.

Downside – Entire option premium, about Rs. 5400 per call just now. Your option premium could be considered your stop, if you don’t want to manage your trade actively. If you do, you can set your stop to fractions of the option premium. In fact, you can go about your trade management however which way you wish to do so. Point is, trades need to be managed, either actively or passively.

Upside – roughly > 2 times the option premium (estimated). Estimation of the upside here could be considered an art, roughly based on the chart patterns at hand, coupled with my interpretation of suggestions by the software OptionScope Version 9.1 by Equis international.

Thus, reward : risk for the strategy discussed is rougly > 2 : 1 (estimated).

Cheers. 🙂

Happy Second Birthday, Magic Bull !!

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Seasons change. So do people, moods, feelings, relationships and market scenarios.

A stream of words is a very powerful tool to understand and tackle such change.

Birthdays will go by, and, hopefully, words will keep flowing. When something flows naturally, stopping it leads to disease. Trapped words turn septic inside the container holding them.

Well, we covered lots of ground, didn’t we? This year saw us transform from being a money-management blog to becoming a commentary on applied finance. The gloom and doom of Eurozone didn’t beat us down. Helicopter Ben and the Fed were left alone to their idiosyncrasies. The focus turned to gold. Was it just a hedge, and nothing but a hedge? Could it replace the dollar as a universal currency? Recently, its glitter started to actually disturb us, and we spoke about exit strategies. We also became wary of the long party in the debt market, and how it was making us lazy enough to miss the next equity move. Equity, with its human capital behind it, still remained the number one long-term wealth preserver cum generator for us. After all, this asset class fought inflation on auto-pilot, through its human capital.

Concepts were big with us. There was the concept of Sprachgefühl, with which one could learn a new subject based on sheer feeling and instinct. The two central concepts that stood out this year were leverage and compounding. We saw the former’s ugly side. The latter was practically demonstrated using the curious case of Switzerland. There was the Ayurvedic concept of Satmya, which helps a trader get accustomed to loss. And yeah, we meet the line, our electrolytic connection to Mrs. Market. We bet our monsters, checked Ace-high, gauged when to go all-in against Mrs. Market, and when to move on to a higher table. Yeah, for us, poker concepts were sooo valid in the world of trading.

We didn’t like the Goldman attitude, and weren’t afraid to speak out. Nor did we mince any words about the paralytic political scenario in India, and about the things that made us go Uffff! We spoke to India Inc., making them aware, that the first step was theirs. We also recognized and reacted to A-grade tomfoolery in the cases of Air India and Kingfisher Airlines. Elsewhere, we tried to make the 99% see reason. Listening to the wisdom of the lull was fun, and also vital. What would it take for a nation to decouple? For a while, things became as Ponzi as it gets, causing us to build a very strong case against investing a single penny in the government sector, owing to its apathy, corruption and inefficiency. We were quite outspoken this year.

The Atkinsons were an uplifting family that we met. He was the ultimate market player. She was the ultimate home-maker. Her philanthropy stamped his legacy in caps. Our ubiquitous megalomaniac, Mr. Cool, kept sinking lower this year, whereas his broker, Mr. Ever-so-Clever, raked it in . Earlier, Mr. Cool’s friend and alter-ego, Mr. System Addict, had retired on his 7-figure winnings from the market. Talking of brokers, remember Miss Sax, the wheeling-dealing market criminal, who did Mr. Cool in? She’s still in prison for fraud. Our friend the frog that lived in a well taught us about the need for adaptability and perspective, but not before its head exploded upon seeing the magnitude of an ocean.

Our endeavors to understand Mrs. Market’s psychology and Mr. Risk’s point of view were constant and unfailing, during which we didn’t forget our common-sense at home. Also, we were very big on strategy. We learnt to be away from our desk, when Mrs. M was going nowhere. We then learnt to draw at Mrs. M, when she actually decided to go somewhere. Compulsion was taken out of our trading, and we dealt with distraction. Furthermore, we started to look out for game-changers. Scenarios were envisioned, regarding how we would avoid blowing up big, to live another day, for when cash would be king. Descriptions of our personal war in Cyberia outlined the safety standards we needed to meet. Because we believed in ourselves and understood that we were going to enhance our value to the planet, we continued our struggle on the road to greatness, despite any pain.

Yeah, writing was fun. Thanks for reading, and for interacting. Here’s wishing you lots of market success. May your investing and trading efforts be totally enjoyable and very, very lucrative! Looking forward to an exciting year ahead!

Cheers 🙂