Moments Before the Plunge

A very common sight right through school and college was last minute cramming. It was an epidemic. I was more the odd one out, walking around without any books a day before any exam. Reason was, I was convinced that if I was unsure of myself a day before an exam, delving into course-material at that stage would make me feel even more insecure.

“Do you have any coffee?”, whispered someone. This fellow woke me up in the middle of the night, leaving with my entire bottle of instant coffee-powder. He was doing an all-nighter before some board exam. At the cost of not being super-prepared, I preffered to sleep the night.

Interestingly enough, I’ve had the chance to speak to some brides and grooms hours before the knot was tied. Jitters, man. Everyone was jittery, well almost. The most common feeling was “… what if this is the wrong step?” This was followed by “…what if we don’t get along?”

Seriously, people, why moments before the plunge? Why does the human being expose him- or herself to destabilizing thoughts just before pulling the trigger? There’s ample time much, much before, to sort all the destabilizing stuff out while deciding whether one goes ahead with a particular action. Similarly, there’s ample time to study for an exam if one starts from day one. Just an hour a day, throughout the term, and there’s no need for any all-nighters.

If you’re all sorted out and well rested to boot, you then have the best chance of seeing peak-performance emanating from your system.

And that’s what we are looking to be, just before opening a market position.

We’ve sorted out our worries and fears. We know how much risk we can handle, and have systems in place to manage this risk, i.e. we know what we have to do if our trade goes bad. Also, we know how to behave when a trade does well. We are aware about the size of the position we need to put on as an appropriate ratio to our stack-size. We’ve tuned in to the idea of position-sizing, and are practising it as we win more or lose more. Basically, we have our basics in order.

After that, we have to see whether we actually feel like trading. Even when our trading system identifies a set-up, the innate go-ahead to trade might just not come from within. There can be some reason for this. For example, there could be some tension prevailing at home. Sort out the external disturbance to the level of closure if you can, or it might constantly disturb trading.

So, internal sorting out, external sorting out, then comes a trade set-up, and one takes the trade. No jitters, here, there, anywhere. All jitter-causing avenues have been chewed up and digested. That’s when triggers can be pulled when they appear.

When Mrs. Market asks you to ride alongside her, your bag should be packed already. You can then jump on to her motor-bike without worries, for you’ve packed well for the trip.

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Moving on to a Higher Table

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.

Going All-in Against Mrs. Market

Yeah, yeah, I’ve been there.

And it backfired.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Line

In the world of applied finance, you will meet the “line”.

Though the line is an abstract phenomenon, it is very real.

Whenever you connect to Mrs. Market, you do so through the line, which comes into existence (you guessed it) when you put your money “on the line”.

Please be aware of the capabilities of the line. If you allow it to, it grabs hold of the emotional switches of your brain. When the price of the scrip you’re trading plunges, the line can turn on your depression switch. As the loss multiplies, the line makes you go into freeze mode. On the other hand, it can also make you go on a spending spree with your notional profits, if your scrip is doing well. If you allow it to, the line then controls how you interact with your family and for that matter with everyone else.

Why give it so much power? Let’s keep the line in its boots. When you’re flying a kite with strong winds prevailing, and the kite plunges downwards and out of control towards some electricity wires, what do you do? Obvious answer, let the string go. Well, not so obvious when you’re holding the string (substitute string for “line” if you wish). You could try and save your kite, or for that matter, your trade, at the cost of being electrocuted, or, in trading jargon, burnt.

When you’re holding the line, common-sense often goes out the window. You start thinking emotionally. Our society doesn’t teach us to embrace failure. We are taught to win. Thus, we want to turn every trade into a winning trade. Big mistake. We are not able to let the line go while any loss is still bearable.

Wins come. The fact remains, that in applied finance, many transactions will be failures. You’ve won if you can then let your line go at a digestible failure level.

When a win does come along, again one is completely misled by the teachings of modern society. “Book your success now, put it on your resume”. An even bigger mistake in applied finance.

A winning trade needs to be allowed room to win some more. After struggling with failures, you’ve finally identified a winning horse. Aren’t you going to let it win more (races)? Aren’t you going to continue holding the line to let a multibagger emerge, instead of letting the line go while you’re showing a small profit which doesn’t even cover your failed trades?

The line is an enigma concerning the discernment of befitting moments for attachment and detachment.

We need to let it go when it threatens to burn us. Also, we need to hold on to it, contrary to any public opinion, that “XYZ can’t possibly go any higher”.

There’s no way we’re playing the line according to public opinion or society rules.

Also, there are times when it doesn’t make sense to get a line going, because the kite just doesn’t take off. At other times, you need to put out one line after another into the sky, because your kites start to soar, one after another.

In the world of applied finance, you need to put your money on the line. There’s no other way to connect to Mrs. Market.

The “when” is up to you, when to get it going, when to let it go, when to hold on, when to scale it up.

And at that level, trading becomes an art.

Elephant in a China Shop

Mr. Cool just plugged his trading exam.

Big time, and for the umpteenth time.

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

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

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

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

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

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

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

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

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

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

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

Next set of mistakes.

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

Not feeding in a mental stop – mistake.

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

Hoping in a trade – big mistake.

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

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

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

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

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

The Concept of “Sprachgefuehl”

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.