Breathing Space

I like to breathe…

…between trades. 

There’s something fresh about being market neutral. 

One is decoupled from market forces. 

One feels light. 

If one has just closed a losing trade, there’s hung-over disappointment. 

Forget. 

Breathe. 

Move on. 

On the other hand, if one has just closed a winning trade…

…there’s remnant euphoria. 

Forget.

Breathe. 

Move on. 

Why forget?

The next trade is the next trade. 

It has nothing to do with the previous trade. 

Also, one is recuperating, remember?

Market forces take a toll. 

Market neutral air allows the system to regenerate. 

Don’t mistake this market neutral with the other market neutral. 

Insiders speak of being market neutral when they are hedged, and trades on both sides result in an overall market neutral stance for them. 

Hedged market neutral candidates experience a double whammy of market forces. 

You’ve understood by now, that we are talking about the “not in the of the market” neutral stance. 

Should one then even call it market neutral?

I mean, one can call it sitting out, or something. 

I like to call it market neutral breathing space.

When does the neutral strictly apply?

When I don’t know if the next trade is going to be long or short.

What will the trade direction depend upon?

Data. 

Chart. 

Technicals. 

Fundamentals. 

Whatever cooks your goose. 

However, sometimes, one is on a short-short strategy, or for that matter a long-long strategy. Meaning, that one might be out of a trade, but one is waiting to go short (long) on the next one, and so on and so forth. Meaning that one knows one’s trade direction for a defined time frame. 

Well, I still like to call the breathing space between trades market neutral, even here, because the word “neutral” reminds me to keep an unbiased mind about the next entry point. 

I try to then look at the chart free from the remains of previous experience, in my search for an entry point, even though I know the direction that I will be trading.

How much time can one spend between trades?

Depends on when the next setup arrives. 

Why the hurry?

Enjoy the calm of the space.

The Benefit of Quantum upon Quantum

Underlying equity. 

How do you protect against fraud and / or investor-unfriendliness?

You’ve done your research. 

All good. 

Stock is a buy. 

Meets your parameters. 

What’s the next step?

Protection. 

You buy quantum upon quantum. 

You don’t plunge into the stock with all you’ve got to give. 

No. 

You put in a quantum.

Then you wait. 

Better opportunity arises.

Fundamentals haven’t changed. All still good. 

You put in another quantum.

Quantum…

…upon quantum. 

That’s how you keep entering the stock till it keeps giving you a reason to enter. 

Year upon year. 

Between quanta, you’re studying behaviour. 

You’re looking for investor-friendliness. 

Your next quantum is only going in if investor-friendliness continues.

No more investor-friendliness?

No more quanta.

You wait.

Will investor-friendly behaviour resume?

And you wait.

Is it coming?

Yes. 

Good. 

Upon buy criteria being met, next quantum goes in. 

Not coming?

At all?

Ok. You’re looking to exit. 

Market will give you a high to exit. That’s what markets do. They give lows, and highs. 

Wait for the high. 

High?

Exit. 

Frozen

Frozen? 

It’s ok. 

Breathe. 

You need to acknowledge that you’re frozen. 

Without that, the next step won’t come. 

It’s normal to freeze sometimes. Just acknowledge it. Then learn. 

For example, I acknowledge that I’m currently frozen wrt to the USDINR short trade. Missed entry. Next opportunity to enter never developed for me, and the underlying is currently in free fall. Don’t have the guts to short it at this level. Yeah, I’m frozen all right.

However, the fact that I’m acknowledging it opens up the learning window. 

Why did I miss entry?

I know why I froze. Fear. What I need to understand is why I allowed a situation to develop that would lead to fear. 

Ok. 

Was running super busy. 

Neglected the underlying. 

Kept postponing entry… 

… till free-fall started. 

It’s good to be busy. 

Hmmm, so this can happen again. 

How do I stop this from happening again? 

If I ID a setup, I need to take it. 

No second-guessing. 

What about strategy? 

Meaning, am I going with a short strategy for USDINR? Or am I keeping the window open for a long strategy?

See, that’s it.

Keeping short and long windows open makes me second-guess all the time. 

So can I go in one-direction wrt USDINR all the time? 

What speaks for it? 

Underlying is falling from a height. Good. 

Short only means no second-guessing. You just go short, period. 

Stoploss will save ruin. 

Not nipping profits in the bud will amass fortunes. 

Can the underlying keep falling over the next few years? 

Why not? Modi’s looking set for 2019. 

Hmmm, so a short only strategy has a lot going for itself. 

There’s more. Future month contracts are quoted at a premium. The premium evaporates over the current month. This move is in your favour if you’re short. 

Ok, enough. 

Yeah, there’s enough on the table to warrant a short only strategy for USDINR. 

SEE? 

Learning process. 

Why did it happen?

Because I acknowledged that I had frozen. 

Now, my strategy is more fine-tuned and I’m probably less prone to second-guessing. 

You need to pull off such stuff when you freeze. 

Use the freeze to evolve. 

Wealth-Generators often go Contrarian

You knew that too, right? 

Sure. 

Going contrarian is a buzz-phrase. 

We hear it again and again…

… till we begin to start thinking… 

… that we know what it means. 

Well, try going contrarian. 

Yeah, try actually doing it. 

You’ll see what I mean. 

It’s real hard. 

Going against the crowd takes all the strength you might have… 

… and then some. 

Most humans aren’t able to go contrarian. 

Most humans aren’t wealthy. 

When there’s blood on the streets, there’s no telling how much more there will be. 

Under such conditions, the contrarian investor lets go of his or her hard-earned money into an investment, knowing perfectly well that the Street might even value the investment tomorrow at a huge discount to today’s price.

That’s ok too, says he or she.

Why?

Because homework’s been done.

Underlying is strong.

Debt-free.

Management is stellar.

Balance-sheet is robust.

Projections are paramount.

That the world is pricing the investment wrongly is a problem with its vision.

Underlying is not going under. With above credentials, this alone matters.

Times change. Vision of the majority changes. Investor makes a killing. Cashes out some, principal and what have you. Leaves lots of free-standing shares… forever… or till parameters change.

Wealth-generators repeat this behaviour-pattern many times in their lives.

They’re not afraid of going against the grain.

They know otherwise.

Also, the money they use has been freed up.

Its being out of action for a long time is not going to change their lives even a bit.

They will have the last laugh.

Wealth is the reward of going contrarian. 

MP vs MoS : the lowdown on Trade-Entry

Margin of Safety (MoS)… 

… hmmm… 

… wasn’t that in investing? 

Well – surprise – it’s in trading too. 

You can enter a trade with MoS. 

How? 

Ok.

ID the trend. 

Wait for a minor reversal.

Let the reversal continue towards a pivot, or a support or a what have you. 

During this reversal, whenever you feel that you have considerable MoS, well – enter. 

Why shouldn’t you wait for the pivot to get touched? 

Things happen real fast at a pivot. Upon a pivot-touch, you can lose your comfort-zone even within minutes. 

Two vital things can happen at a pivot. 

Either there’s a quick bounce-back, or the pivot gets broken. 

Bounce-back means your trade is now in the money, and that you can go about managing your trade as per your trade-management rules. Wonderful. 

Pivot-break is not a worry for you. 

Why? 

Because you’ve placed your stop slightly below pivot, after the noise. 

Upon pivot-break, you get stopped out. You take the small hit and move on to your next trade. 

Eventually, things heat up. 

There is movement. 

Tops get taken out. 

Fast money can be made. 

How do you enter here? (Needless to say, for shorts, everything is to be understood reversed). 

Momentum play (MP)… 

… is the weapon of choice. 

You set up a trigger entry after a top or a resistance or a what have you, and wait for price to pierce, and for your entry to get triggered. Then you place your stop, below top or resistance or what have you. 

MP vs MoS is a matter of style. 

If you’re not comfortable changing your trading style to adapt to times, that’s fine too. Stick to one style.

If you’re conservative, stick to MoS. 

In a frenzy, however, MoS might almost never happen. 

In a frenzy, entry will be triggered exclusively through MP.

Take your pick. Adapt. Do both. Or don’t. Do one.

You call the shots. 

This is about you.

Did you invite the f-word?

The next trade… 
… yeah… 
… take it. 
What? 
Can’t? 
Why?  
Afraid of what might happen. 
That’s the whole thing. 
You see a setup – you trade the setup.
When you see a setup, there are no more what-ifs, supposings or anything. Then, it’s just you and the trade. Take the trade. 
No room for f-(ear). It’s the new f-word.  
How do you drive fear out of the equation? 
Risk a miniscule fraction of your networth per trade. 
Don’t make trading your bread and butter. Make it your bonus. 
Don’t allow anyone else’s negativity to creep in. Don’t talk to people. Trade on your own. No room for tips. 
Don’t listen to your broker. Tell him what to do.
Don’t trade under compulsion. 
Enjoy your trading. 
Once in the trade, lose the mini-bias that got you in. Now, just manage the trade. 
Stop hit? You’re out. 
Run? 
Raise stop. 
Running? 
Keep raising stop. 
Losing some of your notional profits? Market throws you out?
Good. That’s a proper exit. 
See, fear wasn’t allowed to the party. 
Look for next setup. 
Position-size your entry. 
Take the next trade. 
And so on and so forth. 
Not upto trading?
Ok. Don’t trade. Till you’re up to it.
 
Demons out of the way? 
 
Up to trading again? 
 
See the next setup?
 
Take it.

Winning Marketplay, Anyone?

Two words. 

Psychology.

Strategy. 

That’s it. 

Prediction?

No. 

Prediction is not pivotal here. 

We’re getting psychology and strategy right. 

We want winning marketplay, right?

Prediction is for losing marketplay. Prediction might be wrong. That’s when strategy and psychology save you from big loss. A big loss can wipe you out. Thus, dependence upon sheer prediction brings a wipe-out into play. That’s why, prediction is almost always relegated to the bottom rank when one talks about winning marketplay.

We’ll travel with a hint of prediction, though. Just a hint. Doesn’t suffice for losing yet. 

For entry purposes. Only.

Even this hint of prediction is bias-giving, though. Once we enter, we need to quickly lose the bias. Yeah, once we enter, we only react to what we see. 

Our system has an edge. It helps us choose market direction. After that, psychology and strategy take over. 

Meaning, after we’ve entered, there’s no more prediction in play. 

So what’s in play then?

The raw trade. 

And you.

At this point, all your mental strength comes into play. 

Oh, and your strategy. 

You do have a strategy, right?

As in, if x happens, they y, and if a happens then b.

You need a stoploss too.

You don’t have to show it. It can be mental, provided you don’t fool yourself into not using it when the time comes.

You won’t execute your stop. 

Sure. 

Again and again. 

Till you teach yourself how to. 

Till you lose big. And are still left standing. To want to enter again. 

Learning to take a small hit, again and again and again – that’s winning marketplay. Requires huge psychological strength. You acquire this. You don’t have to be born with it. 

Now comes another punchline. 

That profit-sapling just emerging…see it? You will not nip it in the bud. 

You’ll still do it. 

And again. 

You’ll nip it in the bud. 

Again and again. 

Till you teach yourself not to. 

It’s not easy. 

95%+ of all market players continue to nip profits in the bud all their lives. 

To allow the sapling to grow into a tree is the most difficult of all market lessons. Learning to let profits run is winning market play. 

To want more profits, you have to risk some of your current profits. 

No more risk, no more gain. 

You want to quickly exit and post that 22% gain on your Excel sheet. Sure. Why can’t you let it grow into an 82% gain? God alone knows. That’s how the cookie crumbles. You nip the opportunity to make that 82%. 

What’s with 82?

Just a random number. 

Am trying to get a point across. There’s a run happening. In a direction. It’s crossing +22%. Fast. Momentum could see it to +102%, to then backtrack and settle at +82%. It’s a probable scenario. 

Anyways, there are some smarties that risk 12 of the 22% and stay in the trade. Soon the 22 can even go beyond 82. Lets say it does. What do you do?

Nip?

No. 

Not yet. 

You let it travel. Momentum is to be allowed free leeway, till it halts. Let’s say it halts at 102. You say to yourself that the winds might change if 102 goes back to 82, and tell your broker to exit if 82 is hit intraday.

That and that alone is the proper way to exit a winning trade. You exit it with the taste of loss. You let the market throw you out. For all you know, the market might be in the mood for 152. You want to give the trade that chance. Thus, a momentum target exit while the move is still on would be less lucrative for you in the long run, or so I think. 

Why?

Statistics are defined by big wins. These matter. Big-time. Allow them to happen. Again and again and again. 

Now add position-sizing into your strategy. The ideology of position-sizing has been discovered and fantastically developed by Dr. Van Tharp. 

In a nutshell, position-sizing means that an increasing trading corpus due to winning should result in an increasing level risked. Also, correspondingly, a decreasing trading corpus due to losing should result in a decreasing level risked.

With position-sizing added to your arsenal, no one will be able to hinder your progress.

Psychological strength that comes from experiencing first-hand and digesting learning from varied market scenarios, coupled with a stoploss/profitrun position-sizing strategy – that’s a winning combination.

Wishing you happy and lucrative trading!

🙂