Nath on Trading – IV – We’ve got Stamina

61). We’re able to take many, many small losses, without flinching.

62). Only that sets us up for the big wins.

63). We don’t second guess our stops.

64). In fact, we want the stop to hit. As in, hit me, if you’ve got the *****.

65). When the trade moves in our direction, we let it. We’re doing other stuff.

66). When the trade moves against us, we let it. We’re doing other stuff.

67). That’s because we fully understand the function of our stop. It will take us out of the market, whether in loss or in profit. It’s dynamic, you see. It moves with the market as per the definition provided by us while punching in the trade.

68). We’re not afraid that our stop could be jumped. Can happen, in a panic. Hopefully, our technicals will have placed us in the right trade direction before huge and fast moves. It comes to mind that this kind of move occured at least twice in the last six years, once with the swiss franc, and once during Brexit. If we start worrying about such one-offs, we won’t trade at all. 

69). We look at the technicals, and we listen to what they’re saying. The trend is our friend. We trade with the trend, either on fresh highs (fresh lows) or on pullbacks, depending upon the conditions.

70). This is trading, so I personally don’t look at fundamentals. However, cook your curry the way you like it.

71). We might zero into tradable underlyings with screens or searches, but…

72). …we eyeball into final trade selection.

73). Yes, the chart needs to look and feel just right. All but the one tradable entity are rejected by the look and feel of the chart. The one remaining is the one we trade. If none remains, we don’t trade. 

74). Price is king. We’re into price action.

75). Indicators only indicate. Price does the talking.

76). What the price is saying will reflect in the indicator, but with a time-lag.

77). Do we want this time-lag? I don’t.

78). Thus, price action it is, for me. However, everyone is looking at the same price.

79). Therefore, we need to think slightly out of the box, to make money.

80). Edge + out of the box thinking + stamina nails it.

 

 

 

 

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Market-maker

Manipulation. 

Recognition. 

Alignment. 

Trade. 

Spike. 

Out. 

How does one recognize manipulation? 

On the charts. 

After eyeballing many many charts, one gets a feel for it. 

Manipulated strike-points become pivot points. 

It’s a push from a fund-heavy conglomerate. Push becomes a cascade as traders join in. 

After the spike, the market-maker pulls out funds so cleverly that rates don’t fall. 

Funds are now ready for the next push. The same funds. 

Repeat. Same loop. 

Till strategy fails. 

Then, maker starts manipulating in opposite direction. 

Life’s busy for the maker. 

There’s trouble with the authorities. Ends on a compromise. Maker will step in when authorities need to prop the market. 

No maker – no market. 

Why do you think there’s always a quote to your underlying? 

Because of the maker. 

After a market has crossed critical mass, makers sit on their spikes. They roll-over on expiries, and enjoy the ride. 

Ride is not always smooth. 

Makers often get greedy and break their own rules. Functioning with no safeties, many makers get wiped out. To add to their woes, a large percentage functions on borrowed money. 

Makers have an electronic life, which loops from cellphone to terminal and back. It’s a life that’s punctuated by headaches, physical and mental. 

Don’t envy a maker. 

He or she is just doing his or her job. That’s all. 

Trade the maker. 

Looking for a Deal-Breaker

I look. 

Don’t find it. 

Look again. 

And again. 

Keep looking. 

Tired. 

Eyes ache. 

Sleepy. 

Stop. 

Resume next morning. 

Still nothing. 

So on and so forth. 

Few days. 

Absolutely nothing. 

Buy the stock.

Yes. 

That’s the chronology. 

After zeroing in on a stock…

…that’s the chronology. 

Am I happy the search was unsuccessful?

You bet!

Am I spent?

Yawn…yes. 

Was it worth it?

Of course. I now own a quality stock. 

What’s happened before?

Stockscreener. 

Stock pops up. One that appeals to me. 

Check it for value. 

Pass.

Check it for moat.

Pass. 

Look for deal-breaker. 

Yeah, final step. 

Takes the longest. 

It’s boiled down to a yes or no. 

One’s going to holding the stock for a long, long time. 

This is when one is asking every cell in one’s body. 

Yes or no?

No deal-breaker?

Fine. 

Going for it. 

It’s a yes. 

What about the Spark?

Yeah, what about it?

Versatile word.

Used in spy mission abort code phrases.

Romance.

Automotive engineering.

Electrical engineering.

Stocks.

Stocks?

Stocks.

Whacko?

No.

Explain.

Ok.

Stockscreener.

Yeah?

Spits out list.

Yeah.

Eyeballing.

Ya.

Spark? Look into stock.

No spark anywhere, in the whole list? Redefine screener. Screen again.

This is a typical chronology of the beginning of stock selection.

Of course, now follows deep due diligence.

However, what are you DDing in?

That’s decided by the spark.

Remember the word.

The Valuation Game

Value is a magic word. 

Ears stand up. 

Where is value?

Big, big question. 

Medium term investors look for growth. 

Long-termers invariably look for value. 

How do you value a stock?

There are many ways to do that. 

Here, we are just going to talk about basics today.

For example, price divided by earnings allows us to compare Company A to Company B, irrespective of their pricing.

Why isn’t the price enough for such a comparison?

Meaning, why can’t you just compare the price of an Infosys to that of a Geometric and conclude whatever you have to conclude?

Nope. 

That would be like comparing an apple with an orange. 

Reason is, that the number of shares outstanding for each company are different. Thus, the value of anything per share is gotten by dividing the grand total of this anything-entity by the number of outstanding shares that the company has issued. For example, one talks of earnings per share in the markets. One divides the total earnings of a company by the total number of outstanding shares to arrive at earnings per share, or EPS. 

Now, we get investor perception and discovery into the game. How does the public perceive the prospects of the company? How high or low do they bid it? How much have they discovered it? Or not discovered it? This information is contained in the price. 

So, we take all this information contained in the price, and divide it by the earnings per share, and we arrive at the price to earnings ratio, or P/E, or just PE. 

Yeah, we now have a scale to judge the value of stocks. 

Is this scale flawed?

Yeah. 

A stock with a high PE could have massive discovery and investor confidence behind it, or, it could just have very low earnings. When the denominator of a fraction is low, the value of the fraction is “high”. You have to use your common-sense and see what is applying. 

A stock with a low PE could have low price, high earnings, or both. It could have a high price and high earnings.  The low PE could also just be a result of lack of discovery, reflected in a low price despite healthy earnings. Or, the low PE could be because of a low price due to rejection. What is applying? That’s for you to know. 

At best, the PE is ambiguous. Your senses have to be sharp. You have to dig deeper to gauge value. The PE alone is not enough. 

Now let’s add a technical consideration. One sees strong fundamental value in a company, let’s say. For whatever reason. How does one gauge discovery, rejection or what have you in one snapshot? Look at the 5-year chart of the stock, for heaven’s sake. 

You’ll see rejection, if it is there. You’ll understand when it is not rejection, because rejection goes with sell-offs. Lack of discovery means low volumes and less pumping up of the price despite strong fundamentals. You’ll see buying pressure in the chart. That’s smart money making the inroads. Selling pressure means rejection. You’ll be able to gauge all this from the chart. 

Here are some avenues to look for value :

 

– price divided by earnings per share,

– price divided by book-value per share,

– price divided by cash-flow per share,

– price divided by dividend-yield per share,

– in today’s world, accomplishment along with low-debt is a high-value commodity, so look for a low debt to equity ratio,

– look for high return on equity coupled with low debt – one wants a company that performs well without needing to borrow, that’s high value,

– absence of red-flags are high value, so you’re looking for the absence of factors like pledging by the promoters, creative accounting, flambuoyance, 

– you are looking for value in the 5-year chart, by gauging the chart-structure for lack of discovery in the face of strong fundamentals. 

 

We can go on, but then we won’t remain basic any more. Basically, look for margin of safety in any form. 

Yeah, you don’t buy a stock just like that for the long-term. There’s lots that goes with your purchase. Ample and diligent research is one thing. 

Patience to see the chart correct so that you have your proper valuations is another. 

Here’s wishing you both!

🙂

 

Dealing with Noise…the Old-Fashioned Way

There’s a sure-shot way to deal with noise…

…just shut your ears. 

Yeah, the best ideas in the world are – simple. 

Let’s not complicate things, ok?

So, what kinda noise are we talking about here?

We’re not talking about audio, you got that right…!

The concept is related, though. 

If you’re charting, you’ve dealt with noise. 

Yeah, we’re talking about minute to minute, hour to hour or day to day fluctuations in a chart of any underlying.

Markets fluctuate. 

While discussing noise, we are pointing towards relatively small fluctuations which generally don’t affect the long-term trend. 

However, noise has the capability of deceiving our minds into believing that the long-term trend is turning, or is over. 

Don’t let noise fool you.

When has the long-term trend changed?

When the chart proves it to you through pre-defined fashion. That’s it. You don’t let noise to get you to believe that the long-term trend has changed, or is changing. Ever. 

You believe your chart. 

Moving averages crossing over? Support broken? Resistance pierced? Trend-line shattered? ADX below 15? Fine, fine, FINE.

Take your pick. You have many avenues giving decent signals that the long-term trend has changed or is changing. 

How about eyeballing? Works for some. Like I said, let’s keep this simple. 

So let’s get noise out of the way. 

Random numbers generate trends – you knew that, right?

You don’t need more. 

Once you’ve identified a trend, that’s your cue to latch on to it. 

We’re not talking about predicting here. We don’t need to predict. We just need to identify a trend, and latch on. That’s all. No predictions. Not required. 

From this point on, two things can happen.

Further random numbers deepen the trend you’ve latched on to. You make money. Good. 

Or, the next set of random numbers make your trade go against you, and your stop gets hit. 

If your stop is getting hit, please let it get hit. Even that qualifies as a good trade. 

You move on to the next trade setup, without even blinking. 

What you’re not doing is letting noise throw you out of the trade by deceiving your mind. 

So, here’s what you do. 

You’ve id’d your trend. You’ve latched on. Your stop is in place. Now, don’t look at your trade. 

Till when?

That’s your call. 

Don’t look at your trade till you’ve decided not to look at it. For the day-trader, this could be a couple of hours. For the positional trader, it could be days, or weeks. 

By not looking, you won’t let noise deceive you. 

If the trend doesn’t deepen, or goes against you, you lose the risked small amount. 

Just remember one thing. 

A loss has immense informational value. It teaches you about market behaviour patterns. It also highlights your trading errors. Many times, losses occur without any mistakes made by you. 

That’s the nature of trading. 

Ultimately, if the trend deepens, you’ll have made good money, and can then further manage your trade after the stipulated period of not looking.

This is the sweet spot.

This is where you want to be, again, and again and again.

Sitting on a large profit gives you room to play for more profit by lifting your stop and your target simultaneously.

To reach this sweet spot again, and again and again, you have to position yourself out there and appropriately, again, and again and again. 

This is also the nature of trading.

Wishing you happy and lucrative trading!

🙂

Charting Charting Charting

Why don’t you just…

… trade what you see?

Trade the chart, dammit.

Not the level.

Not the expectancy of a turnaround.

And, although I still do this because it gives me a kick, why do we even trade corrections?

Why can’t we just trade the sheer chart?

Every chart is either going up, down or nowhere.

So it’s pretty obvio, that the first step would be to…

… to what?

… to decide where the chart is going.

Again, it should be pretty obvio, that if a chart is going nowhere, then you are doing… what?

Are you trading such a chart?

NO!

Wait for such a chart to break out in one particular direction.

Wait for the LTT to turn in this direction.

Then trade this chart. Not before.

Yeah, LTT stands for long-term trend.

Yeah, we’ve befriended the LTT so much, that we have an abbreviation going for it…

Once you’ve sorted out the direction, look for an entry setup.

Be patient.

If the entry setup hasn’t formed yet, wait for it. If you can’t stop your twiddling fingers from doing something, feed in a trigger entry in case of a hypothetical setup formation within the next few hours / days, if your trading station allows this.

There’s no up or down anymore, to be honest. You are going where the chart is going, period.

You are also not asking the stooopidest question of them all…

… you guessed it… “Did the sensory index go up, or down?”

Just forget about the sensory index, ok?

I mean, we’re so done with sensory indices in this space.

Why?

DLF could tank 20 bucks on a day the Sensex goes up. Dow Jones could be down 50 points, but Pfizer could just spring into a stellar upwards move. Why should we have lost the short-side opportunity that DLF hypothetically gave, or the long-side opportunity that Pfizer could present, for example? We will do exactly that, i.e. lose the opportunity, if our focus is on the sensory index.

Focus on the underlying.

To be more precise, focus on the chart of the underlying.

Happy trading.

🙂