Who Breathes Easier – The Investor or the Trader?

Sure…

…asset-light…

…going with the flow…

…can strike both ways…

…care-free almost…

…that’s the image that lures one to the trading world.

Especially when the investor’s world has turned upside down, the investor starts wishing that he or she were a trader instead.

Stop.

Get your investing basics right. Your world will not turn upside down once you invest small quanta into quality coupled with margin of safety, again and again and again.

Let’s dig a little deeper into the trader’s world.

No baggage?

Sure baggage.

Emotional baggage for starters.

Cash baggage.

This one will always be there.

The trader will always have one eye on the cash component.

It needs to be safe.

It is a cause of…

…tension.

Reason is, the safest of havens for this cash component, i.e. sovereign debt, is volatile enough to disturb those who are averse to volatility when it comes to one’s cash component.

So, not asset-light.

Cash component is also an asset. It’s not light.

Sure, go with the flow. Strike both ways.

Can one say that this is a recipe for making higher returns?

NO.

Investors strike in one direction.

Investors are perennial bulls.

At least they know where they are going.

Small entry quanta make market falls work in favour of investors, over many, many entries into an underlying, over the long-term.

Do the math. You’ll see.

When one is focused on one direction, i.e. upwards here, chances of capitalising on runs are higher. The trader’s mind is always bi-polar in this regard, and game-changing runs are missed out on, upon corrections larger than the concerned stop-loss.

Care-free?

Who’s watching the screen all day?

The trader.

The investor watches the screen only upon requirement. There are investors who don’t watch the screen at all.

Images are deceptive.

Don’t go by images.

Whatever one chooses, it should ignite one’s passion.

Nothing else counts.

Let’s say you’re an investor, and you feel that you’re missing something by not trading.

Fine. Fill the gap. Sort out the basic folio, and then dabble in trading with small amounts, that don’t throw you out of whack. Do it for the thrill, if nothing else. As long as one is clear that this is not one’s A-game, and expectations are not as high as they are from one’s A-game, one might even enjoy the ride.

Let’s say you are a trader and need an avenue to park.

Yes, Equity is a serious avenue for parking.

Use it.

With one caveat.

This is not a trade.

Trading rules don’t apply to parking.

In fact, trading rules are inverse to investing rules.

You’ll need to figure this one out before moving your bulk into Equity for parking.

The investor is able to take trading with small amounts casually, and use it as an avenue for amusement.

When the trader explores the avenue of Equity for parking, its serious business, and spells doom for the trader if basics of investing are not understood.

So, who breathes easier?

One would know this by now.

Are you Saying These are Small Losses, Mr. Nath?

No. 

Everything is taking a hit. 

Sure. 

Hit’s actually in the “Wealth” segment…

…and not as such in the “Income” segment.

Would you like to elaborate on this one, sounds pivotal?

Yes it is exactly that, pivotal. Because of this one fact, I’m talking to you with a straight face.

I see.

Auto-pilot income-creating avenues are still doing what they’re supposed to do, i.e. creating income. Nothing has changed there, yet.

You mean something could change there?

Sure, if companies start going bust, their bonds won’t create income. Instead, principal will take a hit. It’s not come to that yet, at least in India. You have an odd company going bust here and there now and then, but nothing major as of now. Income is intact, for now. If were done with CoVID in two months, this factor might not change. Let’s focus on this scenario. 

Right. 

Secondly, we’re highly liquid. We try and become as liquid as possible during good times, ideally aiming to be 80% in cash before a crisis appears. 

How do you know a crisis is going to appear?

This is the age of crises. A six sigma event has now become the norm. After Corona it will be something else. This has been going on from the time the stock market started. It’s nothing new. Come good times, we start liquidating all the stuff we don’t want. 

Don’t want?

Ya, one changes one’s mind about an underlying down the line. At this point, one shifts this underlying mentally into the “Don’t Want” category. Come good times, one makes the market exit oneself from this entity on a high.

Makes the market exit oneself?

Yes, through trigger-entry of sell order.

Why not just exit on limit?

Then you’ll just sell on the high of that particular day at best. However, through trigger-exit, your sell order will be triggered after a high has been made and the price starts to fall. It won’t be triggered if the underlying closes on a high. That way, if you’re closing on a high, you might get a good run the next day, and then you try the same strategy again, and again. In market frenzies, you might get a five to seven day run, bettering your exit by 15-20%, for example. Who wouldn’t like that?

You talk of market frenzies at a time like this, my dear Sir…

The market is like a rubber band. What were witnessing currently is the opposite pole of a market frenzy. Humans beings are bipolar. If they’re reacting like this, they sure as hell will react like the opposite pole when conditions reverse. Especially in India. We’re brimming with emotions. 

Which brings us back to the initial question…

Yes, these notional losses look huge. But, who’s translating them into actual losses? Not us. We’re busy enhancing our portfolios as multiples get more and more lucrative for purchase. That’s entirely where our focus is. We are numb to pain from the hit because our focus is so shifted. 

And there’s no worry?

With such high levels of liquidity, shift of focus, income tap on, dividend tap on – yeah, please don’t ignore the extra big incoming dividends, underlyings taking a hit currently are paying out stellar dividends, and these big amounts are entering our accounts, because we’ve bought such quality – – – we’re ok.

Stellar would be?

Many underlying have shared double digit dividend yields with their shareholders! That’s huge!

So no worries?

No! We’ll just keep doing what we’ve been doing, i.e. buying quality. We’ll keep getting extraordinary entries as the fall deepens. 

What if that takes a long-long time?

Well, the year is 2020. We’re all on speed-dial. 18 months in 2020 is like 15 years in 1929. Because we follow the small entry quantum strategy, our liquidity should hold out over such period, providing us entries through and through. 

And what if it’s a four digit bottom on the main benchmark, still no worries?

NO! Look at the STELLAR entry over there. A bluechip bought at that level of the benchmark can be held for life without worries. So yes, NO WORRIES.

Thanks Mr. Nath.

One more thing.

Yes, what’s that?

What’s my maximum downside in an underlying?

100%.

Correct. Now what’s my maximum upside in an underlying?

Ummm, don’t know exactly.

Unlimited. 

Unlimited?

Yes, unlimited. Entries at lucrative levels eventually translate into unreal multiples. Looking at things from this perspective, now, the size of these notional losses pales in comparison to potential return multiples. It’s a combination of psychology, fundamentals, mathematics and what have you. In comparison, these are still small losses. If we can’t take these swings in our side, we shouldn’t be in the markets in the first place, focusing our energies on avenues we’re good at instead.

Right, got it. 

Cheers, here’s wishing you safe and lucrative investing. 

🙂

What’s on your mind, Mr. Nath?

Any questions, Mr. Nath?

Ya, I did have something on my mind. 

Ask.

I want to ask someone else.

Who?

Mrs. Market.

How are you going to do that?

I’ll just imagine that I could.

And, what’s the question, for the sake of discussion?

It’s not so much a question, really…

What is it then?

An observation perhaps…

…or a regret, maybe…

… not able to pinpoint exactly.

Hmmm, why don’t you just say it in words.

It’s about rewiring. 

Rewiring?

Yes. The words coming out are “Couldn’t you rewire us earlier?”

Who’s the you?

Mrs. Market.

Doesn’t your rewiring depend upon you?

Yes, that’s why perhaps it’s more of a regret.

What is this rewiring?

We are taught to win in life, and to hide our losses, if any, under the rug. That’s how we grow up. And that doesn’t work in the markets.

True. That’s what needs to be rewired?

Yes, to win in the markets, we need to get accustomed to loss, small loss, as a way of life. Wins are few, but they are big. So big, that they nullify all losses and then some. We make these wins big by not nipping them in the bud.

How long did it take you to rewire?

Seven years.

What’s your regret? A shorter time-frame would have resulted in half-baked learning. 

You are right, it’s not a regret then. Let’s just call it an observation. 

It’s a very useful observation for someone starting out in the markets. 

Let’s pin-down the bottomline here.

And that would be?

Till one is rewired, one needs to tread lightly. No scaling up…

…till one is rewired. 

And how would one know that one’s rewired?

No sleepless nights despite many small losses in a row, because one has faith in one’s system. Resisting successfully the urge to take a small winner home…

…because it is this small winner that has the potential to grow into a multibagger…

…and a few multibaggers is all that one needs in one’s market-life. 

Nath on Trading – Basics Win

1). Put yourself out there. Again and again. Take the next trade.

2). Keep yourself in a position to take the next trade. How?

3). Take small losses. Have a stop in place. Always. Have the guts to have it in place physically.

4). Trade with money that doesn’t hurt you if it’s gone.

5). Don’t exhaust stamina. Put trade in place with smart stop that moves as per definition, and then forget it. 

6). Keep yourself physically and mentally fit. Good health will make you take the next trade. Bad health won’t.

7). Have a system…

8). …with an edge, and even a slight edge will do.

9). Keep sharpening your system. 

10). Don’t listen to anyone. You’ve got your system, remember? Sc#@w tips. God has given you a brain. Use it. 

11). Let profit run. Don’t nip it in the bud. PLEASE.

12). A big profit doesn’t mean you’re it. It can become bigger. And bigger. Remember that.

13). What’s going to keep your account in the green over the long run are the big winning trades. LET THEM HAPPEN. How?

14). You exit when the market stops you out. Period. Your trailing stop on auto is fully capable of locking in big gains and then some.

15). Similarly, make the market make you enter. Entries are to be triggered by the market. Use trigger-entries on your platform.

16). When a trade is triggered, you’re done with it, till it’s stopped out, in profit or in loss. Can you follow that?

17). Your trade identification skills are going to improve over time. Get through that time without giving up. 

18). Despair is bad, but euphoria is worse. Guard yourself against euphoria after a big win. Why?

19). Big wins are often followed by recklessness and deviations from one’s system that is already working. NO.

20). Use your common-sense. Is your calculator saying the right thing? Can this underlying be at that price? Keep asking questions that require common-sense to respond. Keep your common-sense awake. 

 

 

 

Going for the Jugular

It’s time.

Why…is it time?

And, time for what?

It’s time to go for the jugular.

Meaning?

There comes a time, when, after working hard, struggling, doing the whole jig, the rigmarole, you achieve your basics. 

Well done. Pat on your back. 

Then you secure these basics. 

Forever. 

If you can. 

Wonderful. More pats.

Worry factor is now out of the equation. 

Your family is secure. 

Food, safety, education, all basics intact.

Fantastic. You deserve an award. Not that anyone’s going to give you one. Frankly, nobody could care less. Never mind. You know in your mind that you’ve achieved a milestone, and that’s enough for you. 

Whats the next step…

…for you?

Jugular. 

What is this jugular?

Multiplier.

X-factor.

Call it what you will.

What does this mysterious thing do?

Better question is, what is it capable of?

You’re looking to multiply your networth. 

Isn’t everyone?

This is different.

Why?

Because it is coming as a logical conclusion, and not as a first-step with no experience and no secure basics. 

You’re keeping your head-earned basics secure. 

Nothing is touching these. You’ll be surprised at the kind of courage secure basics give you to act further. 

Next, you’ve identified an area where your skill-set can be leveraged into huge profits with minimal risk. 

Specifically in the market, these areas are abundant. 

So what exactly will you be doing?

Playing on a minuscule portion of your net worth. Let’s say not more than 2 %.

Leverage.

Stoploss.

Profit-run.

Position-sizing. Scaling up upon profits. Scaling down upon losses. 

Overcoming your demons. 

Fear.

Worry.

Hypertension.

Exuberance.

Hubris.

Complaecency. 

Going beyond. 

Multiplying.

Going for the jugular. 

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!

🙂 

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. 

How I Wish to Trade

Tension?

No.

Hassle-free?

Yes.

Profit?

Yes.

Fun?

Too. 

I want it to make me want to come back. 

In the background?

Yes.

Part of my normal life?

No. 

Disturbing me in the night?

No?

Terminal on – ideally once a day. Max twice. That’s it. 

Protection?

Yes. Stops for forex. Hedges for options. No naked options. 

Exits?

Make me exit. Yeah, Mrs. Market needs to make me exit. I don’t wish to exit on my own. She needs to throw me out of a trade. 

Fear?

None.

Why?

Bread and butter secured through other-than-trading instruments.

Trading with surplus.

Surplus can potentially become zero. Will I still take the next trade?

Yes. After scanning strategy for errors.

Loss?

Will take small ones, again and again and again. That’s the only way to find the large profit moves. 

Once profit sets in, what then?

Nothing then. 

Normal. 

Behaving as if nothing has happened. 

Giving the trade room. 

It needs to make even more profit. 

It is a potential multi-x trade. Why should I nip it in the bud? As I said, make me exit. Throw me out. 

Family life?

Balanced.

Remnant anger from trading?

None. 

When yes, stop trading. Trading should never be allowed to disturb family life. 

Evolutionary?

Forever. Learning, learning, learning. 

Bias? 

None. 

News?

No. 

Tips?

None. 

Peers?

Maybe to start a strategy with. After strategy is made to fit – no peers any more. 

Discussion?

None. Hopefully. 

Don’t like to discuss trades after terminal shuts. 

Losses piling up?

Review strategy. Discard, renew, implement, trade again. 

Profits piling up?

Great. Do nothing. 

Are you getting the gist?

Similarly, you need to figure out how you might want to trade.

Many things I might be doing will not suit you automatically. 

You need to make things fit. 

If something doesn’t fit, discard it. 

Look for something new that might fit. 

Make a trading strategy that’s lucrative and gels with you and your lifestyle and environment. 

Such a strategy will blossom. For you. 

Is it a Crime?

With due respect to Sade, no, the next words are not going to be “to say that i love you…”.

Is it a crime? To be oneself? For you to be you?

No.

Then why?

Why what?

Why can’t you be you?

You being you is a winning combination in the markets. 

In any market. 

Why?

When you’ve recognised who you are, you invest and / or trade as per your risk-profile. 

More than half the battle is won here already. 

You’re not trying to emulate an RJ, or a WB, or CM or BG for that matter. 

You’re too busy being UU.

When does that happen?

After you’ve been there and done that. 

After you’ve had your fill of loss-making transactions. 

Yeah, you tried to do an RJ, but couldn’t sleep the night 40% down on your position, and then you folded. 

RJ probably sleeps well, even if 40-down on a position. That’s his risk-profile. When equity markets were badly beaten some years ago, I’ve seen him on TV saying that his bread and butter is safe, and his grossly hammered positions won’t be affecting his day to day life, or something to that effect. He obviously had no intentions of folding. That’s RJ. Not you. So, don’t do an RJ. Do a you. 

What happens in the markets when you behave like you really are?

You take digestible risks. Digestible for you. 

No risk, no gain. Remember. You’ll have to put something at stake, to be able to gain. 

You take a risk, again, and again, and again. 

Some play out well. Some badly. 

You nip the bad ones in the bud. 

You let the good ones play out to their logical conclusion. 

This is already a winning strategy. 

Cheers!

🙂

 

 

 

Making it Count

You’re playing a big one.

What’s foremost?

Make it count. For heaven’s sake.

Why?

Big plays don’t come too often. When they do, you have to catch them. You need to have energy left, to play. Then you just go all the way. Till the play plays itself out.

Life is an accumulation of knicks and knacks.

At first, you don’t know what you’re good for.

When you do know it, you start out as a net-net loser in whatever you’re good for, because every rookie needs to pay tuition fees. These are the costs of your mistakes.

Then you start getting the hang of something you’re naturally good at. Tricks of the trade – you learn them. You succeed in making your activity applicable, perhaps even financially viable.

Next step is to scale up.

You need to make your successful model count. Period.

Tired? Want to do other things? Need to borrow? Too big a pain? Time-issues? Overdose? Bureaucracy?

Whatever.

Don’t lessen the flow. Hold on. Ask the Universe for reserves. See the play through.

One life can mean just a few big plays.

When you’ve latched onto one, and have set it up so beautifully, now’s the time make it count.

Best of luck!

🙂

Making Sense of Losing Battles

Winning gets boring after a while.

Unbelievable, but true.

However, losing continues to pinch, time after time.

That’s the key difference between winning and losing.

Life’s bipolar game is skewed more towards the pinch of continuous loss than towards the continued pleasure of winning.

Get used to losing… but, lose small.

Win big. Don’t nip a small win in the bud and thus stop it from becoming a big win.

Sometimes, you identify losing battles.

These are areas where you’re just not able to win.

What do you do with a losing battle?

Walk away. One option. Weigh the odds. If your walking away impacts no one, and simultaneously betters your existence, yeah, this is a very valid option. For example, one walks away from a losing trade.

Fight. Second option. You’re not beyond your stop, whether in a trade or in life. You fight, to save the battle, and perhaps to win.

Learn. Third option. You’re not able to get away from the losing battle, because your exit impacts something or someone. You hang on. No choice. Your pain teaches you big things. You learn. Sometimes, such a big losing battle suddenly turns into a glorious win. That’s because all the lessons from the scenario have been learnt. Enjoy, you deserve it.

Devolution. Not an option. Don’t allow your losing battle to devolve you into a demon.

Incorporation. Very valid option. Incorporate the learnt lessons from your losing battles into winning strategies for other battles in life.

Cheers.

The Line of Least Resistance

We stand on the shoulders of giants.

I’m not guilty about using their work and ideas.

Firstly, obviously, I’m going to quote them. Then, I plan to achieve something new, whilst standing on their shoulders. Those will be my two pennies, and feel free, people, to use my two pennies copiously.

The phrase “line of least resistance” was first coined by none other than Mr. Jesse Livermore. He lost a fortune finding it, then won a fortune following it, and again lost a lot of money at times when he ignored his own discovery.

Pioneers have it tough.

Carving out a new path is perilous, to say the least.

So, what is the line of least resistance?

Imagine yourself to be poking and shoving around, looking for a clear path in the dark. Something gives. You push further, and discover that you can easily traverse the path that emerges, without stumbling. For a while.

Let’s just remain there.

You are travelling along seamlessly on this path you’ve discovered after poking and shoving around.

Freeze.

Now imagine the price of an underlying. Any underlying, that tends to trend. GBP vs USD would be a great example.

Price pokes and shoves (at resistance), as it tries to break out.

Once it has broken out, you need to understand why it has broken out.

It is not encountering enough resistance to make it stop.

It’ll keep moving along this line of least resistance, till there develops sufficient new resistance that is enough to make price stop, or even reverse.

That’s a price move. You want to be part of it. Thus, you look for it. The pokes and the shoves are your entry tries. One of your entries will chance upon the line of least resistance. You’ll experience a clear move, which you’re a part of. The move will continue till resistance builds up again.

The idea, obviously, is to stay with the move to make up for failed entries and then some.

You stay in the trade till there is enough resistance to make the underlying reverse more than your threshold.

That would be your trigger stop.

When a concept is broken down to its absolute basics, it becomes easy to understand.

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!

🙂

Moving away from the Greeks

I’ve never been to Greece.

I have nothing against people from Greece.

I don’t like Greeks, though.

Yeah, I’m an options player.

The Greeks I don’t like are options Greeks, he he he…!

What, you thought I didn’t like actual Greeks?

Come on, I’m sure I’ll love Greece and actual Greeks!

When you don’t like something, you can try to go around it.

I don’t need options Greeks to play options. I’ve found a way around the Greeks.

I’m sure others have discovered this too, because truth is truth.

Let me tell you about it.

You’re buying in the direction of the long-term trend.

You’re buying (calls / puts) after a significant correction / rally level has been hit.

You’re buying post a small move in the direction of the long-term trend, after the correction / rally level has been hit.

You’re buying out of the money to compound the cheapness.

You’re buying with breathing space on your side, so that the trade has enough time to pan out in your favour.

You’re not booking without a very solid reason, once the trade is running in your favour.

You’re trying to book (deep) in the money.

You must, must, must let your profits run as long as you can. This is the toughest part, but also the most essential one.

That’s all.

No Greeks.

Just common sense.

And…How Much Connection Time Exactly?

Well, somebody’s got to ask these questions…

Don’t see very many around me doing so, so I just thought what the heck, let it be me…

This one’s not for all you test-tube jocks in the lab, you know…

Answer’s not about the math really; it’s more about feeling, again…

Nevertheless, this is a very important question.

Answer it wrongly for yourself, and market-play will wreck your life – all avenues of your life, that is. 

And, answer it correctly for yourself – lo and behold, you’ll actually start enjoying your market activity.

The human being ultimately excels in anything he or she enjoys doing. 

This means that if you answer this question correctly, your market activity will yield you profits. 

Told you. This question is important. Answer it.

Let me tell you how I’ve answered it for myself. 

Before that, please understand, that my answer doesn’t have to apply to you.

However, for those who don’t know where to begin while trying to answer the question, it’s a start.

I detest giving Mrs. Market too much power. This was my clue initially, and I built up on this fact. 

Initially, Mrs. M used to take over my life. She used to govern my emotions. It started to rub off on my family. I knew I had to draw a line. 

I started to trade lightly – amounts which my mind could ignore. Then, I did one more thing. 

I started to connect minimally. The was the key step, and it swung the emotional tussle in my favour. Mrs. M’s days of emotional control were over. 

What does minimal connection mean?

You only connect when you have to. Period. 

When you don’t have to connect, you just don’t.

I’ll tell you when all I connect to Mrs. M.

Order-feed – 0 to once a day. Very rarely twice for this in one day. 

Connection for me is having my trading terminal on, and seeing live price-feeds face to face. 

My market research is all offline, so that’s not a connection for me. 

Squaring-off a position – again 0 to once a day. Very rarely twice a day.

Watching the live price-feed – 0 to once a day, and only if if I’m unclear about the buying-pressure versus selling pressure ratio.

That’s it. 

When I don’t identify a potential trade in my offline research, I don’t connect at all. 

When do I connect next?

Whenever I’ve identified the next trade, or a squaring-off situation, all offline. 

There can be two or even three day stretches when I just don’t connect. 

I use options, because they allow me this kind of play for Indian equities. 

Why am I stressing upon the value of minimal connection? 

Connection means exposure to the “Line”. You’ve met the Line before. If not, look up the link on the left (“The Line”). 

Connection to the Line taxes your system, because market forces interfere with your bio-chem. 

Keeping the connection minimal keeps you healthy, and you can go out and do other stuff in life, which rounds you off and refreshes you for your next market-play. 

Keeping the connection minimal detaches you from Mrs. M. You are able to detach at will. This lets you focus on your family when your family members require your attention. 

Keeping the connection minimal makes the task of swallowing your small losses smoother. 

Lastly, keeping the connection minimal helps you let your profits run. 

So, how does one define minimal?

Do the math, and come out with rules for your minimal connectivity, like the ones I’ve come out with above, for myself. 

After that, while sticking to your rules for minimal connectivity, only connect to Mrs. M when you feel the burning desire to do so, like for example upon the identification of a sizzling hot trade, or for the order-feed of a trigger exit after a profit-run or something like that. 

Yeah, you minimise even after your rules.

That’s your minimal connection.  

Learning to be Blunt

Don’t like something? Is it causing you harm? Is someone bothering you? Is something draining your energy? Are you unhappy with a situation?

Get a grip. 

Get that something or someone out of your way. Now. Be blunt about it.

It pays to be blunt. I’m really learning this the hard way, but today I feel there is a lot of truth in this. 

I’ll tell you how I’ve benefited. 

All uselessly energy-depleting people and situations are now out of my life. With the surplus energy saved, I am able to create. 

Stonewalling is for bankers, private investigators, cops, crooks and what have you. 

Diplomacy is for diplomats. Let them do their jobs. 

I’ll do my job. I wish to conserve maximum energy for activities I enjoy and which are beneficial to my surroundings. To achieve this, I have learnt to be blunt. 

Who was my teacher?

Ever wondered?

I mean, do you ask such questions?

Do you use your imagination?

Do you grow?

Are you doing justice to your incarnation as a human?

Ok, enough provocation. Who was my teacher?

None other than…

… Mrs. Market.

I take my stops.

I’m blunt about taking small hits. Very, very often. 

So often that…I’m numb to their pain. 

This puts me in line for…

… fill in the blanks…

… big wins …

… provided …

… fill in the blanks …

… what, you thought this would be a spoon-feed… ? …

… well, … provided…

… provided I let my profits run. 

Dynamics of a Long-Long System

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.

One Up on the Romans

Sometimes, words are hard to come by.

Like now.

It’s a dry spell.

Happens.

At other times, well, they burst forth as if a geyser’s exploded.

Then, I’m not able to stop their flow.

That also happens.

Welcome to the dual-natured environment of Earth.

While we’re steeped in this duality, there’s no option but to get used to it.

One can always go on to then master it.

Oh, I forgot, that’s optional.

I’ll tell you what I’ve done to master such fluctuating fortunes, as far as word-flow is concerned.

Two simple steps, that’s all.

When we’re dry,…, we’re dry. No PhDing over the fact that we’re dry. We’re just dry. Period. Accepted. Digested. We just go on to do other stuff. There are millions of other things that grab our interest on this dual planet.

When we’re up and running – that’s just it – we’re up and running. No PhDing over why we’re up and running. We let the flow happen. We can decide to make it happen even more. That’s optional…, but we don’t stop the flow… till the tap dries itself out.

Similarly, you can experience a string of losses in the markets. Losses make you hit your cut-off. A cut-off is a cut-off. You don’t keep on trading. Nature’s telling you to lay off till your mind and body align themselves with the flow of the markets again. Just do other stuff till you’re mentally and physically back.

On the other hand, when profits run, they can really run. PLEASE LET THEM RUN. Don’t PhD about the run. Let them run till they dry out.

When in dualism, the idea here is to first live through dualism, in order to understand its nature.

We’re one up on the Romans, though.

We’re trying to be masters over our fluctuating dualistic environment.

Yeah, in the markets, we’re getting through losing spells with minimal damage.

Simultaneously, we’re maximizing the potential of profit-runs.

That’s what we’re doing.

If not, then that’s exactly what we are going to do.

Cheers

🙂