Don’t book your basics though.
What are these basics?
Stuff you’re convinced about.
We’re long beyond due diligence here.
These underlyings are running. These are your right calls.
They are not to be booked – as long as your conviction persists.
Hmmm – this question brings in the concept of “Bookability”.
Save the booking angle here – for now.
We’ll just try and answer above question about price.
Sell everything else, as in any low-conviction holdings,…
…bit by bit,…
as markets tread higher and higher.
Ultimately, it’ll all be gone.
You’ll have done very well, and will have made good profits.
You’re also left with your high-conviction holdings.
As a bull market persists, these will start quoting at…
Is something a hold at…
If you wish to be holding a multi-multi-bagger, well, then, yes, with a caveat.
When you can’t hold your trigger-fingers any longer, take your principal off the table.
Now, what’s on the table for you, are high-conviction holdings, with principal off the table – aha – so these holding are free of cost for you.
When these high-conviction holdings are free of cost for you, the urge to sell can only persist because of two things.
You could need the money.
…because of an unfounded urge to book, as in “Score!”… .
Tell your urge to sell that you want to make much, much more, by allowing an underlying to grow to 100x, for example.
Urge to sell will subside.
What’s causing such urge?
Fear of a correction.
When you’re holding free stuff, fear of a correction is unfounded.
This needs to be instilled into our DNA.
With that, we’re done already!
Any questions, Mr. Nath?
Ya, I did have something on my mind.
I want to ask someone else.
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.
Yes. The words coming out are “Couldn’t you rewire us earlier?”
Who’s the you?
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?
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.
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.
You’re learning to sit.
You buy with margin of safety.
You buy in small quanta,…
…and that’s why you’re always liquid,…
…to avail any opportunity that arises.
Yeah, there’s nothing impeding your liquidity…
…because you’ve kept yourself virus-free, i.e. debt-free.
You only buy quality…
…that’s going to be around for a long, long while,…
…because you don’t sell for a long, long while.
You don’t listen to what the grapevine is saying…
…because of the conviction and strength of your own research and opinion.
Yes, you regularly go against the crowd.
You either buy into debt-free-ness, or into managable debt that spurts growth.
Your input into the market doesn’t affect your daily life, leaving you tension-free to address your non-market world and thrive in it,…
…and that is why,…
…for all the above reasons,…
…your blockbuster gain story is going to happen,…
…and what’s more,…
…you are also enjoying the ride leading up to it.
Do you get alone-time?
Can you live with noise?
Does noise cover fact?
Can you see the forest for the trees?
Why do I ask?
Do you want your ideas to turn into multibaggers?
Bask in silence.
There’s something about silence.
You don’t need to think.
Thoughts just come.
Eventually, a blockbuster idea appears.
Distracted, you might not even recognize it.
It will come, and go, worthless as it is forgotten.
Alert, you recognize it.
You put it on paper.
You see it.
It was born in silence.
The biggest money can be made when you think like no one has thought before.
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.
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.
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.
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?
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.
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!
I want it to make me want to come back.
In the background?
Part of my normal life?
Disturbing me in the night?
Terminal on – ideally once a day. Max twice. That’s it.
Yes. Stops for forex. Hedges for options. No naked options.
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.
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.
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?
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.
Remnant anger from trading?
When yes, stop trading. Trading should never be allowed to disturb family life.
Forever. Learning, learning, learning.
Maybe to start a strategy with. After strategy is made to fit – no peers any more.
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.
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?
Why can’t you be you?
You being you is a winning combination in the markets.
In any market.
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.
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.
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.
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!
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.
Just common sense.
What are we doing with options anyways?
We are trying to play a market without needing to be with the market the whole time. Also, we are defining our risk quite exactly. The option premium is the money that’s at risk. You don’t have to lose all of it if the trade goes against you. You can bail out anytime and save whatever option premium is left. The option premium is the total you can lose in the trade. With that, you’ve done one great thing. You’ve installed a stop which will stay with you during the entire trade. Is that possible in any other segment in India? Nope. If my info is correct, stops have to be installed everywhere on a day to day basis. Not so the case with options. You have your stop with you, always.
That allows you to do other stuff. You can have an alternate profession, and still play options.
You don’t need to be afraid of the time element in options. You can trade them in a manner where the time element is rendered useless. I’ll tell you how.
Though you try and go with the overall long-term trend, you try and pick up an option during a retracement. That’s when you’ll get it cheap.
The idea is to buy cheap and sell expensive, right?
Secondly, give yourself breathing space. If the current month is well under way, pick up the corresponding option for the next series month. Give the trade 4-5 weeks to pan out in your favour.
A lot can happen over 4-5 weeks.
Thirdly, you’re trying to pick up out-of-the-money options, which seem to have gotten out-of-the-money as an aberration. These will be even cheaper. Like what happened to Tata Motors the other day. For no apparent reason, the stock drifted towards what was formerly seeming to be an unlikely support to be hit, around the Rs. 430 level. On the previous day, it was nowhere near this level, and didn’t look like reaching it in a hurry at all. An event in the US occurred, and Asia opened down, with the scrip in question falling to the support and bouncing off. At the market price of Rs. 430 – Rs. 435, if you’d have picked up the out-of-the-money option of Tata Motors for the strike price of Rs. 450, which was going very cheap, that would have resulted in a good trade.
Basically you are looking for such predefined setups – buying off a support / selling off a resistance, buying / selling at a defined retracement level, buying / selling upon piercing of a bar etc. etc. etc.
Let’s say you’ve identified a setup.
You’ve seen buying pressure, or selling pressure. Chances of repetition are high, you feel. You try and enter into the option at a time when the buying or selling pressure is off, and everyone thinks that this buying or selling pressure is not coming back.
In this manner you’ll get some cheap entries.
Now you have to wait, to see if your analysis is correct. If not, you’ll probably lose most or all of your option premium. Don’t be afraid of loss. It’s a chance you have to take. Without taking the risk, there is no chance of reward. You have to put yourself in line for the reward by going out there and entering into the option.
It’s possible that the scenario you imagined actually plays out. Let it play out even more.
You can exit in two ways. You could trail the market with a manual stop. This way you’ll be in the trade to perhaps see another day of even more profits. The downside is, that during lulls in the day, your stop could well be hit. The second exit possibility is to calculate an unusually high price, which is slightly unlikely to be reached. You feed in the limit order at this price. If this price is reached, you’re out after having made good money. Now, the scrip can go down for all you care. The downside is that the scrip can go deeper in your trade direction after you’ve exited, and that’s a little painful. The reason this latter scenario is often used is that the time-element keeps getting scraped off the selling price for the option as the series month approaches its end, and your exit on that very day at an unusually high price is more lucrative than you might think. You see, buying or selling pressure in your direction might or might not make itself felt again in the current month. If not, you’ve lost a prime opportunity to cash out at a high. Is it the high? You’ll never know. Therefore, you’ll need to try both exit scenarios and see which suits you more. Sooner or later, you’ll get a feel for both exit scenarios, and will be able to implement either, depending upon the situation.
That’s it for today.
Options are easy.
Playing options is like playing poker. it’s fun!
Imagine in your mind …
… the freedom to trade exactly like you want to.
Is there any market in the world which allows you complete freedom?
Equity? Naehhh. Lots of issues. Liquidity. Closes late-afternoon, leaving you hanging till the next open, unless you’re day-trading. Who wants to watch the terminal all day? Next open is without your stop. Then there’s rigging. Syndicates. Inside info. Tips. Equity comes with lot of baggage. I still like it, and am in it. It doesn’t give me complete freedom, though. I live with what I get, because equity does give me is a kick.
Debt market? A little boring, perhaps. Lock-ins.
Commodities? You wanna take delivery? What if you forget to square-off a contract? Will you be buying the kilo of Gold? Ha, ha, ha…
Arbitrage? Glued to screen all day. No like. Same goes for any other form of day-trading.
Mutual Funds. Issues. Fees. Sometimes, lock-ins. MFs can’t hold on to investments if investors want to cash out. Similarly, MFs can’t exit properly if investors want to hang on. And, you know how the public is. It wants to enter at the peak and cash out at the bottom.
Private Equity? Do you like black boxes? You drive your car? Do you know how it functions? You still drive it, right? So why can’t you play PE? Some can. Those who are uncomfortable with black boxes can’t.
Real Estate? Hassles. Slimy market. Sleaze. Black money. Government officials. Bribery. No like.
Venture Cap? Extreme due diligence required. Visits. Traveling. The need to dig very deep. Deep pockets. Extreme risk. No.
Forex? 24 hr market. Order feed is good till cancelled. Stops don’t vanish over weekends. Stops can be pin-pointedly defined, and you can even get them to move up or down with the underlying, in tandem or in spurts. You can feed in profit-booking mechanisms too, and that too pin-pointedly. You watch about 10-11 currency pairs; you can watch more if you want to. 10-11 is good, though. You can watch 4, or even 2 or 1, up to you. Platforms are stupendous, versatile, malleable, and absolutely free of charge. You can trade off the chart. Liquidity? So much liquidity, that you’ll redefine the word. No rigging – market’s just too large. The large numbers make natural algorithms like Fibonacci work. Technicals? Man, paradise for technicals. Spreads? So wafer thin, that you barely lose anything on commissions. Oh, btw, spreads are treated as commissions in forex; there’s no other commission. Money management? As defined as you want it to be. Magnitude? As small or as large as you want to play? Comfort? You make your morning tea, sip it, open your platform, feed in orders with trigger-entry, stop and limit, and then forget about the forex market for the rest of the day, or till you want to see what’s happening. Yeah, comfort. Challenge? You’re playing with the biggest institutions in the world. What could be more challenging? I could go on. You’re getting the gist.
Forex is a very special market.
Also, the forex market is absolutely accessible to you, online.
If you decide to enter it one day, play on a practice account till you feel you’re ready for a real account.
If and when you do start with a real account, for heaven’s sake start with a micro account, where 1 pip is equal to 0.1 USD.
We do our home-work.
We know our risk-profile.
Our systems are in place.
We know the exact market-segments we are tapping into, and those we are leaving alone.
Our fund-allocation profile is at the back of our palms. We know where what is, and when. We know how to move it.
In our identified segment of activity, we have a feel for the underlying. We can sense it. We don’t need to preempt the underlying, but we can if we want to.
We are not afraid of small loss. It can happen again, and again, and again, as far as we are concerned.
We use stops. Definition of risk is our abc.
We try not to follow news. It gives us a bias. We trade the setup we are observing on the chart of the underlying. Everything else is “egal”, as they say in German, as far as the trade is concerned. We are not going to be biased while trading. We are going to take the setup, in whichever direction it presents itself.
We are nice to our families. We gel with them, and have enough time for them. We are happy in their company. They are not a distraction to our work, but a welcome change. We’ve got a substantial-sized emergency fund going for them, which more than takes care of their needs. This fund generates regular incomes for our families, and we don’t touch the emergency fund, come what may. We might keep adding to it, though.
We take high risks with a very small size of our networths, everyday. Our risks are calculated, and can generate high returns. They can also result in total losses. We practise sound money-management, and put ourselves in line for big profits, again, and again and again.
Yeah, we like to move it move it …
… from one trade setup to another, to another, to yet another, an so on and so forth.
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?
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.
It’s a funny world.
In this funny world, many people work for less than 1:1.
Many of these people don’t have a choice. Their circumstances are such.
Some do, and they still choose losing odds.
What are we talking about?
The reward : risk ratio.
In the marketplace, our risk needs to be defined by default.
If we’re not thinking about defining our risk pinpointedly before entering the marketplace, let’s just pack our bags and study music instead, or biochemistry, if you please, with no disrespect to either music or biochemistry.
Define your risk! Set a stop!
Nobody plays to lose, right?
Once the risk is understood, one starts looking at reward.
Reward potential must be at least equal to or greater than the defined risk. This statement, coupled with a large sample size and more than 50 trades moving your way out of every 100 is already a winning combination.
Anyone can pick 50:50. All you need is a coin-flip.
60:40 is definitely achievable with research.
You don’t need more to win big.
Now make the 1:1 work for you. In 40 out of 100 trades, you’re stopped out at – 1 (minus being for trade going against you, and 1 being your defined unit of risk). I know it’s difficult to do, but take the next trade with a smile. When a trade starts to run, don’t cut your profit at the +1 level. Let your profit run.
At +1, lift your stop to 0. At +2 lift your stop to +1. So on, so forth.
Don’t exit manually.
Let the market throw you and your profit out.
That’s called a proper exit.
I had promised that I would be speaking about proper exits.
Well, there you have it.
We turn three.
You know it, and I know it…
… that this year’s been a slow going.
Sometimes, life is slow.
Such junctures are great times to recuperate and consolidate.
Inaction is big in the markets.
Very few know how to be inactive – and stay sane.
Those who do – well – they make big bucks when it’s time for action.
That’s only if they haven’t gotten rusty and lazy by then.
Yeah, inaction is an art.
In the markets, it is at least equal in importance to – action.
So, for the most part of the year that’s gone by, my market activity’s been practically zilch.
It’s not that I’ve been sitting and twiddling my thumbs. No! For heaven’s sake! Of course I’ve been doing other stuff.
Inaction in the markets must be coupled with action elsewhere, if one plans to stay sane, that is.
Also, inaction in the markets leads to preservation of capital. That, what you made during active times, remains safe, pickled and intact.
Then, when there’s opportunity, you’ve got your whole arsenal to cash in with.
While changing gears, don’t jump out of your seat with your saliva drooling, though.
Have some rules in place for opportunistic action.
I have some basic rules for myself at such junctures. I don’t put more than 10% of my networth on the line, while pursuing an idea. This rule applies for me while changing gears too, more than ever. Also, I don’t pursue more than two ideas at any given point of time. Most of the time, I’m not pursuing any idea, till an idea appears, refuses to break down, and just sticks.
… to hit the sweet-spot…
… when it’s time for action.
Wishing you happiness, safety and profits in whatever market activity you pursue,
Yours sincerely, and just there for you, period,
Sometimes, words are hard to come by.
It’s a dry spell.
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.
The biggest learning that the marketplace imparts is about human emotions.
Yeah, Mrs. Market brings you face to face with fear, greed, exuberance, courage, strength, arrogance … you name it.
You can actually see an emotion developing, real-time.
Today, I’d like to talk about the chronology of exuberance.
In the marketplace, I’ve come face to face with exuberance, and I’ve seen it developing from scratch.
When markets go up, eventually, fear turns into exuberance, which, in turn, drives the markets even higher.
What is the root of this emotion?
The ball game of exuberance starts to roll when analysts come out with a straight face and recommend stocks where the valuations have already crossed conservative long-term entry levels. As far as the analysts are concerned, they are just doing their job. They are paid to recommend stocks, round the year. When overall valuations are high, they still have to churn out stock recommendations. Thus, analysts start recommending stocks that are over-valued.
Now comes the warp.
At some stage, the non-discerning public starts to treat these recommendations as unfailing cash-generating opportunities. Greed makes the public forget about safety. People want a piece of the pie. With such thoughts, the public jumps into the market, driving it higher.
For a while, things go good. People make money. Anil, who hadn’t even heard of stocks before, is suddenly raking in a quick 50Gs on a stock recommendation made by his tobacco-seller. Veena raked in a cool 1L by buying the hottest stock being discussed in her kitty party. Things are rolling. Nothing can go wrong, just yet.
Thousands of Anils and Veenas make another 5 to 6 rocking buys and sells each. With every subsequent buy, their capacity increases more and more. Finally, they make a big and exuberant leap of faith.
There is almost always a catalyst in the markets at such a time, when thousands make a big and exuberant leap of faith into the markets, like a really hot IPO or something (remember the Reliance Power IPO?).
Yeah, people go in big. The general consensus at such a time is that equity is an evergreen cash-cow. A long bull run can do this to one’s thinking. One’s thinking can become warped, and one ceases to see one’s limits. One starts to feel that the party will always go on.
Now comes the balloon-deflating pin-prick in the form of some bad news. It can be a scandal, or a series of bad results, or some political swing, or what have you. A deflating market can collapse very fast, so fast, that 99%+ players don’t have time to react. These players then rely on (hopeful) exuberance, which reassures them that nothing can go wrong, and that things will soon be back to normal, and that their earnings spree has just taken a breather. Everything deserves a breather, they argue, and stay invested, instead of cutting their currently small losses, which are soon going to become big losses, very, very big losses.
The markets don’t come back, for a long, long time.
Slowly, exuberance starts dying, and is replaced by fear.
Fear is at its height at the bottom of the markets, where maximum number of participants cash out, taking very large hits.
Exuberance is now officially dead, for a very long time, till, one day, there’s a brand new set of market participants who’ve never seen the whole cycle before, supported by existing participants who’ve not learnt their lessons from a past market-cycle. With this calibre of participation, markets become ripe for the re-entry of exuberance.
Wiser participants, however, are alert, and are able to recognize old wine packaged in a new bottle. They start reacting as per their designated strategies for exactly this kind of scenario. The best strategy is to trade the markets up, as far as they go. Then, you can always trade them down. Who’s stopping you? Shorting them without any signals of weakness is wrong, though. Just an opinion; you decide what’s wrong or right for you. The thing with exuberance is, that it can exercise itself for a while, a very long while – longer than you can stay solvent, if you have decided to short the markets in a big way without seeing signs of weakness.
At market peaks, i.e at over-exuberant levels, long-term portfolios can be reviewed, and junk can be discarded. What is junk? That, which at prevailing market price is totally, totally overvalued – that is junk.
Formulate your own strategy to deal with exuberance.
First learn to recognize it.
Then learn to deal with it.
For success as a trader, and also as an investor, you will not be able to circumvent dealing with exuberance.
Best of luck!
To win big as a trader, one needs to understand and implement a strategy of doubling down when things are looking good.
The difference between mediocre success and mega-success as a trader is linked to a trader’s ability to double down at the proper time.
We’ve discussed position-sizing. That’s one way to double down.
A day-trader, or a very short-term trader has the luxury of seeing one trade culminate and the next trade start off after the first one culminates at its logical conclusion. For most longer-term traders, many trades can be occurring simultaneously, because started trades have not yet come to their logical end, and new opportunities have cropped up before trades commenced have come to their logical end.
What do such traders do? I mean, they do not know the final outcome of the preceeding trades.
Yeah, how could such traders position-size properly?
Well, a trade might not have come to its logical conclusion, but you do know how much profit or loss you are sitting on at any given point of time. The calculation of the traded value for the next trade is simply a function of this profit or loss you are sitting on. Simple, right?
Well, what if you don’t like to position-size in that manner?
What if you say, that here I am, and I’ve finally identified a scrip that is moving, and that I’m invested in it, and am sitting on a profit. Now that I know that this scrip is moving, I’d like to invest more in this very scrip.
Good thinking. Nothing wrong at all with the thinking process.
You now pinpoint a technical level for second entry into the scrip. Once your level is there, you go in. No heavy or deep thinking required. As a trader, you are now accustomed to plunging after trade identification and upon setup arrival.
Question is, how much do you go in with?
Is your second entry a position-sized new trade? Or, do you see how much profit you are sitting on, and enter with the exact amount of profit you are sitting on? The latter approach is called pyramiding, by the way. Pyramiding is a close cousin of position-sizing. Normally, one speaks about pyramiding into one very scrip, when the trader buys more of that very scrip after showing a profit in that scrip. Once could, however, also pyramid one’s profits into different scrips.
When you’re pyramiding into one very scrip, you’re putting many eggs in one basket. Right, the risk of loss is higher. The thing going for you is that this risk for loss is higher at a time when your profits are up in a scrip that’s on its way up. Therefore, the risk during a downslide is higher, but the probability of that risk’s ability to result in an overall loss for you is lower than normal. You understand that you have balanced your risk equation, and with that understanding, you don’t have a problem putting many eggs in the same basket. After all, it’s a basket you are watching closely. Yeah, you know your basket inside out. You are mentally and strategically prepared to take that higher risk.
There’s yet another way to double down. I’d like to call this the “stubborn-bull trading approach”.
Let’s say you are sitting on a profitable trade. Yeah, let’s say you are deep in the money.
Now, a safe player would start raising the stop as the scrip in question keeps going higher and higher.
On the other hand, a trader with an appetite for risk could risk more and more in the scrip as it keeps going higher and higher – by not raising the stop, till a multibagger is captured. On the other hand, this trader would also be setting him- or herself up to give back hard-earned profits. Yeah, no risk – no gain.
What’s the difference between the stubborn-bull trading approach (SBTA) and investing?
When you’re adopting the SBTA, you’ll cut the trade once it loses more than your stop. You’ll sit on it stubbornly only after it has shown you multibagger-potential, let’s say by being up 20-50% in a very short time. You’ll keep sitting on it stubbornly till your pre-determined two-bagger, three-bagger or x-bagger target-level is reached. After that, you’ll start raising the stop aggressively, as the scrip goes still higher. Eventually, the market will throw you out of your big winning trade. You see, the SBTA strategy is very different from an investment strategy. For starters, your entry into this scrip has been at a trading level, not at an undervalued investment level. Undervalued scrips normally don’t start dancing about like that immediately.
Let’s be very clear – to reap big profits in the long run, you, as a trader, will need to adopt at least one of these doubling down strategies – position-sizing, pyramiding and / or the stubborn-bull trading approach.
Have a profitable trading day / week / month / career! 🙂