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.
Isn’t everyone following all this?
Do the markets behave accordingly?
No. Not really. Sometimes, sure. Generally, no. Just my opinion.
Where does that leave you?
How do you plan your trade entry?
There’s not much planning to it really.
Pray on what basis is one to enter then?
Then overall feel.
With no study, direction’s a 50:50.
With study leading to overall feel translating into gumption, this ratio could well become 55:45.
You don’t need more.
Blackjack odds for the card-counter are perhaps 53:47 at peak.
Ok, so you’ve got your 55:45, what then?
You make your money managing your trade.
You cut the wrong call. Nip it in the bud.
Let the right call continue being even more right.
Learn, perhaps the hard way, to let the winner continue winning.
Trade might reverse.
That’s the risk you have to take, to win more.
There are no free lunches in life.
Makes you sleep easy.
Simultaneously, you are able to take a calculated risk.
Why should you take a risk?
No risk no gain.
It’s as simple as that.
You have to put something on the line to possibly gain something.
That’s what market activity is all about.
You’re doing this all the time.
Day in, day out.
You’ve become used to a steady and dynamic LINE. Your line doesn’t harm you anymore. It doesn’t disrupt your life.
How did you achieve this?
By using stops and hedges.
What’s the difference?
The difference is technical, and then practical.
For some mindsets and positions, a stop is more suited.
When you don’t mind exposing your market-play, and want to close your terminal and do other stuff, use a stop.
You get up from your desk, engage in other activity, and have forgotten about your position, because now you don’t need to tend to its needs for 24 hours, for example.
Your position will either play out, or it won’t.
If it doesn’t, your stop will automatically throw you out of your position.
The level of the stop is digestible.
Next morning, you simply move on to a new trade.
Let’s say you don’t want to to expose your market play, or, in some cases, when you don’t need to expose your market play – how do you then insure yourself?
A hedge maintains general market neutrality.
It leaves windows open for what-if scenarios.
For example, the trade could make money, and then the hedge could make money.
Or, vice-versa. As in lose-lose. Sure, there are win-loss and loss-win scenarios too.
The starting point is somewhat neutral, and then there are permutations and combinations.
Some people prefer this kind of play.
They like the possibility of maximizing profit from the total position at a calculated higher risk.
Generally, the idea is for your main position to make money and your hedge to lose money.
It might or might not play out like that.
Some like this uncertainty and know how to benefit from it.
A stop is sure-shot and straight-forward. It is low-risk as long as it is digestible.
Hedges open you to the risks of a meta-game. Play becomes more interesting, consuming, and possibly, more profitable, for experienced hedgers.
In my opinion, a hedge is slightly higher in risk than a stop.
However, both entities lower overall risk.
Currency pair forex trades are typically taken with a stop. However, they can be hedged too.
Market-neutral option-trades are typically taken using hedges.
Step into a trade with either or, for peace of mind and career longevity.
I like to trade without a bias.
Lack of bias means freedom…
… freedom to think independently…
… not falling prey to another person’s opinion…
… which then allows you to listen to your system…
… trade identification…
That’s it, move on to the next trade.
News gives me a bias.
You know what else gives me a bias?
I don’t wish to look at fundamentals.
If my eyes are seeing a setup in the EuroDollar, I would like to take it without the nagging thought of “what will happen if Scotland says NO or YES”.
I don’t want to care about inflation numbers, or job figures, or industrial output or what have you.
I mean…can I just …do it?
Meaning, can I just do away with fundamentals, and focus on technicals only, which is my area of specialization?
Sometimes, I get a little unsure.
I start looking around.
How are others doing it? The experts, that is.
My uncertainty gets fanned a little more, when I see experts not really ignoring fundamentals, even though they might be specialized in technicals. Hmmmm. I’m still not happy looking into fundamentals. I mean, why should I take time-out from my strong suit, and devote it to my very weak suit?
No, I decide. I’m really not going to look at fundamentals.
What’s the worst that could happen?
Let me just see if the worst that could happen is bearable.
Ok…I ID a trade…demarcate a setup…and the trade goes against me because of the announcement of some number in the afternoon. People looking at fundamentals would have waited for the announcement of the number and then traded. Fine.
In the world of trading, it is always good to have the worst-case scenario unwrapped and right before your eyes to see what it really means.
You know, I can take this.
Would you like to know why?
Firstly, I would like you to understand that we are looking at large sample-sizes here. Any sensible reasoning would only apply to large sample-sizes.
Over the long run, and over many, many trades, Mrs.Market will go either way after an announcement of a fundamental number with a chance of roughly 50:50.
If this is true, it is very good news for me, good enough to just kick fundamentals out of the equation.
At times, the market reacts as per the crowd’s anticipation.
At other times, it reacts in the opposite fashion.
I assume that the ratio of the above two directions taken by Mrs. Market over a very large sample-size would be 50:50.
I think my assumption is correct. I don’t want to go through the labour of proving it mathematically.
Ok, let’s assume that my assumption is correct. I then kick fundamentals, and go about my work while relying on my strong-suit, i.e. technicals. This trajectory will very probably have a happy ending.
Now let’s assume that my assumption is wrong.
What saves my day?
Technicals very often give setups that factor in crowd behaviour and crowd anticipation of market direction.
Technical setups get one into the build-up to an announcement.
More often than not, one is already in the trade, in the correct direction, enjoying the build-up to an announcement without even knowing that the announcement is coming, if one is not following fundamentals.
Technicals can actually do this for you. I’ve seen them do it. I mean, the GBPUSD has been giving short setups during the entire 1000 pip run-down recently. To have availed such a setup, people haven’t needed to know that a referendum is coming. All they’ve needed to do is to take the trade once they see the setup.
Actually, that’s it. I don’t need more.
I don’t need to reason anymore with myself. Everything is here.
I think I can let go of fundamentals safely.
Even this trajectory should have a happy ending.
… as if nothing has happened … is one of my biggest trading goals.
You see, our society teaches us not to lose.
It doesn’t teach us that we can lose a bit 5 times, and after that we can win big, recovering all our losses and making money overall.
It teaches us to try and win all the time.
That’s the exact reason 90%+ of all society members actually lose in the markets. They’ve not learnt how to lose small, move on, and take the next trade.
Mrs. Market won’t budge an inch for you. You’ll have to make the adjustment.
So how does one take a loss in one’s stride?
Only one type of loss is immediately digestible – a small one. Therefore, define your risk in the market. Cut and scoot when required. Don’t get married to your trade.
Then, once the small loss has happened, and has been taken, it will nag you.
It’ll be there, trying to bite your brain in the background.
Focus on your next trade.
Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – … … [what’s the difference between implementation and entry? Well, you could be implementing the trade through a trigger, which is not equivalent to entry yet].
Don’t let the nagging bother you by keeping yourself busy with Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – … …
Ultimately the nagging will die out, as your mind starts to revolve around your current trades.
If you give in to the nagging, it will grow, and will slow you down. You might snap at a family member. You might go into depression. You might freeze. DON’T. Don’t give in to the nagging. Don’t let it grow. Don’t let it slow you down. Maintain your family equilibrium at all costs. Move on.
The nagging is worst if there’s been a close below your stop, and the market is to open the next day, or after the weekend. You have to deal with this one. If you’re not able to deal with this particular situation, you’ll either need to expose your mental stop prematurely and feed it in intraday (before there’s been a close under it), or you’ll need to follow the progress of your trade from half an hour before next market open onwards.
Yes, this last one’s tough, and you need to absolutely work your way around it.
You can do it with a bit of practise.
Taken a hit?
If yes, at least admit it… to yourself and for your own sake.
People take hits at various times in their lives.
That’s the way of the market.
That’s how it teaches us to make money next time.
Think of your loss as tuition fees.
In my opinion, the best way forward is to take lots of small hits in the first seven years.
Then, in nine cases out of ten, you won’t fall for the big ones.
Big hits can decapacitate a player, especially when they come late, since there is no time for full recovery. Besides, emotional breakdown at a late stage is very difficult to get out of.
Make it a point never to take a big hit.
That’s only possible, if at any given time, the capital that is risked is within reasonable limits.
Let’s say you risk not more than 1% of your networth at any given time. What’s the maximum hit you will take at one time? Right, 1%.
That’s something you can shake yourself out of, and move on.
Moving on is a huge quality to possess in the markets.
Taken a hit?
Move on and make your next trade.
All this while, you are putting any remnant emotional hurt in cold storage.
Yeah, there’s a certain portion of emotional hurt that won’t be nullified by family time, vacations, hobbies etc. We’re talking about the hurt to your ego. Only a big win will wash that away. Only then is your emotional recycling complete.
Put yourself in line for that win.
After a hit, rest, recuperate, grab your wits, focus, and…
… put on the next trade.
What is the singular most lucrative aspect of trading?
Want a hint?
Ok, here’s the hint. It is also the safest aspect of trading.
Here’s the answer. It’s called position-sizing. (The pioneer of position-sizing is Dr. Van K. Tharp, @ www.iitm.com, and I have learnt this concept through him).
Surprised? I would be surprised if you weren’t surprised.
Yeah, trade selection is important too, but other things are more important while trading.
For example, trade management is more important than trade selection. So is exit. Entry might be paramount to an investor, but to the trader, entry is run of the mill. It happens day in, day out. The trader … just enters a selected trade. There’s no deep thinking involved. The trader knows this. Crux issues are to follow. The trader is saving his or her energies for the crux issues.
So far, we’ve spoken about the chronology of a trade, i.e. entry – management – exit.
Before entry, you decide how much you want to trade with, and how much you want to risk. That’s the size of your position, or your position-size. Remember, for the concept of position-sizing to make any sense, your stop-loss percentage must remain constant from trade to trade. Only your traded value goes up or down.
What does the level of your traded value depend upon?
It depends upon HOW WELL YOU ARE DOING.
If you’re on a roll, your traded value for the next trade goes up. The increment is proportional to the profits you are sitting on. Since the stop is a constant percentage, the amount risked is also higher. Return is proportional to the amount at risk, and the long-term net return of such a trade will also be higher. All this means, that the more you make, the more you set yourself up to make even more…!
Take a coin. Flip it millions of times. There will be a stretch, where you’ll flip tails 5 times in a row, or six times in a row, or maybe even ten times in a row. The 50:50 trade called “coin flip” can well result in a series of back to back losses. You are an experienced trader. Your trade selection ratio could be 60 winning trades to 40 losing trades, or perhaps a little better, let’s say 65:35. Even a trade selection ratio of 65:35 will result in back to back losses. As a trader, you need to take large drawdowns in your stride, as long as you are confident, that in the long run, your system is working. What’s working in your favour during the large drawdown?
Your position-size is.
You see, as trade after trade goes against you, and your losses pile up, your position-size KEEPS GOING DOWN. Your stop percentage remains constant. This means, that the more you lose, the more you set yourself up to lose lesser and lesser, trade after trade. Yeah, position-sizing gives you the safety of losing less. Nevertheless, because of this safety assurance from your position-sizing strategy, you keep yourself in the market by just taking the next trade without too much deep thinking (and with no melancholy whatsoever), because your next trade could be the one decent trade that you are looking for. Yeah, your very next trade could cover all losses and then some. TAKE IT.
Now, two things can happen.
Firstly, if you keep losing, and hit your loss cut-off level for the month, well, then, you just stop trading for the rest of your month. You then spend the rest of the month reviewing your losses and your system. You tweak at whatever needs tweaking, and come back fresh and rested the following month. Position-sizing kept you in the market, ready to take the next opportunity to earn big. The auto-cut takes you out of the market for a while. That’s why, in my opinion, while position-size is still activated, it provides more safety, because it keeps you in the market to recover everything and then some, starting with your VERY NEXT trade. Having said that, auto-cut is auto-cut. It overrides position-sizing.
The second thing that can happen is that your losing streak ends before your month’s cut-off is reached. Yayyy, position-sizing is still activated! You’ve lost lesser and lesser on each losing trade as long as you were in the losing streak, and now that you are winning again, each win sets you up to win more in the trade that follows.
After many, many trades, just cast a glance at your trading corpus. It will boggle your mind!
Your position-sizing strategy has kept raising your corpus, because your system is 60:40+, and you win more than you lose. Ultimately, your corpus has become substantial. Its size exceeds your expectations BY FAR.
All thanks to position-sizing.