Who’s Responsible for that Last Technical Bit?

Planning a technical trade?

You’ve got your chart open. Scrip’s been falling.

You plan to initiate a buy on that last support. Still a few percentage points to go. 

Your buy point seems a bit off, right? 

Scrip might not reach it, huh?

It might just take off before reaching your buy point, hmmm?

What you need to understand is this – for nothing comes nothing.

You don’t want to risk a buy at current market price. That’s a fact. An acceptable one. Fine … as long as you are willing to pay the price for this fact. 

The price is that you might not be in the trade as the scrip might take off without your stop-type trigger entry price being hit. 

The up-side is that the scrip might correct to your buy price, triggering your entry, and thereby giving you a perfect technical entry point, along with a great margin of safety, since you’ll then have bought low as compared to current market price. 

Yeah, that’s the trade-off.

Is this trade-off acceptable to you?

Yes?

Fine. In my opinion, you would not be doing anything wrong in going ahead with your planned course of action, as long as you have mentally accepted the trade-off. 

What’s the other guy at? You know, the fellow who’s entering at current market price. Well, he’s taking a risk. He’s buying a little high, without margin of safety. What’s his trade-off? For starters, he’s in the trade. Scrip can take off immediately for all he cares, leaving you behind. He’ll be most happy. What’s his down-side? Scrip can correct to technical support, your buy-point. He’ll already be in a losing trade, and you’ll be just entering. In his worst-case scenario, his stop will already be hit as you are just entering. If the scrip takes off on him now, he’ll probably be puking. Yeah, that’s his trade-off. He’s accepted it mentally. After such acceptance, in my opinion, he’s doing nothing wrong by entering at current market price. 

What’s going to happen?

No one knows. Either of the outlined scenarios can play out.

Who’s that last technical correction left for? Yeah, who or what exactly will be responsible for that last technical correction?

An event. A negative one.

At this point, a negative event can happen. On the other hand, it may not happen. 

If it happens, the scrip will very probably open at the technical buy point the next day, and your buy will be triggered. 

If there’s no negative event, and buying pressure goes up, the scrip will take off without you.

Why is that last bit left to an event?

Events give prices a push or a pull, depending upon their positivity or negativity. 

That last support was made a bit low, right? You were wondering how the scrip reached so low, huh? In high probability, an event pushed it low for a few hours, and a low was made. If this low coincided with a past low, one started to speak of a lowish support, which was a little low considering current market price, and for which the scrip needed a pull-back to reach. 

Like this morning’s pull-back. The US decides to allow air-strikes in Iraq. Japan opens 3% down. India opens 1% down. 

A lot of scrips open really down this morning. 

Some of them even open at lowish supports they were not (at all) intending to touch yesterday. 

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Playing the Stock or Playing a Scenario?

Many roads lead to Rome.

Everyone’s approach to the markets is different.

Today I speak about two approaches.

One can choose to play the stock. 

Here, one decides to follow the same stocks everyday. One decides to learn their nuances. The number of stocks that one follows is manageable. As a thumb-rule, one should be able to count them on one’s fingers. No more. One should be able to recall the stocks one follows in a jiff, with no sweat at all. 

The chart of a stock begins to make sense. Trading plays emerge. One needs to then follow the progress of the same stocks everyday, and take trades as and when entry setups make themselves available. This methodology requires following the action everyday, live, during market hours.

What if we don’t want to be glued to our screens everyday?

Can we still get one action?

Yes. 

How?

Simple.

We then don’t follow any stock in particular.

We define a scenario which contains all that we want to see in the chart of a stock at that point of time, when we decide to follow the markets and perhaps take a trade. 

We then convert this scenario into an algorithm.

Again, don’t let the word algorithm scare you.

You don’t need to know how to programme. Your market software should allow you to put your algorithm together by combining chunks of simpler algorithms which define singular pieces of your scenario. These simpler algorithms are visible in your market software. You then need to copy, paste and combine your copy-pastes together with mathematical symbols. This is a vital statement. This is technology-power at its peak. This practically puts a very powerful weapon in your hands. 

From this point onwards, trade identification is a piece of cake. Your let your algorithm run through the gamut of stocks quoted on the markets. Your software does this for you in under a few minutes. Your algorithm picks those stocks that are currently exhibiting your scenario, and opens their charts for you. You need to define your algorithm in such a way, that not more than 50 charts open up. You then sift through the 50 in about 5 minutes. Just pure eyeballing. You narrow the 50 down to 5, which are showing good entry setups. You pick the stock with the best setup. Then you feed in a trigger entry order in your trading account. The whole exercise take less than 15 minutes.

Isn’t that wonderful?

Approaching a Contrarian Buy as a Pivot Point Trade


Long live Jesse Livermore!

In his colourful life, Jesse pioneered the science of pivot points. He went bust many times while trying to understand pivot points, but ever since the fundamentals have been delineated by him, pivot points have stood the test of time.

After falling to a pivot point, where there is heavy volume, a stock then doesn’t look back for a while. Entry into a stock is considered ideal at or around a pivot point. Due to the surge-potential at pivot points, one’s trade gets into the money very fast here.

I don’t think pivot points can be predicted off-hand. Potential pivot points make themselves visible at newer lows. Their trademark is the accompanying very high volume.

So, what does one do here?

One punches in a trigger-buy above the pivot-bar or pivot-candle.

If the point pans out as a pivot, and the characteristic surge follows, one’s entry is triggered as the price pierces the pivot-bar high. Good entry.

Now manage the trade, and exit properly.

How does one exit properly?

I’ve spoken about this many times, and will do so again, not today, but very soon.

Cheers!

Approaching a Contrarian Buy as a Pivot Point Trade

Isn’t This Other Party Getting Too Loud?

We in India have decided to go for gold after the Olympics.

I mean, there’s a whole parallel party going on in gold.

What’s with gold?

Can it tackle inflation?

No.

Is there any human capital behind it?

No.

Meaning, gold has no brains of its own, right?

Correct.

Is there a storage risk associated with gold?

Yes.

Storage volume?

Yes.

Transport inconvenience?

Yes.

Price at an all time high?

Yes, at least for us in India. We’d be fools to consult the USD vs time chart for gold. For us, the INR vs time chart is the more valid one for gold, because we pay for gold in INR.

Getting unaffordable?

Yes.

No parameter to judge its price by, like a price to earning ratio for example?

No.

Then how am I comfortable with gold, you ask?

Right, I’m not.

Can I elaborate, is that what you are requesting?

Sure, it’s exorbitance knocks out its value as a hedge. A hedge is supposed to balance and stabilize a portfolio. Gold’s current level is in a trading zone. It is not functioning as an investor’s hedge anymore.

Why?

Because from a huge height, things can fall big. Law of gravity. And gold’s fallen big before. It doesn’t need to begin it’s fall immediately, just because it is too high. That alone is not a valid reason for a big fall, but the moment you couple the height with factors like improvement in world economics, turnaround in equities (if these factors occur) etc., then the height becomes a reason for a big fall. Something that can fall very big knocks out stability and peace of mind from an investor’s portfolio. The investor needs to bring these conditions back into the portfolio by redefining and redesigning the portfolio’s dynamics.

How?

By selling the gold, for example, amongst other things.

What’s a good time to sell?

Well, Diwali’s a trigger.

Right.

Then, there are round numbers, like 35k.

What about 40k?

Are you not getting greedy?

Yeah – but what about 40k?

Nothing about 40k. Let 35k come first. I like it. It’s round. It’s got a mid-section, as in the 5. It’s a trigger, the more valid one, as of now.

Fine, anything else?

Keep looking at interest rates and equities. Any fall in the former coupled with a turnaround in the latter spells the start of a down-cycle in gold.

Is that it?

That’s a lot, don’t you think?

I was wondering if you were missing anything?

No, I just want to forget about gold max by Diwali, and focus on equities.

Why’s that?

There are much bigger gains to be had in equities. History has shown us that time and again. Plus, there is human capital behind equities. Human capital helps fight inflation. What more do you want? Meanwhile, gold is going to go back to its mean, as soon as a sense of security returns, whenever it does.

And what is gold’s mean?

A 1 % return per annum, adjusted for inflation, as seen over the last 100 years.

That’s it?

Yeah.

And what about equities?

If you take all equities, incuding companies that don’t exist anymore, this category has returned 6% per annum over the last 100 years, adjusted for inflation.

And what if one leaves out loser companies, including those that don’t exist anymore.

Then, equity has returned anything between 12 -15% per annum over the last 100 years, adjusted for inflation.

Wow!

Yeah, isn’t it?

Betting Your Monsters and Checking Ace-High

Blah, blah, blah, I know, poker terminology yet again…

Can’t help it, people, it’s just so valid…

When you’re holding a monster hand, you bet out on the next street to build up the pot. Similarly, when a trade starts to run, you’re looking to load up some more on the scrip at the appropriate point.

When you’re holding air, or a mere bluff-catching hand like ace-high, you check it down through the river. Likewise, if the scrip you’ve just bought into stagnates, or moves a bit down, you do not double up on your trade. Instead, you just wait for your stop to be hit, or if before that your time-stop has run out, you square-off the trade.

An aggressive-passive style?

Who cares?

Recipe for winning in the long run?

Yes.

Right, then we’re taking it.

Two out of ten trades may start to run big. It’s taken you time, money and effort to identify those two. You are in the trade. You can feel the adrenaline pumping. Now’s not the time to sit passively. Spade-work’s all done. Right, put some more money on the winning scrip. Point is, when?

Additional points of entry are tricky.

I prefer a little margin of safety here. I like to double up at a point where there’s been some correction, and possibly when a Fibonacci level has been hit. After that, I want to see the scrip going up back through the level, and I’d like to see volume go up simultaneously. That’s my point of second entry.

You can be more aggressive, no one’s stopping you.

You can even choose to enter the second time above some kind of a previous high or above the breaking of a resistance with volume.

Risky?

Yes.

You do, however, stand a good chance of catching a big move in a very short time.

You see, at this particular point, where you’re choosing to enter, the scrip is pretty hot. People are plunging in. There is no resistance from above. Upward movement is smooth.

Downside is, that those who’ve been sitting on notional profits might start to book these anytime. When that happens, the scrip might plunge well below your high entry and hit your stop. That’s a risk you have to take, since you have decided to enter above a high.

No risk, no gain.

At my more conservative second entry point, the scrip is not as hot. It is meeting with overhead resistance from recent entrants who entered high to then find the scrip correcting, and who are now happy to exit at their entry points as the scrip retraces its upward move. So, I will have to wait longer for a possible second run of the scrip to develop, and this might or might not develop. That’s a chance I have to take. That’s the price of being conservative during second entry. I’m comfortable.

Staying in your comfort-zone at all times adds a lot of value to the rest of your life, even after you shut down your computer. One does carry over one’s emotions, and it’s best if these are under control when you reach home. By trading in your comfort-zone at all times, you make sure that you come home in an emotionally balanced state.

If you can take the second entry above a high or above a resistance while still remaining in your comfort-zone, by all means, please do so. It’s an exciting play, capable of yielding large and quick rewards. I’ve tried it at times, but cannot get a grip on the excitement levels. Thus, I normally choose the more conservative play mentioned above. It’s just a personal choice.

Similarly, I’m very comfortable checking my ace-high trades down through the river. If I’m in a trade and it’s not running, I don’t jump about trying to pull stuff out of a hat in an effort to make the trade run.

If it’s not running, it’s not running. Feed in a trigger stop and shut the computer.

Once you are alerted that the stop’s been hit, look for a new trade.

Keep it simple. That’s another recipe for winning.

Burn-Out Notice

Information overload.

Short circuit in the brain.

Black-out.

You want to move your left hand, but the right one reacts.

Your body needs re-wiring, and rest.

This set of circumstances comes with the territory of trading. Often.

Imagine plugging into the complex matrix of erratic market play. That’s what happens when your trade gets triggered. Your poor nervous-system then deals with a lot of load, which doesn’t recede till well after the trade. Joy at profits, sorrow at losses, life is one big emotional pendulum. And this is just one trade. A sluggish trader might take one trade a week. The over-active one could trade many times in a single day.

What are we dealing with here?

Basically, the writing on the wall is quite clear. If you’re not able to regularly offset the damage to your system due to trading, you’re looking at early burn-out. As in, very early burn-out.

Your method of recuperation needs to bring your system back to its base-line, and then some. Your recuperation savings account needs to be in the black, as much as possible. That’ll ensure longevity in the trading arena.

What happens if you are drained, and the next trading opportunity comes? For me, the answer is crystal clear. Don’t take the trade. Rest. Recuperate. You would have played it wrong anyway. You were drained even before the trade, remember?

Sometimes, periods of recuperation can be long. At these times you need to stop comparing yourselves to other traders who find unlimited energy to keep trading, from God knows where. You are you. They are they. Who gave you the right to compare? Why are you judging others playing to a different plan with different energy and time-set parameters. If you really want to judge, then judge yourself. That’s it.

So, if a prolonged recuperative time-frame announces itself, respect it.

Your system will last longer in the game.

Trading is about sticking to the ground-rules, and then lasting. Your market-edge plays out only over a large number of trades taken over a long time-frame. Over the long run, your market-edge makes you show winning numbers, because the sample-size is big enough, and the time-frame under consideration is sufficient for many big-hitter trades to occur. Your big-hitter trades give a tremendous impetus to your numbers.

Even the best of edges can show a loss over a small sample-size (i.e. number of total trades taken in one’s trading career). It’s statistically very possible to suffer ten losses in a row, for example. You can call a coin-flip wrong ten times in a row. Possible. And that’s a 50:50 shot per flip. Your market-edge gives you a 60:40 shot, or maybe even a 70:30 shot. Still not good enough to not suffer a losing streak.

Winning streaks occur with time, and with supportive sample-sizes. Because of your edge, the winning streaks outnumber the losing streaks.

In the world of trading, if you want to win, you need to last.

Game-Changers

Change.

The one factor that keeps us evolving.

Adapt or get left behind. Seems to be the Mantra of the times.

The management of money has seen some big game-changers over the last few decades. We want to speak about them today.

In the ’90s, Bill Gates wrote about business at the speed of thought. We’re kinda there, you know. Let’s say you have an idea. From idea to framework, it’s mostly about a few button-clicks, with the web being full of idea-realizing resources. See, we’re already discussing the biggest game-changer, which is the flow of information. Today, we live in a sea of information. It’s yours to tap. Delivered to you on a platter. Such information flow changes everything, from lead-time to middle-men. Best part is, almost all of the information available is free!

Then there’s technology. Cutting-edge software, everywhere. Now, there’s even a software to smoothly organize your contract notes and calculate profit or loss, and taxes due. It’ll give you the appropriate print-out, whichever way you want it. You don’t need to hire an accountant to audit your market play. You just click the contract note and the software extracts all relevant information from it, organizing it beautifully. Actually, that’s nothing. Market-play software is what we should be speaking about. Cut to the movie “A Good Year”. Just picture Russell Crowe motivating his “lab-rats” to go for the kill and short an underlying, only to short-cover a few points below. The technical software follow-up of the underlying’s price on the wall-panels is the image embedded in my mind, as the price gets beaten down, and then starts to rise again.

Market software allows you to run scans too. A common exercise I do at the beginning of a trading day is to narrow down the 4,537 active stocks on the BSE and the NSE to about 10 tradable ones. I do this with 2 back to back scans. Each scan takes a minute. Then, I study the charts of the tradable stocks and select two or three to follow. That’s another 5 minutes. Putting on trigger buys or sells for these stocks takes 2 minutes. So, assuming that a trade gets triggered in the first minute, I have arrived from scratch to active trade in 10 bare minutes, with no prior market preparation. That’s what technology can do for you, and more. Software is expensive. It’s mostly a one-time cost with a life-time of benefit. Worth it. The management of money is a business, and each business needs initial investment.

Numbers have changed the game. Volumes have grown for many underlying entities that were illiquid earlier. When volumes are healthy, the bid-ask spread is very tradable. Thus, today, you can choose to trade in almost any avenue of your choice and you are almost certainly going to get a liquid trade.

Our attitudes and lifestyles have changed too. Today, we want more. No one is satisfied with mediocricity or being average. We have tasted the fruit that’s to be had, and are willing to get there at any cost, because we are hungry. Luxurious lifestyles lure us to rush into the game, which we play with everything we’ve got, because as I said, we’ve tasted the fruit, and we want more. Our approach has made the stakes go up. We need to adapt to the high stakes with proper risk-management.

It’s never been easier to access funds, even if you don’t have them. Leverage is the order of the day. Of course that changes the game, leading to higher volumes and increasing the frequency of trading. We need to keep debt-levels under control. It’s never been easier to go bust. Just takes a few button-clicks and a few missed stops. The leverage levels take care of the rest.

Game-changers will keep coming our way. As long as we keep adapting and evolving, our game will not only survive, but also blossom.