Monday, April 25, 2011

Two for one money management

Here is a specific money management method that helps maximise profits and reduce risk.

1. Identify one 'unit' of the intrument that you trade. Suppose you trade 400 Nifty, then 1 unit = 400. If you trade 500 shares of ICICI Bank, then 1 unit = 500.

2. Enter all trades with a well defined stoploss.

3. Once you have a profit which is equal to the stop loss, then exit half of your position, which means, exit half unit.

4. Move the stop loss for the remaining half to breakeven. This means the stop loss for the remaining half should be your entry price.

5. Now, you have a 'free' trade on the remaining half unit. Keep a trailing stop to maximise profit on this half.

Friday, April 22, 2011

Higher time frames on Current Chart

Gulshan needs some help,
"If I am using 34 period wma on hourly bar then converting into 1 minute bar, periods becomes 2040 and again converting into 5 min bar then periods becomes 408. But when comparing hourly bar and 5 min bar on same time the wma gives different values. Why is it so?

My purpose is to see the value of wma on 5 min bar calculated on hourly bar."

My Notes:

I go by your numbers, which is that a 34 period wma on the hourly chart is equal to a 408 period on the 5 minute. When you plot the 408 period wma on a five minute chart, you should get the same flow of the moving average, which you get on the hourly. Which means, the direction, and, relationship to price should be the same. But, the values will be different. Remember, on the hourly, you are actually calculating the average using every 12th bar of the 5 minute chart. On the five minute, you are using all the bars. Therefore, values will be different. Yet, so far the view is the same, you should be accepting the differences in values.

Thursday, April 21, 2011

The Anti - A swing trading pattern

The Anti is a price/indicator setup popularised by Linda Raschke and Larry Connors in their book,  Streetsmarts. The pattern dentifies a small pullback after an impulse, trending move. The pullback may look like a bull/bear flag on the price chart, OR it may repersent a pullback in an indicator. The Anti can be identified in indicator which use two lines - fast and slow. The slow line should be used to identify the trend direction. The fast line moves against this trend. When the fast line turns back in the same direction as the slow line, the Anti is confirmed.

At least for Technical Analysis, a picture is worth a thousand words. So here is a chart showing the Anti.

Wednesday, April 20, 2011

What is a trading range?

When prices are bound by two well identified levels, it is a trading range. For the Nifty, we have seen repeated attempts to cross 90. So far,that level has acted as resistance. This is one line. The Nifty dips but finds support around 70, again and again. So this is the second line - support.

The Nifty is locked in a trading range. Trading inside a range is fraught with danger. Each day can be up or down since there is no trend, that is wht there is a range. Trading should be done on lower time frames - preferably intraday. The big trade will come when prices move out of the range. Therefore, trade carefully, inside these boundaries.

Thursday, April 7, 2011

ITC - Are new highs bullish?

ITC, the largest tobacco company in India, is currently trading at life time highs.
--> In October 2010, the stock made a high of 181.80 which was the highest so far, and this week, stock prices crossed this high, recording 185.7 as the highest price.
--> ITC share price is now at life time highs. By doing so, it has easily gone above its 2008 bull market high while the Nifty remains lower than its 2008 top.

All signs for ITC are upbeat.

So, why do I not like this share, and, what is the way forward.

Why I am bearish on ITC?
I dislike the core business of ITC - selling cigarettes! I feel it is only a matter of time before health conscious society will come strongly upon tobacco manufacturers. In terms of damage to health, the cost of one cigarette is probably many times higher than its retail price. So, how can I be bullish on this business?

What do the charts say?
Bullish. New highs are bullish. While the run up has been sharp in recent weeks, therefore a dip or consolidation is likely, ITC may well outperform.

Wednesday, April 6, 2011

An Age of Genius

Sir John Templeton was one of the last century’s greatest investors who, like most people who exhibit unusual skill in the financial markets, had an appropriate view of the balance between investing fundamentals and investor psychology. At one level Templeton's approach to investing was simple and familiar: go against the flow and seek out opportunity where no one else dares to look. As usual, the problem with such advice is that it’s very easy to give and very hard to take.

But Sir Templeton could go against the flow and make money. Here are some examples:

The DotCom boom
In year 1998 to 2001, everyone knew that the dot com stocks were price at absurd levels. But, no one could short them since there was no opportunity to do so. Sir Templeton figured that the entire dotcom experience was based on momentum. He also figured that the company owners would know this but would be unable to sell for a six month lock-in period after IPO. Ergo, they would sell out as soon as this period finished and effectively reverse the momentum.

He identified and shorted 85 different stocks in the run up to their founder's lockouts ending and walked away with a million bucks for every year of his life.

Templeton's philosophy was captured in 'the ten maxims'

Some of his quotes were:
“When any method for selecting stocks becomes popular, you need to switch to unpopular methods"

" It is impossible to produce superior performance unless you do something different from the majority."

The Templeton Moment

Of course, perhaps the most permanent reminder of Templeton’s philosophy is the so-called “Templeton moment”: the point of maximum pessimism:

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the right time to sell”.


Monday, April 4, 2011

The Next Big Short

An interesting Blog Post on the parabolic rise in Silver and to some extent, in, Gold.

In 2001, the bubble in tech stocks burst. In 2008, Hedge Fund Manager bet that the sub prime market was going to crash. He was correct, big time. The bubble getting formed in Silver and Gold may qualify as a similar short. The reasons are:


1.Explosive & exponential gains (>400% gains w/Gold & >700% gains w/Silver since 2002)

2.General public participation
3.Everyone's a winner

4.People who did not participate before - participate now (insert your personal anecdote here)

5."This time is different" syndrome (the financial system is broken, therefore...)

This trade is no different than Paulson's short on the housing sector - or Buffet's short on the dollar. They did their due diligence - recognized an asset class that was so historically stretched in relation to the mean and waited for their ship to come in. It is most similar to the Paulson trade - because everyone believed that the housing market was infallible to the kind of declines Paulson recognized as inevitable.

Today, everyone believes the inverse relationship to be true. That the financial system is broken, that the Fed has lost control and that Islamic Jihadists or a Middle Eastern state(s) will bring us to our knees. While there is some truthiness in shades of that - it's more hyperbole than reality.

It was the confluence of the Tech Bubble bursting in 2000, the events of 9/11 and a commodity sector that was overdue for outperformance - that gave birth to this bubble. As with every bubble - it starts with a legitimate thesis for outperformance - and then runs away with emotion. It is only after we reach the dizzying heights of the sun that we realize the danger we so confidently embraced.

That moment seems imminent.


Sunday, April 3, 2011

Sustained up move in Nifty

With gains on eight consecutive trading days, the Nifty has come up all the way from 5350 to 5850 - almost 500 points. That's a lot for the Index, any Index.
So, what's the way ahead?
The short term view: follow the momentum. Markets are in a strong uptrend, go witht he flow, buy dips, buy consolidation.
The long term view: India is in a secular bull market. I expect higher levels, five years from now. So, buying on significant corrections is the approach for the long term investor.
Joker in the pack: The intermediate trend is down. We had a rally from 2200 to 6340. This rally MUST correct. All markets correct, it is just a question of When?