Sunday, September 30, 2012

Success in Trading

We often read it and listen to people saying that trading is a losing game and 90% of the traders lose money. Now we have not heard about any actual conclusive study about the percentage of successful traders but yes many people lose money in trading. On the other side there are number of traders who are very successful in it and earning their living out of it and if they can do it you can do it too.   

Ari Kiev in his book “Trading to Win”, states “believing that an outcome is possible, makes it achievable.” He quotes the example of famous runner Roger Bannister who was first to break the barrier of running a mile under four-minutes. After he achieved this feat people started believing in this possibility and soon many other runners accomplished this once considered “impossible” feat.  

If you are doubtful of your winning, how will you be able to put your 100% effort in it? (Please note I have said 100% effort and not 100% capital.) Trading gains are certainly not as easy as those young supposedly MNC workers in web ads claim to make by trading forex just part time. Trading can be very rewarding businesses provided (1) you are dedicated to first learn trading (2) you have a robust system (3) you are disciplined to follow the rules. (4) You treat it as a business.

Readers are welcome to share their own experiences about success in trading.

(Contributed by Jitender Yadav)

Winning against the Quants

You can read the full article Here.

Nicholas Colas, group chief market strategist at ConvergEx, recently attended an algorithm-themed conference, and discovered — to his surprise — that quants aren’t really like regular people.

I was a stranger in a strange land, but there’s a strong case to be made that adoption of this quant-first approach to investing is set to accelerate.

Most computerized trading models try to either do something faster than a human trader/investor, or do it more consistently. We can’t beat them on speed, so forget the first one. But can a human investor learn what these new algorithms will look for, and then base an investment style around front-running the machines? Or at least stay out of their way.

There is a lot of money to be made adding fundamental and news inputs to what are still pretty brute-force high frequency trading strategies. This will happen, and quickly. The second is that this approach is very rules based, and is subject to the same fad-chasing practices as the “Traditional” money management community. There will still be outperformance to be had as this transition occurs – you’ll just need to be a step ahead of the machines.

My Notes: Nicholas Colas says that computerized trading models and high frequency trading is here to stay. Yet, individual traders can outperform because of a simple reason: Most models will start doing the same thing - the herd mentality. The Trader can shift focus, change tactics and do better than the herd of computers. Sounds good to me.

Tuesday, September 25, 2012

The Uncertainty Principle of Financial Markets

In quantum physics, the Werner Heisenberg principle states that there is a fundamental limit to the precision up to which a particle’s physical properties of position and momentum can be known. It means that the more precisely a particle’s momentum is determined the less precisely its position can be determined and vice versa.

Financial markets have their own uncertainty principle, the implication of this principle is that either you can determine the direction of the move precisely or you can determine the timing of the move. For example, we all know (direction) that markets will touch new highs sometimes in future but we exactly don’t know (time) when. In this example we know the long term direction of the market is up but we are unable to determine the exact time of touching new highs. On the other side, before important news events like the recent Federal Reserve or ECB meetings, we knew (time) fairly well that a big move would come on the day of announcement but then we didn’t know precisely (direction) if that move would be up or down, which depending upon the news could be either ways. After the announcement the more the direction became clear, the lesser we knew how long will it continue?

This uncertainty principle particularly applies to options market because the knowledge of a move’s direction and exact timing is most important there.

Nobody can know, at the same time, both the direction and the time of a move. As traders we should always keep in mind our limits and trade accordingly. We traders are managers of risk and player of probabilities.

(Contributed by Jitender Yadav)

Tuesday, September 11, 2012

Trend is friend and stop loss the saviour

An old adage in trading is that trend is your friend. Trading in the direction of the trend is like working in the direction of gravity. If we could catch the direction right, we just sit tight. But then gravity never fails however trends do end, sooner or later. When trend reverses stop loss comes as a saviour. Stop loss minimizes the damage when the trade goes in the opposite direction of our entry. The key word here is “minimizes”. Traders must understand that having a stop loss order does not guarantee that one can avoid losses completely. Sometimes during gap openings stop loss orders would not get a fill at all and at other times, markets would move in the trade entry direction only after triggering the stop loss order and thereby making a trader miss a potential profit opportunity.

But still having a stop loss on your side is beneficial because it may take just one or two Black Swan events to wipe a trader’s entire capital if he is not using stop loss orders. So for long term survival traders should treat and respect stop loss as their savior.

 Please do remember no savior can help a trader who has no rules, no patience, and no discipline.

(Contributed by Jitender Yadav)

Sunday, September 9, 2012

Stocks below their 200 DMA

Of all the technical indicators that traders follow, moving averages are the simplest. Among moving averages the 200 DMA is considered the most important. The closing of an instrument above or below its 200 DMA has major bullish or bearish implications.

Now the point here is simpler, don’t go long in stocks that are trading below their 200 DMA. Most of extraordinary falls have happened in stocks when they were trading below their 200 DMA. You would have avoided major falls in stocks like Satyam, GTL, GTL Infra, Suzlon and many more, had you exited from them when they closed below their 200 DMA.

Yes, sometimes we can find bargain stocks when they are trading below their 200 DMA but it is difficult to identify bargains when they stocks are trading at their lows. The basic and simple rule is: Buy stocks when they are in long term uptrend (price above 200 day MA) and not in downtrend.

(this post contributed by Jitender Yadav, edited by me)

Sunday, September 2, 2012

Subtle changes in Market Behavior

For technical traders, it is possible to be bullish one day and bearish the next day. Look at a chart where prices have fallen and are now finding support at (a) a rising trend line (b) previous high. It is possible to take a long trade since this is a buy on dips setup. Next day, for whatever reason, the stocks gaps lower. The trader gets stopped out. The gap down breaks below the trend line giving a sell setup. Trader can get bearish. Small changes in charts at critical points can led to significant changes in perception.

To avoid repeated changes in perception, traders use long term charts to identify the long term trend. Then, they favor the setup which matches the long term trend.

But, at reversal points, the short term trend will reverse quickly and traders should be agile to capture these reversals. It is as such points that the bullish - bearish changes can occur with some frequency. That is the way the market behaves. Or rather, that is the way technical trading is done.

On not posting regularly in this Blog