31102012

Nifty  opened within previous day range. Initial range formed. Skipped BOF of PDL as bias was bearish. IR formed. Later another range enveloped it.BOF of IRL gave a long signal. TP at Range High. Went short on BOF of Range High.Stopped out.

30102012

Nifty opened within previous day range. Did not attempt any trades till dust settled after RBI announcement. Went long on the BOF of LOD. This trade did not move . Scratched.

Reading: The Trading Contradiction

One of the real contradiction traders face is that the forces that attract people to trading are exactly what make them lose in trading.
For most traders, trading is attractive because they can:

• Make a lot of money - greedy
• Get rich quickly - impatient
• You have the best commute - lazy
• Make a good living trading only 2 hrs every day. - super lazy
• Live anywhere - mercurial
• No bosses or employees needed - poor social skills
• Be unaffected by economy, political shifts, natural disasters, etc. - fearful
• No hard assets, office space, etc needed. - unattached.

As you can see, the worst developed personalities are naturally attracted to trading and its no wonder that 80% of traders lose everything they ever put into trading. To be successful, you need to fight the very qualities that brought you to trading in the first place. This is the contradiction that traders face on the very first day that they begin to trade.

Once you acknowledge that just choosing to be a trader automatically sets you up for failure, you have the opportunity to amend the very qualities that brought you to trading and modify yourself to be the very opposite and thus be successful.

Cadver
http://ninetrans.blogspot.in/

29102012

Nifty opened near PDC. Skipped BOF of IRH as there was no space for the price to move.BOF of PDH/HOD gave a short signal.BPB of DO/IRL was another opportunity,BOF of LOD and TST of PDL gave a long signal.This one also gave some profit

Probability

“Trading is a probability game”. You might have read it a thousand times. I think many of the traders have not understood this or have misunderstood this. There is much difference between betting on the probabilities of a method with an edge and using statistical probability to find an edge.

To trade the Markets profitably, we need a method with an edge. Edge is nothing but a positive expectancy. As we all know well, there are no certainties in the Market. Anything can happen at any time. We must trade the method long enough, ignoring the individual trade results, to make this positive expectancy to work in our favor.

Working on statistical probabilities to find an edge in the market is altogether a different ball game. It is not easy as we think. For example, after an elaborate study, we find that 70% of the gap ups fill on the same day and we conclude shorting the gap ups at the open could be a profitable strategy. Sure it is not going to work.

There are many logical fallacies that could distort the studies. Many statistical tests calculate correlation between variables and in many cases correlations does not imply causation. It will be totally wrong to conclude two events that occur together are taken to have a cause-and-effect relationship. To cite an example all the momentum moves in the market will be preceded by an MA cross over. But acting on all the MA crosses is not going to make you money

Spurious relationships are much more dangerous. Some times two events or variables have no direct causal connection, yet it may be wrongly inferred that they do. This could be due to mere coincidence or there could be an unseen factor.

Market is a place where countless people executing countless strategies at any point of time. Each and every trader is a variable who can change the direction of the Market, at least theoretically. Every moment in the Market is unique and probabilities themselves shift from moment to moment.

In my humble opinion, statistical probability studies alone are not enough to find an enduring edge in Markets.

Classic Patterns

I do not trade classic chart patterns. People have written Encyclopedias on this subject. Many of these patterns can be traded, if you know where to look for them.Unfortunately many masters have no clue

Location where they occur is more important than the pattern itself. Observe closely when price hangs around a Decision Point or an important Flip Zone. You will identify many tradeable classic patterns

Frankly, yet to find a way to trade Jerry's Dragon Pattern and HPT's C&B Pattern.

23102012

Nifty opened within previous day range. Initial move was down. IR formed. BOF of IR High gave a short signal. Covered at the BOF of IR low.BOF of LOD gave a long signal . I expected it to move well, but it did not. Scratched.

22102012

Nifty gaped down within previous day range Failure to continue down gave a long signal. Went long with stop loss below PDL. BOF of PDH gave a short signal TP at BRN. Did not attempt the BOF of BRN. Nifty channeled the rest of the day.

The SAR Circus

SAR (Stop and Reverse) is a market neutral trading system that is always in the market. It automatically gets you long when market is going up and short when the market is going down. Stops are reversal points. People follow different methods to calculate SAR levels. It can be moving averages, Bollinger bands. Pivot points, some market profile levels etc.

I have very keenly observed the development of some SAR systems. Very simple mechanical systems later became very complicated and discretionary. More and more tweaks and rules were applied on it. Tweaks involve multiple lot entries, partial exits, re entries and filters.

I just could not understand the use of filters. SAR is just a number that helps you to stay on the right side of the price move and not a barrier to price move. Further, multiple lot entries and partial exits will do more harm than good. The basic concept of the system is to sit tight through the whipsaws and capture a big trend move. Here you will end up getting whipsawed in multiple lots and cant capture the full benefit of the coming trend move due to partial exits.

Markets are cyclical in nature and alternate between trends and ranges. Expect a lot of whipsaws during the ranging period and never forget Market ranges 70% of the time. We may need to take all the signals as we will never know which one is going to be a home run. During the trend moves you will be able to recoup your earlier losses for sure. But once the market start to consolidate and range again you will give back everything and will be back to square one.

Another problem occurs when you want to scale up your trading. After gaining some decent profit you become confident and double your stake. Immediately market decides to range and wipe out the entire profit earned during the past in no time. Long term profitability of a SAR system cannot be judged with two or three years of data and back testing as the market cycles may vary. Profitability will depend on where you start and where you quit. Hard core SAR specialists can always paint a rosy picture like the wayside fruit seller, who always hides the rotten apples behind the fresh ones. Do not question them. They always keep their “Discipline” cane handy

In my humble opinion, Market will not give you any static edge. Why should Hedge funds spend millions of dollars hiring specialists for research? Why mutual funds are struggling to produce alpha? It is a shame that Goldman Sachs and Credit Suisse professionals are not aware of this wonder method.

I will not advise you to stay away from SAR methods as I have not traded this method live and have no right to say so. I am not responsible if you miss a fortune by not trading the method. I will suggest you to try a plain vanilla SAR method for a very long time. Be prepared for a life long Roller Coaster ride.

I am approaching fifty and I have neither the time nor the patience for this endless Snake and Ladder game.

Cigarettes

Do you smoke? If yes pay attention to the “Cigarette” patterns that frequently occur in Nifty Futures. It may give you sufficient money to buy enough Cigarettes with which you can smoke your soul out. Non smokers can think of some noble cause like donating to some pain and palliative clinic for oral cancer patients.

I had mentioned about this pattern earlier. Many thought it was just a joke. No. It is real. It is actually a very tight trading range .Mostly this pattern appears immediately after the open. Usually a very narrow initial range continues for hours together. Range hardly exceeds 10 or 12 points. This happens because order flow remains more or less matched. This Cigarette like formation at the end can go up like a puff of smoke or fall down like the ash.

Most of the traders enter their position within the first half an hour of trading. As the time passes more traders join. These people will keep their stop loss orders just above or below the range. Some others will place limit orders at the extremes to capture the imminent breakout. Now there are clusters of orders above and below the range.

Finally some small imbalance pushes the price to an extreme and these orders start triggering causing an explosive move to that side. Almost always you may get a 15 to 20 point move within a few minutes. You must be very nimble to trade this. Keep your entry order a little far from the range extreme to avoid false breaks. You should book your profit immediately when the pull back starts. Don’t expect a new trend. If the break out fails and price moves back into the range, kill the trade fast.Explore the possibility of reversing the trade as most of the time BOF of a range extreme will lead to a successful breakout of the other extreme

These moves will almost always come back. There are Algos sniffing around looking for such temporary imbalances. They will act within seconds and execute trades to exploit this price variance. Index arbitraging and cross exchange arbitraging are their bread and butter. Their action will make the market mean revert. Your paper profit may vanish.

Rush in where "Algos" fear to tread. But do not forget to  rush out.

19102012

Nifty gaped down within previous day range. Failed to go below yesterdays major swing low . IR formed and Nifty traded within the range for nearly 3 hours.This is a  pattern which I call "Cigarette Pattern".Shorted the break of range low . Another short opportunity came on the BPB of IR low. TP at PDL. Did not attempt the BOF of LOD as I thought there wont be any commitment from operators due to week end and coming holidays

18102012

Nifty opened within previous day range.Initial range formed. Skipped BPB of  IR low as PDC/ Gap Closure level was too close. Went long on BOF of IR low which moved very well breaking IRH, PDH and BRN.. I was looking to short HOD as BOF. But avoided it as I noticed a  Price Flip Zone very close.

17102012

Nifty gaped up within previous day range due to overnight global cues. IR formed. Short BPB of IR low. Scratched the trade when it failed to move down. Nifty then moved in a 10 point range. BOF range low gave a long signal. Scratched this one also when it reversed immediately.

16102012

Nifty gaped up above PDH. Bias was bullish. BOF of PDH/IR low gave a long signal.TP at IR High/HOD. Rejection on TST of HOD gave a short signal which moved very well. It went down breaking  PDH, PDC, BRN. When it started channeling near PDL, I exited and missed the final 30 point move.It was just a flag.

Reading: High Speed Trading

The hottest new thing on Wall Street is cooling down. 

High-frequency trading firms — the lightning-quick, computerized companies that have risen in the last decade to dominate the nation’s stock market — are now struggling to hold onto their gains. 

Profits from high-speed trading in American stocks are on track to be, at most, $1.25 billion this year, down 35 percent from last year and 74 percent lower than the peak of about $4.9 billion in 2009, according to estimates from the brokerage firm Rosenblatt Securities. By comparison, Wells Fargo and JPMorgan Chase each earned more in the last quarter than the high-speed trading industry will earn this year. 

Read the full article at The New York Times

15102012

Nifty opened near PDL. and traded below it till noon. Did not attempt a short because of the MSP around which a 80 point momentum run originated. Entered long when the second attempt to move down failed. Scratched the trade when the breakout of PDL-DO failed. Missed the 40 point run.

Nifty Levels

The above picture shows the charts of Nifty Futures and Spot for 12th of October 2012. NF chart is on top and the lower one is Nifty Spot.NS and NF move in tandem. In higher time frames price discovery happens on NS and NF follows. Due to the premium and discount components we cannot rely solely upon NS levels.We are playing with  10-15 points stop loss and NF can move on  its own   and stop us out.Sometimes NS leads and pull NF along and when NF run amok NS rein it.

Look at the above chart. Please note that there is  no relevance for exact price levels. Decision points are important. In the morning NS was leading. It hit PDH and a BOF happened. NF failed to test the PDH hence I missed the trade.

On the way down NF was leading and hit the IR Low and broke it. I shorted the BPB and got stopped out. It was a clear BOF on NS. This loss could have avoided by monitoring NS.But I would have lost money going long when NF came back above IR Low because it was already a BOF on NS.

This area requires a detailed study. We may need to act differently depending on which one leads, NF or NS.Leader is the one which hits the DP first and not the one quoting higher.Please do some brain storming and let me know your ideas. This may help us to catch some good trades and avoid some bad entries.

I would like to thank "bizagra" and " Atharva" for bringing this subject to my notice..
Kindly read the comments and give me some feedback 

12102012

Nifty opened within previous day range. Being an announcement day did not attempt any trade early morning.Could not get a short signal as Nifty did not test PDH and there was no retest of HOD.Shorted the BPB of IR Low even though I suspected a "Bracket". Stopped out for a point.Did not attempt any other trade. Later only I came to know Nifty was channeling down.Channels are really frustrating. Is there a way to identify it earlier ?

Brackets and Envelops

I assume the Market is trading in a range all the time. For me a trend is a series of range breakouts. Market moves in waves and every wave is a probable range. I had written about this earlier (Read).

“Decision Points” are another idea on which my trading is built. Decision points are proven levels of demand and supply imbalance. Once price approaches this area again, traders are expected to act at these levels again and create an imbalance.

Sometimes these two ideas applied together can create confusion. I have identified two different scenarios where we will have some confusion .Two type of range formations repeatedly occur in Markets where we may make costly mistakes. These are “Brackets”and "Envelops”

"Brackets" are formed when a range establishes around a decision point. In such cases mostly the DP acts as a midpoint of the range. Yes, you guessed it right. It is a Barbed Wire pattern. Barbed wires are tight bracket formations where we stay out. Bracket formations could be wide and tradeable. Once a Bracket forms, the DP in between loses its significance. Trade a Bracket as if you trade any other range, if it is wide enough to trade.(Example)

“Envelops” are ranges that engulf a previous range. Sometimes market establishes a range and later the extremes get extended. In such cases the previous range loses its importance. Still the old range extremes may continue to attract some order flow and confuse the traders. In case of Envelops, trade the new range as if you trade any other range.(Example)

Pay attention to Brackets and Envelops. Solution is very simple

Trade the extremes. Don’t fiddle with the middle.

11102012

Nifty opened within previous day range and sold immediately. Cracked PDL and pulled back after forming an IR . Went short the BPB of PDL as bias was bearish .Scratched the trade as the price was not willing to go below the IR Low. BOF of IR Low gave a long signal. My target was IR High. But it gave a 80 point nice move cracking PDL, IRH, BRN and PDH. VWAP was 5695 at 3.15 PM . there was a margin of 45 points.This fueled the further up move during last minutes.

10102012

Nifty gaped down below PDL and BRN. I was looking to go short on the retest of BRN . But it went above it and formed another range overlapping  IR. This made original IR irrelevant. BOF of Range Low and retest gave a long signal which moved as expected. BOF of Range high gave a good short signal. I expected a break of Range low and further move down But Nifty made a Barbed wire around LOD.rest of the day.

09102012

Nifty gaped up within  previous day range and spiked. Bias was bullish and was looking to go long. It did not channel as expected. TST of IR low gave the first signal. TP at range high. TST of IR high and failure to continue above it gave a short signal which dropped all the way down to BRN/PDC/PDL cluster. Expected a retest of the low to go long. This did not happen. Nifty channeled the rest of the day.

08102012

Nifty opened near PDC and sold. IR formed. Bias was negative and I was looking to go short. It formed a small range within the IR and I went short when the third attempt to move up failed.My target was PDL.Nifty scared me a lot when the breakout of IR Low failed .There was no follow up buying. Tested the patience for nearly 90 minutes and finally went down.TP near BRN.Expected a BOF at BRN on second test , but it came too late.

Discipline

Originally the word “Discipline” refers to the systematic instructions given to “disciples” to train them in an activity which they are supposed to perform. This requires following a code of conduct. In trading parlance discipline means sticking to our own trading plan. While trading, many of us find it difficult to do this as we succumb to our emotions such as fear and greed.

Trading discipline involves behavior change. We must train ourselves not to take emotional decisions and act such a way to protect our own best interest. This is done by overriding the emotional reactions and sticking to our original trading plan.

What motivates one to change the behavior? There are many approaches. The simplest and the easiest one is by changing motivation. One of the oldest ideas in behavior change is people dislike pain and enjoys pleasure. They will do the stuff that reduces the pain and increases the pleasure. This requires an incentive, punishment system which increases the pleasure when they perform a behavior and cause pain when the desired behavior does not occur.

As far as trading is concerned you need not design a motivational approach. It is inbuilt. If your trading method is having an edge and makes money when traded properly, that itself will motivate you to be disciplined. Losses will prevent you from violating your profitable trade plan.

Most struggling traders believe their core problem is discipline. This belief is further reinforced by the “Trading Psychologists” who themselves cannot trade and “Trading Gurus” who can escape the responsibility by blaming your” Lack of discipline” when their methods are not working.

If your methods have edge and they are working, you do not need to make extra efforts to be disciplined or focused. The returns which you get will motivate you to be disciplined.. In my humble opinion, there are no psychological problems related to trading alone. If you have any, it may affect the other areas of your life also.

If you think you have some, go and get it treated as early as possible.

Decision Making

Trading is all about Decision Making. As traders we are continuously making decisions. We need to decide on the price levels to initiate a trade, which direction to trade, where to keep stop loss where to exit etc. Good trading decisions will make money for us .Being consistently profitable is becoming better at this decision making skill.

Any decision making process involves three steps. These are Gathering information, evaluating the necessary inputs and deciding upon the possible action. Information overload is a major constraint for effective decision making. So we need an effective filtering of information inputs to a manageable level. Focus only on the right and important  information . Avoid the extra information having negligible impact.

I have seen traders monitoring a plethora of inputs. They track everything you can think of. Elliot waves, Fibs, Gann, Parabolic SAR  a dozen moving averages, different oscillators, trend lines and channels. Sorry, I forgot the floor pivots and Camarillas. Supports and resistances are also very important.Oh No, I almost missed the time cycles,Wolfe waves and ORB.

If you mark all these levels on a chart, it will cover the entire chart space. Monitoring all these levels is almost impossible. Even if you do, it is not going to make you profitable. Instead it is going to make you more confused. But it will help the “Trading Gurus” for sure. They can find some or the other reason for all the price behavior and convince you that " lack of discipline" is the root cause of your trading failure.

The sooner you define your decision making process, the better. Decide on your information inputs, how to weigh them, and what actions to take on them.

To attain knowledge, add things everyday. To attain wisdom, subtract things everyday. ~ Lao Tsu

04102012

Nifty gaped up above PDH and moved straight up. Did not expect a channel move as it had gone up a lot. As expected it moved in a range all the day. BOF of HOD was the only trade taken . This Counter trend trade ended as a scratch.

03102012

Nifty opened near PDH . IR formed and BOF of IR low skipped as there was no space for the price to move. Went short on BOF of PDH/IR High. TP at LOD. Long when third push down also failed.As day traders we are going through a very difficult period.Let us hope the situation will improve soon.

01102012

Nifty opened near PDC and spent the entire morning session in a 12 point Initial range.Went long as I could keep the SL below PDL.TP when the previous day afternoon range high resisted. Expected a BOF of PDH which did not happen.