We can't run from who we are!!

For a change, let me talk about a fascinating movie!

Movie is “Rounders” which revolves around poker game. Matt Damon plays the lead role and Edward Norton plays as his friend. I was randomly picking the movies and got this movie without even reading the plot. But, I started loving this movie the moment it started as it starts with below narration.

 “ If you can't spot the sucker in your first half hour at the table,

   then you are the sucker.

   Guys around here'll tell ya... you play for a living.

    It's like any other job. You don't gamble. You grind it out.

   Your goal is to win one big bet an hour, that's it.

   Get your money in when you have the best of it, and protect it when you don't.

   Don't give anything away “

Any trader would be delighted when a movie starts with such a voice over narration :)

Movie is about a law student - Matt Damon, die-hard poker passionate young kid. Gambling is in his blood to the extent that he can risk his term fee of law school in a poker game. One day he bets huge and lose everything at one shot. He quits the game and does part time driving for his survival and studies. But, things start to take a toll when his childhood mate Edward Norton joins him after released from his sentence. Circumstances push friends to a situation that they have to earn 15 grand in just five days time. Halfway in the process, they draw a wrong card and get hit badly. Friends split and finally Matt Damon is the lonely man who decides to finish the job to earn his reputation in the livelihood but his life is already in stake with just one day dead line.

Plot is simple but I liked the movie due to the poker game back ground, detailing in the movie and the catchy dialogues.

I believe every trader would like this movie. Matt Damon narrates the game, talks about psychological and emotional condition when you are in game, explains the importance of “sitting tight” to wait for your chance to beat your opponent and tells you when to “quit”, he talks about success and failure mindsets and a lot more throughout the movie.

As a trader, I could correlate with almost every dialogue in the movie. Some of them are here :)

Matt loses all his money in one go. His well-wisher consoles him.

“Man, I lost my case money. I lost my tuition.

 It happens to everyone. Time to time, everyone goes bust.

 You'll be back in the game before you know it.

 I'm done. I'm out of it.

 They all say that at first.”

Law school professor talks about his past and tells his student about following a passion. This gives Matt Damon some strength and he later decides to take the help of the game on a do or die situation when he is pushed to the corner. He gets inspiration from what professor told him.

"We can't run from who we are. Our destiny chooses us"

Matt is asking help from his senior poker player who is a well-wisher of him. He plays game for his survival and he has no other job. He is a full timer and a known pro in the clubs for his temperament and consistency. When he refuses to lend money to Matt, he gets angry and yells at his senior.

 “You see all the angles. You never have the stones to play one.

  "Stones"? You little punk.

  I'm not playing for the thrill of f*cking victory here.

  I owe rent, alimony, child support. I play for money.My Kids eat.

  I got stones enough not to chase cards, action...

  or f*cking pipe dreams of winning the World Series on ESPN”

Just wanted to share few dialogues but there are many more :).

If you are a trader, who trades with a passion rather than making money, then watch this interesting movie. Trading is a zero sum game. Money switches between the pockets of right and wrong traders on the given period. We always try hard to deny the sucker title. right ??!! :)

Draw down, Whipsaws and my 3 months trading!

I have something to share from the recent trading experience in this volatile market enviroment.

Let me first put down few questions related to mechanical trading.

What kind of drawdown you should be prepared to absorb to avoid getting out of your trade?

How many whipsaws you can survive to remain holding the position in a particular counter?

Is it worth to remain entering all the trades in the counter despite it sucks all your capital slowly but steadily?

I faced all these questions since Jan till early may and didn't have perfect answers though i knew them partly. Now, I beleive i have those answers and let me share here.

After turning out to be a pure mechanical trader, this is the first longer whipsaw phase I have witnessed in my trading career. After doing patch of trials and patch of real trading in 2011 based on a mechanical system, decided to load the guns fully in 2012. Started with more capital from Jan'12 and increased the trade basket size. I have settled with Crude oil and Silver and partly with Nifty. What happened then? When you expect something, it won't happen!

Let us find answers for the three questions at top, from my own experience.

Q # 1: What kind of drawdown you should be prepared to absorb to avoid getting out of your trade?

Ans: If you have a faith in your system and if you have earned money for some time, then be prepared to take any deep cut i.e. the very deep drawdown in your account. Since Jan till end April, I had 120% drawdown from my margin money. I beleive this is not the worst and i may have more draw down also in future when the volatility is going to be at its best.

Q # 2: How many whipsaws you can survive to remain holding the position of the counter?

Ans: If you are experiencing whipsaws means, markets are seeking direction. It has no signal from the market participants after a bigger move or pretends that it has no signal prior to bigger move. In a mechanical trading, it’s very hard to skip the whipsaws till you gain some knowledge and experience. Let the whipsaws run and do not count them as it’ll frustrate you. I had 21 consecutive whipsaw trades in crude oil which resulted in the drawdown I explained above. This phase was going on for three full months. The 22nd trade wiped all the loss from 21 trades and yielded extra profit of 40%. And the best part is, that profit was poured in just 3 days! 3 months of frustration was cured in just 3 days in a lightening speed. So, make it clear that whipsaws are part of the game and you don’t need to break down for the same.

Q # 3: Is it worth to remain keeping position in a particular counter despite it sucks all your capital slowly but steadily?

Ans: When crude oil was boiling my account with 21 whipsaw trades, Silver was also in competition with crude oil to beat it’s record. Silver was making its 20th whipsaw trade but I had to quit the position as I was in a position to remain in either one of the crude oil or Silver due to shortage of funds. Considering various factors, I have decided to say bye to silver and stuck with oil. When I left silver, my silver account was down by 70%. After couple of days, It had its bigger move and within a week and needless to say it has produced 120% of returns.Managed to pocket part of the profits here by entering in a mid-way.

This has become a routine with mechanical trader that he takes all losses in the whipsaw mode with the hope that “bigger move is here”! But, when he is in the kissing distance of such move, he exits the position. This was a repeating story for me in 2011 but I have made all arrangements and mentally set to avoid this situation this year.Still, I was able to sat tight only with crude oil but had to dump silver. So, it doesn’t matter how bad the whipsaws, you shouldn’t exit the position if you are following a mechanical system. Prepare youtrself in such a way!

Now, what am going to do to avoid all the above three situation as it would happen quite often month after month and year after year! That’s for sure!

Simple – I am going to trade only with 33% of my trading capital.

If you want to make money from the markets, do not fund your account with just little above the margin money. I was having the theory of keeping 100% of the margin money in reserve i.e, you trade only with 50% of your capital available. Now, I’ll make sure that I keep 2 times more than the margin money in my trading account i.e., I would utilise only 33% of my trading capital and the rest would act as the shock absorber to manage drawdown.

Note # 1: One must understand the difference between hope and trust. Hope sometimes is dangerous (thanks to shashank redemption). Do not blindly hope that after certain draw down or whipsaws, you will get windfall returns. You should have done your home work i.e, back test, paper trade or the real trading for some time which should reinforce your trust in the mechanical system you are trading. So, if you can trust your system, stay calm at such testing times but never blindly remain in hope!

Note # 2: Someone can have the doubt as “Is it worth to trade with only 33% capital?” My answer would be – It’s damn worth coz you are going to execute all the entries and not going to leave a single entry. This would make you richer than what if you would have traded with your 100% capital by missing few trades!

Note # 3: All the above are applicable only to the fellows who really can’t spend their full time in the markets but wants to make money using a mechanical system. If you are a full timer and can make more money by spotting trends and whipsaws, then skip this post :)

Gandhi or Hitler?

Nifty is in consolidation. Crude oil barrel is rolling both sides to hit stop loss regularly. Silver is not at all making a move. Let’s have this pause time to make one interesting self analysis. 

Where are you standing? On the sides of Dalai Lama, Mahatma Gandhi or Stalin and Hitler, when you have to take sides based on your political and social views?

 If you wish to know the answer on your political and social stand, take this test here - Political compass test . 

Questionnaire is quite interesting. It do not confuse you but so simple to get your honest opinion. 

It may take some time but I found it useful. Hope you too!

And, my stand is shown in the below chart. Am standing closer to whom? You will notice it when you finish the test :)

Stop loss!

I have read and heard this many times. “Never key in your stop loss in the system but keep that in the mind”. Many argue that “mental stop loss” is always better than “ system stop loss”. Ok, here is the simple chart to tell you what a “mental stop loss” can do!

Above chart is not from any trading journal or from any historical data. It’s a 15 min crude oil chart of last evening i.e, 23rd Mar’12. There was news around 7.00 pm that Iran’s crude oil stock would come down sharply this month. Crude oil was trading in the tight range of 5425-5450 since morning and it was slightly moving up and making high around 5460 by 7 pm. But, the moment the speculation about Iran’s oil inventory was out, oil had a gigantic spike to hit 4% upper circuit for a moment and then cooled down.

If someone did not place the stop loss in the system, then it would have been a very tough situation to take a decision as the move was such a harsh one to freeze up in an absolute mere time. So, the moral of the story is never keep a mental stop loss and always key in your stop loss along with a trigger price once your buy or sell trade is done. One can argue that it’s once in a while spike and no need to always key in stop loss in the system as biggies might eat your stop loss. But, this once in a while spike can swipe major share of your trading capital completely.

I was actually holding short position which was sold at 5405 and my SAR was at 5465. I always key in my stop loss immediately after my trade and never wait. Due to the keyed in SL, my loss was restricted to just 60 points i.e, Rs.6000 per lot and the reversed longs actually compensated the loss. If it was a mental stop loss, my losses would have been huge and it must have pushed me out of trading for next few days. We all know that that mother of all the trends would start only when we are away!
 

Price filters in SAR trading - Gain or Pain!

There is always a struggle in mechanical trader’s mind as what kind of filter he should use on the sideways market to get away from whipsaws. Simple truth is "no filter value" can benefit in the long run. I personally  experienced the fact that most of the trades gets whipsawed even though the price filters are applied before reversing the trade. Whatever can be the filter value, but price will go there to kiss your SAR order and pull back:)

I hope many mechanical trading system followers would have experienced this.I definitely agree that few trades might survive from whipsaws due to application of price filters. But that's once in many trades. If you run the check with your old trade log, you will realise that there is no point in the fixed price filters.

They are actually a  pain to your mechanical trading system.How?

Look at the below table from my records.

Now, below is the small brief to understand the difference between the returns shown above.

Total trades in a year – 96

Say, we keep filter of 0.1% which is around 5 points per trade (considering average price of crude oil as 5000).So, when you place a order for reversal, you place 5 points above or below your actual SAR value.

Let us assume that we are reversing one short position into long with a loss. We place the order 5 points above the SAR level to enter into long position. One has to understand that we have straight away included loss of 10 points in the above trade. That is, we extend the loss of the existing trade by 5 points as well as we reduce the profit from the next trade also by 5 points with the lateral entry.

It is obvious that you are making loss of 10 points in every trade and if you zoom this calculation in to 1 year period, you lose 960 points ( 96 trades as i shown in table) in the name of filters. It is absolute 384% of returns you have lost by using filters. Even if your system do not generate any major gains for the year, if you would have saved this 384%, that is more than enough for any trader with any system.

Caution : My entire explanation is based on commodities and especially from my testing with crude oil. This cannot be considered as is for trading other contracts for eg, Nifty, without proper testing. And, my system is different and the effectiveness of filter might change among different trading vehicles.Check every contract you trade before making a decision.

My note # 1 : If one is already trading with filters, there is no need to immediately skip the filters. Try to reduce the filter size gradually. It can be flexible and worked based on some important TA levels placed around SAR price.This would work.

My note # 2 : I have stopped trading nifty and don't have the updated data. But I can do a approximate math with my experience in Nifty. If we assume that we execute around 75 trades in a year, then trading Nifty using a SAR system with 10 points of filter will lead to the invisible loss of  75x10x2 = 1500 points  which is 300% ROI. Am I correct?

Bottom line of this post is to highlight the invisible slow poison which dilutes your capital.So, keep a check on that!

Naked truth!

 One of the top turtle trader Curtis Faith writes as below.

// I won’t go into specifics here, but those of us who actually trade for a living know the names of many “famous traders” who are famous as “traders” but that don’t make money as traders. They make money selling new trading systems, seminars, home study courses, etc. Most of these so called “experts” can’t trade and don’t trade the systems they sell //

Very true!. I believe in this statement as it's a common sense.

Person who is proved right in trading will never try his hand in any other mode of income.He will desparetely pump all the available capital into his trading pool and always wish to grow big. If  he starts seeing some money using his own trading strategy, he will devote all his time only in improvising his trading method and he can't even think of any other activities to earn money. Trading is such kind of game which occupies your mind completely and not allow you to peek around.

Only when a trader gets frustrated by series of loss or not able to cope up with discipline to follow his own system, he looks for other derivatives of trading business to make money. It'll mostly work well for him.I can spot the trend and reversals exactly when am not in trading but i'll miss them if i am involved in trading.

So, absolutely there is no point in looking for free trading calls, following other's trading system or listening to trading strategists in media. Only way to excel is, listen and study everything whichever comes in your way for the sake of knowledge. Never follow anything blindly. Apply your mind over everything and try to build something on your own.

I always feel that one should create his own trading system or methodology. He can learn a lot in the process of discovering something on his own. Best phase in any trader's life is this R&D phase. Experience which he gains from this R&D phase is much more superior than any trading book written so far. None of the trading expert or book can teach him well than the own experience.

Newbies should always know this logic behind "experts" and "own study" well before losing their hard earned money.

Basic instinct!

Am sure all the traders might have experienced this.

When you decide to enter or exit a position, the very moment you think about it, there will be a flash of decision in your mind in a lightning speed. This is purely from your instinct. But, we always ignore that decision and go with the decision after many analysis which is mostly contrary to the instinct decision. Always the consequence go against your analysed decision but favoring the instinct decision which popped on first hand. We then curse our self for not following the instinct. Later, we used to do mind calculations, “if I could have followed that, I must be sitting on this much cash! Phew! I missed it!”. 

I experienced this many times especially on the option contracts before expiry. The moment I think about taking a option position on the expiry day or 1 day before expiry, I skip my instinct and go for the contrary position which always failed. If I could have taken all the positions as per my instinct, then I would have made more than 100% every time :)

It’s a simple logic. Brain is the best programmed software of mankind. Since the trading is in your blood and you think about it all over the day while eating, talking and even in sleep, your brain stores all the information you read, hear, discuss and your own analysis and keep it in the priority racks. It also stores all your past good and bad experiences from your everyday trading life. When you face the situation of decision making in trading, your brain do the quick analysis based on the experiences and link it with the information stored. It immediately trigger your instinct saying “go for this” or “ leave this”. But, we poor traders never listen to it and goes for own decision making after so called many analysis which mostly fails.

We all know why techincal analysis is so famous and getting you some money. Reaction of the mass crowd against particular price movement never changes. It may be another day or year, but the reaction of the traders at certain price levels after a specific move in any given contract, never changes. It’s a balance of greed and fear. TA captures this beautifully and generate signals at appropriate places to enter or exit. Core fundamental for any TA indicator is based on this concept only. You can take fibo, waves, RSI, MACD, Pivot or anything else.. you will understand this simple concept.

Combination of your basic instinct and sincere obedience to TA will never let you down!

--------------------------------------

Ok..why this post now! Because, my instinct saved me some 20k . I was carrying crude oil long positions which was actually bought at 4976 on Tuesday. My stop loss (SAR) for the same was at 4916. INR had a big role yesterday with its  volatile move, caused MCX crude prices not to run parallel along with its mother contract in dollar prices. After my buying at 4976, crude oil spurted to 5025 in a quick time but later fell heavily and exactly made low of 4916 i.e, at stop loss. After taking a support there, it again bounced to 4940-4950 and left me in a dilemma to take a decision whether I should reverse the position to shorts or to remain in the longs. As per TA, I can consider both option.

I can say either price has hit the stop loss so I should reverse or I can consider that stop loss actually gave the support to the price hence I should remain long. Price was swinging between 4920 to 4950 but it never came off. So, I didn’t reverse the position and closed the day with long position. After market is closed, I was thinking that I should have reversed to shorts as only due to  INR volatility, my stop loss was missed by a whisker!. If  INR was in the normal range, then prices should have gone way below the stop loss. Incidentally, the moment after our market is closed, I have seen that dollar prices were diving down heavily.

Next day, my stop loss has gone down to 4865. I am still in the long position and if I have to reverse to shorts today, I should wait for another 50 points from yesterday’s SAR. My instinct asked me to go for shorts when the prices going down below yesterday’s SAR and low i.e, below 4916 today and I responded to it. Lucky! Prices fell sharply and closed at 4855 yesterday and now it is trading at 4800.

If I skipped my instinct, loss of 55 points must be added to my wallet now.

I can sense the tide!

Am sensing a big tide across equities, indices and commodities. What we have seen since the new year is going to be a mere small movement compared the movement ahead waiting at corners.

Here i am using a term tide coz i am not certain whether it is going to be ride or fall!. Silver has already run up 4000 points, copper has run up 20 points and crude has fallen 400 points. But, still am guessing lot more to do!

But, my guess with crude throws me to look at two destinations. Either 4700 or 5300 and now it is trading at 5000 :)

Biggest rally i have ever seen!

What is the maximum return a trader can achieve in 50 trading days, if he is a sincere mechanical trader?

10% 

50%

100%

No..I have some better magical number. 

It’s 1000 %. 

This may sound stupid to any FA or TA people. But this post is to insist traders about the possibilities they can reach if they are disciplined and sincere to their trading system.

Ok, read below details. 

Contract name : Guarseed 

Trading Exchange :  NCDEX.

Lot Size : 100

I got a BUY entry at 4600 on 24^th Nov. In the very next 2^nd day, I saw 4900 on the screen and obviously booked my profits as I got neat 100% returns in just 2 days.

Rest is history which I cannot forget for a long time. It was moving up and up to finally close today at 9989. Of course in this mega rally, there were few SELL reversals which produced some loss. But, if someone would have carried the trades as per reversals from system, then the returns stand at 1072% in just 45 trading days.

What is bottom-line of this post? There are plenty of possibilities available to a trader. What is all required is a dedicated approach to his own study and methodology!. Am sure any trading system could have caught this rally but one should believe that it is happening and be with the trend without a doubt.

Negative factors before you apply your hand on NCDEX contracts:

1. Weak hearts never try Agri commodities. Stress level is huge.
2. Be ready for never ever seen kind of volatility. For easy comparison, I can say that volatility is equivalent to nifty traveling between 4500 and 4800, 2-3 times a day hitting your stop losses twice or thrice.
3. Margin requirements change overnight when prices are severely trending in one direction. When I made my first buy entry of guarseed, margin requirement per lot was Rs.30000.00 but today you need Rs.4.0 lakhs for buying and for short selling it is same Rs.30000.0. You might have shorted one lot and when you open your screen next day, you may not be able reverse the trade in to buy due to short margin and have to pump huge capital for reversal.
4. Price jumps are quite common. Last week, in the last 2 minutes of trading it spurted 200 rupees and average close was about 150 rupees below from actual close. This will dampen your TA levels severely.
5.  I would recommend deploying only 10% of capital for trading and keeping a reserve of 90% for safe play. Sounds funny! But that is what it is and still you can make money! :)

SAR, the Number , a math not a myth! A Trader's view on What is SAR Trading and How to Trade on SAR system – Post # 5

Click here to check the previous Post # 1,Post # 2,Post # 3 & Post # 4 on this series about SAR Trading. 

In this final post of the series, we will go through the Do's  & Dont’s when we adapt SAR Trading. I have to repeat some of the points which I have already given in the article. But thought of putting them all together below will be appropriate to finish this article.

Do's :

1.       Trade only with 50% of your capital. This might look impossible for beginners. But without following this rule, you cannot stay in the market for long time. Always make sure that 50% capital is reserved for MTM losses and whipsaws. If you have 1 lakh capital, trade always only 2 lots of Nifty. Many traders fail in this. As I said earlier, whipsaws are not at all avoidable in any good trading system. Whipsaws can drag your capital down by 50 to 75% in a single stretch. I have got trapped in many such instances and stayed out of the trade after 5-6 whipsaws due to shortage of funds. But the very next trade after my exit, showed greater profit which was much bigger than the loss incurred in 5-6 trades. If you have 50% capital in reserve, you will never feel the pain.

2.       Select minimum of 3 or at least 2 counters. Do not trade only one counter. This diversifies your risk and impact of MTM loss is minimised. Please make sure that both counters/contracts are different in nature. I would recommend nifty traders to try their hand with commodities too. Many counters like silver, copper are available with mini contracts which requires margin less than 10k. Holding positions across index and commodities makes your life easier. Just for your knowledge, please click here to refer my old post related to commodities trading. 

3.       Believe your system irrespective of the market environment. I know that most of the retail traders stay out from the markets during important events. If your system is perfect, you should stay in the market under any circumstances to ride the bigger movements. I personally believe that my system knows better than me about world economy, mind of the RBI governor etc.. I have a confidence that any good system will place its owner in the right direction before the world economy or RBI governor starts their move. 

4.       Make sure that you are always holding the position when you go home i.e, even if you have opted out for profit booking during the day, try to re-enter later and carry the position. Without holding overnight position, you cannot reap fortune from mechanical trading. I have back tested about 10 SAR Trading systems for Nifty and all of them were in buy mode when the 2009 election results gave a huge gap-up.

5.       Do hard work on back testing. As long as your back testing is perfect, errors in the real trading can be reduced. I was at one stage become more passionate to back testing rather than real trading and did so. This infused a greater confidence when I faced tough times in real trading. I referred the back testing data for similar tough times in the past and realised that later they all had a happy ending. It gave me the courage to sit tight with my positions.

6.       Commodity traders should be keener with the price levels. Give weighted importance to the operation of a major external market and its non-trading days for its cue on our indian market. Though we have markets open on Saturday, it is only to adjust the friday closing of the abroad markets. One need to adjust our friday price levels based on saturday prices if the price has variation. Do not apply the Saturday prices as is. It may affect TA in some studies. Same applies to international holidays when major markets are closed. If the previous day is a holiday with US and Europe markets, skip the corresponding day’s Indian commodity market’s values and stick to previous day’s values. Whenever you have high volatility in USDINR, try to work with the price levels of mother contracts i.e, prices in dollar terms.

7.       Though I have said not to attach any tools to your main system, keep looking on the price behaviors with various technical levels which are parallel to your system. You can adjust your system for better yield if corollary methods like part-booking or booking-out and re-entering at appropriate price-pull-back place is done. But I reiterate that it is only after you gained experience and earned your investment from the markets. That is, try out additions and variations to the system after you have earned out the capital you have invested into a trading method by trades done in that method itself.

8.       Try to have a partner or a group. I have a friend who is good in number crunching but fails to re-collect instances. I am good at recollecting faces, names and instances but do badly with numbers. This combination works well. He reminds me of importance of price levels and I reminds him of price behavior when prices reach certain pivotal levels. My sense of “entry” works well and he spots the “exit” perfectly. We both discuss several times and the discussion helped in many occasions to catch a huge profit or escaping from greater losses. Try to teach your partner or group the system. When you all together follow a system, you will get better idea as how to manage trades. Teamwork will also help in effective back testing and cross checking. But a partner or group should be dynamic, open minded and match your wave length. If you have a spoiler in the crew, then mission is failed. 

9.       Apply price filters. Allow 0.1 to 0.2% of price filter with your SAR reversal levels. This would save you from whipsaw trades to some extent. I would ask brave hearts to keep mere small filters (for eg, just 3-4 points for nifty). I noticed that filters do not impact returns in a big way. 

10.   When you are ready to start trading with particular trading system, start with small quantities like mini contracts. This will help you not to lose control when you are practicing the system on the initial days. After some 3 months, if you feel that you have got some grip on the system, you can fire your gun with full load.

Don'ts

1.  Never over-leverage that a draw-down hits your finances beyond your holding capacity.

2. Don’t look around and lose heart. You may be in long position as per your system but you will see all technical gurus from media and all websites telling that there is no world tomorrow and you should sell everything. Simply ignore them. Everyone is having their own study and those studies and system must have prompted them to shout a “sell”. But, you have your system which consistently showed you money and when it says “long”, be in a long position. If there is real problem in a economy or market condition, no doubt that your system will also ask you to go short the very next day. So, just follow your system and do not bother about external noises.

3. Most of us do not understand the term “Follow the price”. We all tend to predict, what if RSI goes there and what if volatility index comes here, what if Fed increases interest rates etc etc… Never reverse your trade in advance with pre-emptive thinking i.e., before the system shows the reversal. Always reverse your trade only when the SAR number hits. Getting away from the position before it hits SAR is a bigger crime in SAR Trading. I have come across many instances that my trade was saved by just a few ticks. It will be hard to believe but it is the fact that one of my trade in silver was saved by just 1 rupee (Silver is king of volatility and it is trading at 52000 levels now. Average daily range is 1000 rupees) and saved me from a loss of Rs.40k per lot.

4. Don’t give-up when you are badly hit by whipsaws. Stronger the whipsaws, stronger the chances of brutal move in your favor. Have confidence and keep a close move with the system. I won’t sit on my trading terminal in the days when am taking more misses.  

5. Don’t fall in love with laziness. Mechanical trading makes yourself lazy especially when you take some money from the system. Don’t get stagnated into that sick dullness. Generate ideas to save yourself from rainy days. Try your hand with similar systems and other strategies to strengthen your system. Always try to study about the various financial instruments where you can deploy your system. Don’t hesitate to enter into new arenas. System is a system for any markets. So, when your system shows you money, slowly extend it to all possible zones without any hesitation.

6. Never ever increase your position when you are in loss and also never try intraday trades to overcome your positional loss. Both will add more pain as you are stressed out and not able to take decision. Your mind is well set to the positional trades and you cannot tune it suddenly for intraday trading. These intraday errors will finally lead you to stay away even from the positional trading temporarily. I lost three months of my positional gains just in a single day only because of vengeance trades.

7.  As your system generates buy and sell signals and you are making money, devil in your mind will sneak out. Because of your system’s success, you believe that you are smarter than your system. It’s not that way. You might be the creator of the system. But robots are more disciplined than the scientists who created them. So, never get an urge to overtake your system and make trades by trying this and that. If you do that, you will realize by the end of the year your capital remains at the same amount from where it started its journey. All your errors, by overriding your system, will swing your account up and down but you will not see any returns at the end. Just follow your system and rest all will be taken care of. If you want to try out new methods, try it with separate account and separate capital. Don’t mix it up with your regular trading account.

 Final notes:

In early 2007, I was not even able to make out anything when I saw the price tickers first time in the business TV channel. I started my investment with mutual funds in 2007 and later developed interest on the equity markets. Very second purchase was Orchid chemicals and my purpose was BTST. But, I had to keep it with me for 30 months to finally dump it at 30% loss. Since 2007 till early 2010, I have completely lost my capital thrice. Am in my 4^th innings now and this is the longest innings with some better batting average and success. My success in the 4^th innings is only because,

a)      I stopped trading for a while after my 3^rd failure. But watched market very closely. Spent time in searching for my system. This silent mode helped a lot in thought process as I could approach the market with an open mind and was able to generate ideas.

b)      I have honestly analysed my errors and I have made my set of rules for better trading life. I have listed here my set of rules .

c)       I have tried my level best to follow the rules I laid. It’s like a disciplinary code what I follow in my social life. 

I am in the stage to follow at least 75% of my own rules. If I can follow my own rules 100% , am sure I would be writing my 2013 New year article from somewhere in the hill station or island, relaxing in my own chateau or yacht !! 

Good luck to all!

Thanks to seniors:

I am very grateful to Moh. Without him, this post is not at all possible. He was the one who helped a lot in content of the article and for providing the beautiful charts. I picked up a lot and lot from his inputs to shape this article. Not only for this article, but even for my trading carrier, he is the driving force on many occasions. He is running this blog with such hi-fi charts, tables and data contents which is at par with any international TA sites. I don’t know how many of the readers can notice the treasures hidden in his charts and if someone can read well between the lines, he can have a great trading sessions. I feel happy to have this article written here at OJN.

I also thank Sri for his excellent inputs based on FA for this article.

SAR, the Number , a math not a myth! A Trader's view on What is SAR Trading and How to Trade on SAR system – Post # 4

Click here to check the previous Post # 1,Post # 2,Post # 3 on this series about SAR Trading.

Basement of SAR Trading – “Backtesting”:

To me, back testing is the backbone of the mechanical trading. It’s like sharpening the axe before cutting the tree. Longer and proper you sharpen it, shorter the cutting time. I have seen many traders just blindly following the trading system, which they found on the net, forums and from the textbooks. Of course you can do that but only after a thorough back testing that system. Each trading systems has its own pros and cons, which you will come to know only after back testing. On the first look, everything looks mouthwatering. But only when you do back test, you will understand the nuances in the trading system.

Going for longer and deeper back tests save lot of money and stress.Don’t be optimistic or over-confident when you see good returns in the back test, and don’t think you have got the Holy Grail. Go for real trades only after double/triple checking the back test.

I will consider the following important aspects while carrying out back test.

1.      Test your system at least for a 3-year period data. If you do it only for one year, you might be testing only some trend i.e, you might be only testing bull or bear phase of the market. What the back test shows you may not happen in the next year in real trading if that is sideways market. So, go for at least 3-year period, which has more probability to cover most of the market phases (a bull phase, a bear phase and a sideways phase).

2.      Test your system at least with 3-4 counters across different sectors. Results should be more or less in equal % with all counters. This makes sure that your system is somewhat capable of sensing and following the trend irrespective of individual nature of the stock. This will also help to correct the errors, if any, caused by testing on false data or wrong data by mistake. By doing this, you will get more confidence on reliability of the trading system. 

3.      If you want to go deeper, select multiple contracts, each one or two from equities, indices and commodities and if possible also with currencies. Of course, there will be difference in the returns across different vehicles but you should check if you are getting decent returns from all vehicles. If your system provides such acceptable returns in the back test, then it’s a sign that you have the system ready in hand to start with the real trading.

4.      If you get different returns with different contracts, filter the system only for the similar contracts where you got higher returns. Do not use that system for other contracts. For example, Moving Average based SAR system may show good results with Nifty whereas it may not perform well with Crude oil. I will stick to trade Nifty with MA based system and go for another system for crude oil.  

5.      If you wish to have good success in real trading, then spend at least 3-6 months on back testing. One might think why it needs so much time? Back testing is not merely entering formulas and dragging the values down in the excel sheet or making some code in AFL to check data. It is a process of going through each day’s price action and signals generated. Check every value and make sure that there are no mistakes. 

6.      Very important – Data what you have taken for back testing should be a correct data without any flaws. For example, many false open ticks in any counter can drastically change the value of returns in the back testing. Data might be showing some open high value whereas it could have actually opened with gap down and resulted a loss in real trading. So, always try to get clean data free from false and momentary spikes at open with low volume. Many forums would help you to get such clean data. If you cannot fetch such pure data, I would recommend paying and getting data without any false ticks.

Application of SAR Trading – “Real trading” :

Believe me, this is the easiest part for a true mechanical trader if he has done all his groundwork well. If your back testing is perfect, if you commit yourself 100% to your system without any doubt in mind, real trading is merely a cakewalk with the help of SAR Trading system.

 One should develop following three qualities to succeed in real trading.

1. Strong belief in his trading System.

2. Strict discipline to follow his system irrespective of market condition.

3.  Patience to travel with the system wherever it takes you. Take the lead from the system and never try to lead it.

Essence of SAR Trading – “Sitting tight”:

All the traders know the value of this term “Sitting Tight”. None of the succeeded trader can refuse to concede the importance of this term. I have realized it at least 10 times in the year of 2011. In a sideways market, if I had made 10 trades with 8 losing trades and 2 winning trades, in all the instances 2 winning trades helped me recover the loss from the 8 losing trades and in addition fetched me more profits too. In some cases, it paid me back twice what I have lost in 8 failed trades. But the miserable part is that all of us sleep with all the 8 losing trades without fail but exactly miss part or full of those 2 potential winning trades. Once you book out of a trade, you will never re-enter it. Otherwise, you will get trapped at high (when going long) or low (when going short) of that swing in the process of re-entry. 

It’s a fate of mechanical trading. Your system keeps you engaged in all your failing trades till the Stop Loss hits for reversal. But it will shake you to quit early from winning trades before realizing the full potential of the trade. It is because of the fear in your back of the mind of missing a good trade in the whipsaw. This results in bad returns from the trade.

To stop all these mess, simply SIT TIGHT. Longer you sit tight, quicker you become rich.

Nuisance of SAR Trading – “Whipsaws “:

This is the biggest headache to any mechanical trader and most of his time is spent on to find ways to minimize whipsaws. My advice to the beginners or to the lazy people (like me) is “Accept Whipsaws and don’t fight with it”. Don’t do anything in the initial stage to reduce whipsaws. All your attempts will go in vain and you will end-up with a mess. 

Biggest puzzle is, what should be done when price is beating SAR number quite often during the day?  I’ll reverse the trade on the very first trigger and I have no other thoughts or action for the day. I do not look for volumes, news etc when the price is triggering SAR number. Once reversed, it may retrace back heavily but its ok and situation would be in manageable condition in a day or two. 

Tackling whipsaws is the subject for the succeeded traders and not for the beginners. So, don’t break your head too much on this. Look the whipsaw like a loss in the business. All business is run with profit and loss. All financial statements are having credit and debit columns. Similarly all trading system will have loss by whipsaw trades. You cannot avoid it and should accept it. 

I have carried about 240 trades in 2011. All of my bigger profits came from less than 20 trades. If I delete these 20 trades from my diary, then my trading record shows a huge deficit. To catch these 20 winning trades, I had to participate in all the 240 trades. I did not know which of the trade among the 240 would have got me huge money. One should not omit a single trade due to whipsaw fear. To run the system successfully, you need to accept whipsaws and run with the system. 

Art of surviving whipsaws cannot be taught as it varies among trading system and trading counter. Am sure you will find a way on your own once you dissolve yourself in your trading system. Mom is the best person in the world to know about her kid.

    

     Hindrance of SAR Trading – “Part booking”:

My friend and me trade same trading system. All through the year, I have traded with same quantity. My friend enters into each trade with double the qty than I do. He off loads 50% with some profit and carry remaining position till the next signal. By end of the year, both our trading books stand with more or less same profit. How can it be possible as he made part booking in many trades? Ok, that was one rosy side of the picture.  What about the other side? Whenever we had to reverse the trades with loss or at the time of frequent whipsaws, he had to reverse the trades with double loss than mine.  

I do not mean that part booking should be avoided. It is suitable only for the experienced hands and deeper pockets. To the beginners who trade with small quantities, part booking is a hindrance, as they cannot survive emotional part. They cannot bear the pressure when the loss is maximized with the additional qty and also cannot sit idle when the profit is flying off after the part booking. So, till you become an expert to spot the reversal at resistance and support or to call the trend of the market rightly, do not put your hands in part booking.

“Position Sizing” & “Add-on methods for better performance in SAR Trading” :

In the back test of crude oil, I started the testing with 1 lot and whenever paper showed more profit, I kept adding quantity. After testing one-year trade, I noticed that there were total of 120 lots in trading in the 9^th month but by the 12^th month it got reduced to 4 lots due to the loss incurred between 9^th and 12^th month. Most people say that when you are sure with the trend, add more qty and when you are less sure about it, reduce the exposure. If am able to judge the trend, why would I still be looking for holy grails?

Position sizing cannot be done this way. You mostly end up with loss i.e, your trades are hit badly when you have high exposure and market in favor of you when you are holding small qty.

You need to trade with fixed quantity for fixed time. I normally go for 6 months time frame. One year is far better. Organise the fund, select your trading counters and fix the quantity. At least for a year, never miss a trade and never change the qty. You will for sure feel better after a year. 

Many would get tempted to refer additional tools thinking that it can help to boost gains or reduce loss. But mostly, any additional tool to any mechanical trading system results in an adverse way. One should not attach many tools to his system. It’s like adding more weight to the racing car.

Lesser the weight, better the performance.

Ok, final break before closing this series. Will come up with “aye” and “nay” list for successful SAR Trading in the next post. 

SAR, the Number , a math not a myth! A Trader's view on What is SAR Trading and How to Trade on SAR system – Post # 3

Click here to check the previous Post-1 & Post-2 on this series about SAR Trading .

What are all cannot be a SAR system?

I shall consider only following two criteria to evaluate and accept any system as a mechanical system.

o   Annual returns

o   Capital depreciation in the sideways markets.

1.       I shall not go for a system, which shows less than 200 % annual returns in the back test or paper trades. If you have got 200% returns in the back test, you can realise only 40-50% returns in real trading that too only if you religiously follow your system with 100% commitment.

The deficit between the returns from back test and real trading are because of the typical errors we tend to commit when we follow SAR Trading systems. Missing the trades after continuous whipsaws, increasing the trade qty on just few trades which would miserably fail, too much of prediction and assumption due to references from media and other external sources, doing some poor intraday trades to recover positional losses, early entry and exits etc.. are some of the factors which can cause a huge deficit in the returns between paper and real trading.

 In my experience, it is very difficult for any trader to remain resilient when it is gloomy. Above said mistakes bound to happen in the initial days when you trade with SAR system.

So, go for the system which shows >300% annual returns in back test, which will definitely keep you upbeat.

2.       Any system which eats more than 75% of your capital in the sideways market should not be considered for SAR Trading. Don’t get panic about 75 % losses. You may hear from market men that it is not wise to lose more than certain % of capital in a single trade or in a certain period. But this will not work with mechanical trading. Fact and my experience are different. Any mechanical trading system will eat at least 50-75 % of your capital in sideways market at a stretch (in a short period of time and not in a single trade). But, if you remain in trading without staying away from the system after such painful loss, you will definitely realise the profit which would be greater than the loss you suffered.

Above 2 criteria are mandatory to me to decide if a SAR System is suitable to proceed further.

A point to note while selecting a SAR system:

This entire note is only a suggestion from me, and one can skip this note if found inappropriate to his style of trading.

We have two kind of SAR levels available based on trading systems.

o   EOD SAR level

o   Developing SAR level

Developing SAR:  If you choose a method for example like MA cross-over, your SAR is a developing SAR on daily charts. One has to wait and watch to initiate his trade when the MA cross-over happens in the daily chart.

EOD SAR:  If you choose a method like MA EOD values such as High, Low or Close as a SAR, it’s an EOD SAR. Your SAR number for the next day is available to you the moment market closes today. 

 Selection between above two system can be done based on the following:

Developing SAR will suit to the people,  

a)      Who can watch markets live.

b)      Who has the mental fortitude to keep calm and digest sudden rapid price movements during                                                                                                 intraday against his position.

c)       Who can take right decisions quickly without any second thought in live trading session.

EOD SAR will suit to the people,

a)      Who is a part-time trader and cannot watch price action all the time in the day.

b)      Who cannot control his emotion and used to commit errors when seeing adverse price action in small time frame.

c)       Who has deep pockets and wants to trade in multiple counters and contracts with peace.

I personally prefer and follow EOD SAR system, which suits my profession as well as to my character and attitude towards market. I prefer beginners to stay away from live action to avoid the temptation to act on every wild tick movements. You may see many times price has closed at the same place where it closed on previous day. But during intraday, it might have troubled many men’s life on that day. EOD SAR helps to prepare you mentally to accept the gain or loss. Decision-making can be done with ease and emotional errors are bound to be less.

I repeat again, above note is purely from my exposure with the markets and you may have a different approach and mental make-up. So, it would differ for different traders. Please analyse and select the type of SAR which suits you well.

What are the contracts suitable for SAR system?

Any market/contract can be traded using mechanical system. But following must be kept in mind.

1.       Price range and volatility are main factors to be considered. Trading system should be selected based on these two factors. High beta and volatile counters cannot be traded with short term SAR systems as it leads to whipsaws quite often.

2.       You cannot have break-out methods such as 3 day swing high/low for narrow range counters such as zinc in commodities or Ashok Leyland like equities. This will also lead to more number of whipsaws.

3.       It’s advisable to avoid narrow range and low volume counters to trade under mechanical trading. 

4.       Generally, any trending contract can be traded well with SAR systems. I would suggest following to start with.

a)      Nifty

b)       Large cap scrips like Reliance, SBI, Tata motors etc

c)       Bank Nifty

d)       Crude oil

e)      Silver

f)       USD EURO 

Hitting the pause here. We will meet again to read about following in the next post.

Basement of SAR Trading – “Backtesting”:

Application of SAR Trading – “Real trading” :

Essence of SAR Trading – “Sitting tight”:

Nuisance of SAR Trading – “Whipsaws “:

Hindrance of SAR Trading – “Part booking”:

“Position Sizing” & “Add-on methods for better performance in SAR Trading”