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.