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”
