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.