dil chahta hai

three friends
in same job
learnt trading together
started trading together
made their first lac together.
they all decided to celebrate their achievement
together
by going for a long drive
like amir, akshay and saif
in 'dil chahta hai'.
for this they decided to pool in
half of what they had earned in the market in their first rendezvous.
-
and they did.
and what a vacation it turned out to be.
on the last day of their vacation
their car met with an accident.
all three got escaped unhurt.
but car was badly damaged.
after insurance
they had to shell out the balance
(half a lac each).
-
the vacation and stock market triumph
was thoroughly over.
they returned by sunday.
monday dawned.
the first friend thought
"i made money, so god punished me with this mishap."
the second friend thought
"thank god i made extra money from the market, otherwise how could i meet such expenses."
the third friend thought
"i should improve and focus more. i must earn more and more in the market so that such hiccups don't bother me in future!"
-
five years down the line
the first friend had quit trading and settled in the job, happily.
the second friend is in mutual funds, happily.
the third friend has quit the job and a professional trader, happily.
and all of them lived happily thereafter.
unexpected mishaps still happen in all of their lives
but they have no excuses.

trading bicycle!

sometimes (if not always)
if u have power in your pocket
you are tempted to use it.
in stock markets
those with money
have the power to take a trade.
amateur traders
succumb to the lure of using this power
almost everytime!
they are "instigated" to use them!
-
i too have been through this phase.
i just couldn't say no
to chocolates, icecream and indicator signals.
overwhelming majority of signals from the indicators and methods and tricks i learnt
turned out to be right.
but i was still not making money
atleast not considerable amount.
much less than what was possible!
i always wondered what was the reason
till i realised
that 80% of these "signalled" trades yielded
just 20% of the profit
but 80% of the trading costs!
besides, these 80% calls caused 100% of the stress!!!
i realised
that i had to reduce my number of trades.
i realised
that i had to find a way
to spot the hollow (though right) signals!
this seemed more difficult
than learning trading!
acquiring power is easy.
taming mind not to use it at the drop of the hat
is difficult.
-
and then, one fine day
the solution was right in front of me.
i recalled, remembered
(this fact is the easiest to notice
but the most difficult to follow)
that
prices move in cycles.
i am not talking about seasons
though they are included herein,
i am not just talking about macro-economic cycles
though they too are included here
neither do i mean only bull and bear cycles
although they are also included
i am talking much smaller cycles.
the weekly / fornightly cycles.....
-
i spent some days
just re-watching all charts
from this point of view.
i marked points on the charts (5min tick, 30min tick, 1day tick etc)
which according to me
were the turning points
of a cycle!
all crest and troughs....
amazingly, all these turning points were superbly marked by indicators also.
also, every cycle was part of a bigger cycle. in other words, there are cycles in cycles in cycles...the smallest cycle being the intraday (2 min tick cycle).
it was an amazing realisation.
the secret was in front of me.
all i needed now
was to adopt this in my trading.
i had to ignore all the signals after and before the turning points.
the signals for the turning points had to be different and distinct from the "in-between" signals.
-
to reduce the stress while i experimented
i used options for these "cyclic" trades.
since the signals i use are generated using a combination of two indicators,
i findly call this type of trading style
as riding the trading bicycle.
-
riding this bicycle
my number of trades are dramatically down
and bottomline is dramatically up!

language of stock trading

ecg is the language of the heartbeat.
richter scale is the language of the earthquakes.
and a chart
is the language of the stock.
-
while priceline is stock's analog language
the indicators are its digital language.
the clarity, range and depth of the digital language is far better.
though a language can't claim to reveal all that is there in the heart of the sayer
coupled with the "body language" of the sayer
it can reveal quite a bit.
-
those trained and experienced to read the chart
can tell what the market or stock movement is trying to say.
you don't have to be a science or engineering student
to be able to master the language of the chart.
since this is a language
any arts student
or a person with sensitive and watchful eyes and head
can learn and master it!
-
as i mentioned in my earlier post,
random behaviour of a sufficiently large group
becomes a pattern!
everything around us (including markets)
exhibits patterns!
even change happens in a pattern
(afterall, we have change, rate of change, rate of change of rate of change......and so on!
but it will always become a pattern.)
even brownian motion has a pattern of randomness! you can expect randomness and apply probability theory!!!
-
the beauty of watching and watching and keep watching
stock price movements is
that soon you start seeing and hearing and feeling and understanding
the hidden pattern, the message, the signal!
no need to be good at statistics or maths....
no need to have the memory of a chess player.....
just need to be relaxed
and in love with the market.
love has a unique language...
it teaches u everything.....including trading!!!
-
going a step further
just recall
the sign language of the speech-challenged people.
do they communicate with just one hand?
or do they use two?
mostly, it is with two hands!
i used this hint
to learn the language of charts.
i studied rsi to a fine extent,
but still i found that it bluffed many a times.
i just added the "second hand"
- william % r
......results were enough to make me
roll and roll and roll with laughter!!!

master patterns to master trading

random behaviour 

of a big enough group 

again becomes

a pattern!

master stock markets

by mastering patterns.

they will always be there!!!

6 trading shoes

if you don't like wearing a hat
you have the choice of
6 trading shoes.

in my previous article
"6 trading hats"
i talked about the adaptation of
edward de bono's
"6 thinking hats"
to trading.

the treatise will be incomplete
if i don't discuss
edward de bono's
another masterpiece

"six action shoes"

amazon.com describes it as
"a brilliant new way to take control of any business or life situation"

how about trading!!!

let's see -

THE SIX SHOES

1. NAVY FORMAL SHOES

- these are the black formal navy drill shoes
when u r in them
u follow rules, systems and procedures!
no artistry, no gut, no if, no but.

"navy formal shoe" mindset is essential
to ensure safety and to avoid mistakes.

- in trading, you wear these shoes (psychologically)
while following your trading system

2. ORANGE GUMBOOTS

- these are long, imposing, hard "boots"
ready to face any dirty or tough situation

- in trading, you "wear" these shoes
when things turn real bad or outright ugly.
you don't lose heart, deploy emergency rescue plans and fight back.

the idea is to handle unexpected bad situations with courage, determination and self-control.

3. PINK SLIPPERS

- slippers are for relaxation and comfort
easy to get in and get out. you slip into them and take it easy.
you lower your guard remain informal.

- in trading you "slip" into "slipper" mindset
while coolly waiting for a favourable situation
or
once in the trade - ignoring volatility till there is a clear exit signal.

4. BROWN BROGUES

- these are "woodland" leather shoes which are designed to weather any condition!
brogues represent practical sensible adaptive unshaky approach.
they stand for “what can be done in this situation” mindset.
they denote common sense and readiness to “get your hands dirty” if the need be!

- in trading, u "wear" your "brogues"
during volatility or adverse losing movements.

the idea is to get past trying market times or uncertainty.

5. GREY SNEAKERS

- these are flexible, sports shoes.
....quiet, casual and relaxed

- in trading, u "wear" "sneakers"
while understanding a situation before spotting a trade.
it is all about collecting information and quitely analysing it.
you can't be looking for profitable trading opportunities while wearing brogues or boots or slippers!

6. PURPLE RIDING BOOTS

- these are the authority boots of the king's men. not for ordinary people.

- these are worn by operators and fund managers and big players
who have the reigns in their hand....
who know that its they who drive the price.....

- not to be worn by retail traders in the street.

6 trading hats

in his iconic masterpiece
"six thinking hats"

edward de bono had suggested
that mind needs to play
atleast 6 different roles
at different times
to effectively manage anything.

he emphasizes that all types of situations in front of us
can be braoadly classified into 6 types
and all these types of situations
need different response from us.

unfortuantely
we deal with all types of situations
with same mindset.

result?
wrong results
in atleast 5 out of 6 times!

he anticipated
that adjusting mindset to changing situations
is easier said than done.

to make it easier
he suggested
that one may imagine wearing
a different coloured hat
symbolising a particular different mindset.

he picked 6 colours

white = neutral, objective.
red = emotions, anger
black = serious, somber
yellow = sunny, positive
green = growth, fertility
blue = cool, sky

based on these colours
he suggested 6 coloured hats!

i found these perfect for trading also.

my adaptation of the same is given below:

-

1. the white (trading) hat
(for gathering information and facts)
= just watching, collecting fatcs, absorbing and understanding what's happening; checking indicators; the ground work without bias, prejudice or preconceptions.

2. the yellow (trading) hat
(symbolizing exploring and probing, looking for and analysing available facts and figures)
= translating the facts, figures and technicals, letting them speak fearlessly without any pressure or bias!

3. the black (trading) hat
(symbolizing the judgment as to why something may not work, spotting threats, dangers and difficulties)
problem if overused.
= looking at the possible traps, gaps and overlooks. challenging the analysis. considering the "what if" scenario

4. the red (trading) hat
(to search for and welcome any intuition, emotions and feelings; no justification required at the moment)
= stopping the logic and listening to your trained gut!

5. the green (trading) hat
(for ideas, creativity, exploring possibilities, letting the thought take you where it wants to)
= double checking, looking deeper and further

6. the blue (trading) hat
(to think and control)
= executing the decision and strategy ruthlessly and without emotions till its time to wear white trading hat again!

the secret game-plan of option writers

we all know
the number of option sellers
are much lesser than the number of option buyers
as option selling requires much more premiumthan option buying
besides there being more and unlimited risk in selling options!

are option sellers (or "writers" as they are called) bad on money matters
that they opt for risky and expensive option of writing option?

they are supposed to be smart people
and they are not fools.

so what they do cannot be wrong
atleast not for overwhelming majority of the times!

yesterday, i observed some strange things.

they were always in front of me
but somehow they always skipped my eyes.

i was observing the behaviour of
the quotes for call options of bank nifty
on the trading terminal.

the first obvious observation -
as the underlying rate of the index increased
the asking rate for SELLING the call option
kept on increasing systematically
rather, very systematically.

second observation -
they always smoothly maintained the premium gap
between their asking rate
and asking rate of buyers.

third observation -
the premium kept on increasing
with the rate of increase of the underlying price.

fourth observation -
and this one is quite significant....
THERE WAS NO SHORTAGE OF NUMBER OF LOTS
ON THE SALE!!!

fifth observation -
and this is bombastic!

THE SELLERS WERE READY TO SELL ANY NUMBER OF LOT OF OPTIONS
IRRESPECTIVE OF MARKET CONDITIONS!!!

sixth Observation -
and this mind blowing!!
THE SELLERS WERE PROVED TO BE WRONG IN THEIR POSITIONS.

--

i was shocked !
what are these sellers doing?
they are supposed to be custodians of smart money
and they are losing!!!?

what is their game plan?

all they stand to gain is
the premium amount
and that too
at the expiry!

and that too, if they are right.
and in this case
as i saw
they turned out to be wrong!

being smart money
they couldn't be wrong
even when caught red handed.
there must be something more than that meets our eyes!
so, what is their game plan?
what are they up to?
--

i searched for clues to the answer
but didn't seem to get it.

then,
it struck me
"who is writing the put options?
what is happening at the put writing space?
what's the scenario there?"

i shifted my attention.
i focused on the put writing column for some time
and was shocked with a smile!

it was exactly the mirror image of what was happening
in the call writing column.

* as the underlying rate of the stock fell
the asking rate for SELLING the call option
kept on increasing systematically
rather, very systematically.

the asking rates were changing as if being controlled by a computer.
i am sure it was a computer behind it all!

the change in the asking rates of option buying was more jerky
and intermittent than option writing!

this indicated that humans were buying from computer software!!!

* the put writers always maintained the premium gap
between their asking rate
and asking rate of buyers of put options.

* the premium kept on increasing with the rate of fall of underlying price.

* THERE WAS NO SHORTAGE OF NUMBER OF PUT LOTS ON THE SALE!!!

* THE SELLERS WERE READY TO SELL ANY NUMBER OF LOTs OF PUT OPTIONS TOO
WITHOUT BOTHERING ABOUT WHETHER THE PRICE WILL KEEP FALLING OR NOT!!!

and last but not the least (rather the most crucial)
THE SELLERS WERE PROVED TO BE WRONG IN THEIR POSITIONS again!

--

all pieces of puzzle seemed to fall in place now.

the end of the thread of the game was in my hand.

the tactic of the option writers was simple

= they were selling any number of calls being asked by buyers
but at handsome premium!

and they were selling any number of puts being asked by buyers
but at handsome premium!

the loss in put writing was sure to be offset by the gain in call writing
or vice versa in reverse market movement

they always were assured of premium gain.

so they never bothered about
which way the market was going to go

they will always be assured of going with the trend
courtesy computers in their service.

but there were two more critical requisites for this strategy to succeed

one, they had to have very big bags of money (we all know they have! not just big bags but currency printing machines!!!)

two, they have to be satisfied with just premiums!

the second condition was a bit perplexing!

but when i recalled the annual earning figures of all big operators / FIIs / banks
i realized that they never earned more than 50-200% per annum
big from our standards
but too small with respect of our own stupid expectations.

getting 50% plus per annum was a cake walk if one was assured of the premiums only!
and that was precisely there game!!!

they had money
they were satisfied with premiums only!

even normal percentage return on big big volumes would give them millions (if not billions) of returns in absolute value.

it is a game of principal amount, not percentage.

--

a big cartel or wing of the operators or big pockets
are not interested in the future of the market.
their own future lies
in the present of the market- the premiums of the current and nearby series!
moreover,
they are also not overtly bothered about the market fluctuations.

they have the regulator controls in their hand
- not supporting buying when they want it to slip.
- not supporting selling when they want it to rise.
- supporting buying when they want it to soar
- supporting selling when they want it to collapse.

--

i stood where i was sitting

and saluted the writers

not the story writers
but the fortune writers!!!