Saturday, May 29, 2010

Why is the man on the other side laughing?

For every buyer there is a seller.

For every seller there has to be a buyer.

Both buyer as well as seller have to be there to complete any trade.

So why and when does the price fall or rise?

Well, the price rises when the buyers are desperate
and it falls when the sellers are desperate.

The volumes on the opposite side and intensity of desperation decide the rate of fall or rate of rise of the price.

But the point to be noted is why will anyone enter a stock when people are rushing to exit?

Or, why will anyone want to exit a stock when people are desperate to enter it?

When the buyers are desperate why don't the sellers see the reason behind the buyers' desperation and hence not sell?

When the sellers are desperate to get out of the stock, why don't the buyers see the reason behind dumping of the stock by the sellers and hence not buy?

Who is the fool on the other side of the trade?

Or, Is he not a fool and someone else is?

Very important questions with some very interesting answers.

The trader on the other side may still be interested to complete your trade for the following reasons:-

1) He may not know the reason behind your move.

2) He may be a long term investor, or a trader who has had enough profit by now.

3) He may be a "cool" trader who wants to profit from your panic reaction.

4) He may be trying to catch the "falling knife" with a belief that it has "fallen completely"!

5) There may be a ill-designed computer software on the other side

6) There may be an ill-decided stop loss on the other side.

7) There may be a big division of opinion among the trader universe about the interpretation of the current situation and hence being on opposite sides of the trade.

8) Trader fraternity may be using thousands and lacs of different tools,indicators and software each singing different songs?

Or is it that there are many a herds of sheeps behind each of the above reasons!

Whatever the reality, the fact is that we must be aware about the trader on the opposite side.

This will remind us to not to get carried away!

Afterall, we have the right to know why is the other man so happily catching what we are throwing!

When to be with the mob and when to leave it is a great sign of trading maturity.

Friday, May 28, 2010

Unfinished story

When I was a kid, I loved going to my granny's house every weekend at Ambala.

She loved me very much and I loved her more than anyone else!

She used to tell me bed-time stories every night.

And I used to fall asleep before any story finished!

But the beauty was that my Granny always used to tell me stories that never finished in one day!

I always loved long stories!

The next night, she used to revise the story-till-last-night before continuing it further!

I was always excited to finish the unfinished story.

Similarly I never day trade anymore.

Because I have experienced that the nifty story from oversold to overbought and back is never finished in one day

just like my granny's story.

Some upside or downside is generally left which spills over to the next day or even for a few days more!

And I still hate missing "the rest of the story"!

I always feel that 2-5 days swing trading is much more profitable than day trading of all these days put together.

It is because in day trading we miss and waste a major portion of the move - both before we enter and after we exit.

Besides, we miss the big jumps called gap up or gap down openings!

So, I don't do day-trading

I do week-trading!

And I have the approval of my Granny who keeps watching me from up above the sky!

Thursday, May 27, 2010

Trade "hunting" lessons from Lions!


Lions tend to hunt mostly by night or in the early mornings

(Lesson) = Trade mostly by night (overbought) or early morning (oversold)

and for much of the rest of the time lions are the embodiment of lassitude (weariness, fatigue, tiredness) .

(Lesson) = Stay inactive till opportunity and best time to trade

However, being opportunists lions will hunt whenever the chance arises and that could be the middle of the hottest day.

(Lesson) = When an unexpected opportunity comes accept it with both hands

Of some significance here is the fact that lions are not very fast animals,

(Lesson) = It is a myth that only the most clever and dramatic people in the pit are the best traders!

while by contrast, the animals lion hunt are some of the fastest on the planet.

(Lesson) = The oversmart and hyper traders generally lose out to the opportunist hunters!

Consequently lions have developed two main hunting methods. The first - lion stalks from cover to cover with a final burst of speed at the end.

(Lesson) = Be on the lookout for tried and tested "hunting" signals

The second = find a bush close to something your prey needs - usually water - climb in and wait.

(Lesson) = Wait for the unbeatable itch-needs of your prey - excess greed and excess fear!

There are, however, two things that help the lion considerably. First, they are incredibly good at hiding and phenomenally patient.

(Lesson) = be incredibly good at "hiding" and phenomenally patient.

Secondly, the antelopes, while physically fast, are mentally not quite so sprightly.

(Lesson) = The careless "hyper-active" traders get hunted by the careful "patient" traders.

These antelopes pay perhaps too little attention to learning from their mistakes.

(Lesson) = Those traders who don't learn from their mistakes get hunted.

Lions know it very well that they are likely to miss 2 chases for every 1 successful hunt! Still they are kings of the woods!

(Lesson) = If you miss chances, you are still a champ!

If Lions spot danger to their lives, like when surrounded by a group of buffaloes or elephants, they call it "quits" for the next time!

(Lesson) = Stop loss. Don't make it a prestige issue!

Don't close your eyes!

Long ago (I remember, it was 1989)

one day I was waiting for the bus at the bus stop of Sector 10 in Chandigarh

to go back home after attending my lectures at DAV College.

My friend Ashish was with me.

We saw 2 girls coming from our left on the busy Madhya Marg on a scooty at rather decent speed.

Suddenly a truck appeared from nowhere from the T-slip road into the Madhya Marg!

The truck was right in front of the scooty of the girls, though around 50 meters away.

50 meters is reasonable distance to apply brakes at whatsoever speed.

But to our jaw-dropping shock

the girl at the control of the scooty didn't apply the brakes!

Rather she got confused!

As the scooty approached the truck, which had entered the Madhya Marg the wrong way,

the girl's face turned pale!

but she didn't apply the brakes!

She had got unnerved!

Perhaps she was a new driver and was experiencing that nasty situation for the first time.

She didn't knew what to do?

All this was happening at super speed.

All eyes of the shocked onlookers were on the unfortunate girls.

The girl at the controls still didn't apply the brakes.

Rather to our shock

She closed her eyes!

And banged her scooty in the side of the truck!

Everyone ran towards them.

Fortunately, the survived.

The scooty was badly damaged, legs of the girl in the front got fractured badly.

That incident got etched in our memories forever.

I can still replay that video in my mind as if I was watching it on You-tube!

I can't still believe the girl didn't apply the brakes despite seeing the danger

Perhaps the danger had unnerved her

Perhaps, petrified by the sudden situation, she was no more in control of the controls!

Brain stops working when it is needed the most.

This is precisely what happens in stock market also.

This is the reason why people don't use stop loss brakes despite seeing the danger,

despite knowing that consequences.

They close their eyes!

Like an ostrich.

Same thing happened to me many times!

Till I saw the fact

and said to myself

"Enough is enough"!!

Till I decided that

instead of worrying about loss in such a situation

instead of worrying about why it was happening

I would start thinking about how to strike back

how to win my money back

how to recover!

I still remember once I was caught on the wrong side of an evalanche in stock market.

I was long and the market started falling.

I was leveraged!

God helped me by not switching off my brain when I needed it most.

My courage was in my pocket.

I just booked loss and shorted in the downward stampede.

I recovered my loss in a flash and earned handsome profit.

Had I closed my eyes, I would perhaps been out of the market that day

and not writing this article.

That was a watershed defining moment in my trading "career".

Attack, they say, is the best form of defence.

When in trouble

instead of spending energy on negative thoughts

pool all reserve energies and focus on positive thoughts

not wishful thinking but combat mode

to strike back!

Kick start the treacherous brain

and remember

never close your eyes!

Tuesday, May 25, 2010

Welles Wilder - father of RSI & SAR (a biographical sketch)


Welles Wilder

a leader among technical analysts

the inventor of RSI and Parabolic SAR besides many other technical indicators.

Between high school and collage worked as an automobile mechanic, joined Navy and became an aeroplane mechanic.

After the Navy, graduated with a degree in Mechanical Engineering from North Carolina State College.

After seven years left engineering and got into Real Estate and Land development business!

Built 1,035 apartments in five cities in North Carolina and Virginia with two other people.

Bought an airplane, learned how to fly it, and made the rounds of the five projects about every day.

When the apartments were almost finished his two partners offered to buy his share of the projects.

Thus, at 38 years age, Wilder had "all the money needed" and "nothing to do"!

Became interested in trading commodities because "they are even more highly leveraged then like Real Estate".

Initially, made a lot of money in Silver.

Soon learnt that one can also lose money trading commodities.

So he stopped trading and began to get into technical analysis in the early to mid seventies.

Wrote and self published his first book, NEW CONCEPTS IN TECHNICAL TRADING SYSTEMS in 1978.

In the New Concepts book, he introduced 4 new automatic trading systems.

The Parabolic Time/Price System,

The Volatility System

The Directional Movement System, and

The Swing Index System.


the first momentum oscillator to put all commodities and Stocks on one scale

the RSI!!!

Also, developed an automatic visual trading system called The Reverse Point Wave system.


"The markets must win or else their will be no markets. There must be more money lost than won."

"The big winners are the Commercial Hedgers with huge money to back up their positions. These are the Fundamental Traders."

"The second group of traders is the Large Speculators which are mostly the big commodity funds. They are technical traders."

"The last group is the Small Trader. The Small Traders certainly outnumber the other two by I would guess a thousand to one. Since only 5% of Small Traders (over time) end up making a profit you can see where the money comes from to make a market."

"Since the markets must win, most trading systems can work fairly well for a year or two and they break down to loosing as more and more sophisticated market action adapts to defeat the system. So what has changed is that the markets adapt to most every kind of trading system, and it becomes harder and harder to come up with a system that can beat the markets. But, a few of them do beat the markets year after year."

"Letting your emotions override your plan or system is the biggest cause of failure."

"Some traders are born with an innate discipline. Most have to learn it the hard way."

"The trade should be in the major trend direction. It should not have wild gyrations. If possible there should be a nearby support area to provide a reasonable stop."

"If you can't deal with emotion, get out of trading."

"Risk is something one should consider before entering the trade. He can use a chart to determine the support and resistance. If those allow too much risk, forget the trade. Most importantly, do not increase the risk if the trade is going against you.

One RSI, Two Rubber bands!

Here is an easy way to understand RSI and its effect on price!

Imagine two tight rubber bands are tied horizontally on the rsi chart.

one, along 0 rsi level

and the other along 100 rsi level.

The rsi is tied to both these rubber bands.

Also, the rsi can only move within these 2 rubber band boundaries!

Now, whenever the market sentiment,liquidity and/or fundamentals whip the bulls,

the price starts shooting up.

Along with the price, rsi also starts moving up.

When rsi moves up, the lower rubber band attached to its body starts getting stretched!

More the price moves up, more the rubber band stretches!

Stretch, stretch,.....more stretch!

Only the force of the trend keeps the price attached to rubberband rsi from snapping back!

It is easier for the market forces to stretch the rsi rubber band from 50 to 60 than from 60 to 70.

Stretch from 70 to 80 requires more force and momentum.

Stretch from 80 to 90 is very tiring!

Beyond 90 is anybody's guess!!

Degree of momentum required to stretch the rsi for next 10 points is always higher than the last 10 points!

The more the rsi rubberband is stretched, the more dificult it becomes to stretch it further.

And easier it is to snap back!

This increasing difficulty of stretching the rsi rubber band is because of many reasons

One of them is that the bears are just looking for a chance to call bulls' bluff and make money!

Also, with every rise in price, the greed starts making way for the fear!

The same thing is available now for higher price and hence lesser enthusiasm.

The momentum slows, the volumes drop.

Nobody, including sensible bulls wants to overdo!

Consequently, we see the rubber band rsi pull back.

RSI tries to pull back the price with it.

How much the price retreats depends upon the momentum left in the sentiment, liquidity and fundamentals!

Once the rubberband rsi takes a few steps back, it is now less stretched.

It is now ready to take the next stretch! Provided market forces have not exhausted.

This cycle of stretching and relaxing continues till all reasons with sentiment, liquidity and fundamentals are finished!

Then this rubber band gets the chance it was looking for....

and pulls back with vengeance!

Along with it comes down the price!

Now the sentiments, liquidity and fundamentals take the other side.

The same earlier story is repeated, albeit in the reverse direction.

But remember, the elasticity and hence the stretching the 14/2min rubberband is much easier than 14/30min which is further easier than that of 14/1day!

That is why, when RSI 14/30min rsi rubberband is stretched to, say 7, it is less easier to stretch it further and easier for it to snap back - less or more!

Now you can understand the reason behind "failure swing point" when the rsi makes a lower second peak and hence fails to "hold" its stretch thus resulting into snapback (trend-reversal)!

Almost any rsi pattern and behaviour can be understood with this rubber band analogy!

So, predict the movement of the price with the stretch and behaviour of the rsi rubberband!

Dr.Elango's RSI dilemma

My Mudraa friend Dr.Elango called me a short while ago to share a genuine dilemma with me.

"Jagmohanji, at present nifty is at 4835.

RSI 14/30min on 1 month chart is at 7.

According to what I have learnt, Nifty shouldn't be falling much from here.

But many of my friends are saying that if Nifty falls below 4830 then it will fall big!

Both these statements seem contradictory."

Well, Dr.Elango's dilemma was right as well as wrong.

Right, because 4830 was crucial support!

Right, also because, nifty had room between 7 and 0 to fall even more!

Wrong, because when rsi on 1month (and not intraday, mind you) is at 7, it is quite an oversold position already!!

Though, to fall from this already oversold position is not impossible, that fall has to be quite low.

Even if it isn't that low (due to panic situation), the force causing that fall has to be Mammoth!!

Besides, the spring back will be equally swift!

I told Dr.Elango that in my opinion RSI 3month chart (14/1day) indicated that we might see 4700-4750 levels also.

But (and that is a big 'But')

RSI has to climb to upto 15-25 on 1 month chart to make some room for more fall.

So, in my opinion, nifty can't fall "huge" from current "considerably oversold" levels "Today"!

It can fall that much "Tomorrow" provided RSI climbs before market close today and makes way for that fall!

Otherwise, either "big" gap-down opening tomorrow is not possible


The pull back will be dramatic!

Monday, May 24, 2010

RSI - rocket behind the price!

Everyone knows RSI.

But very few benefitted from it!


Because, as Aristotle once said

"Nobody loves the man whom he fears!"

People fear RSI - so they don't love it!

Why do they fear RSI?

Well, what else can they do when they got their fingers burnt while trading with RSI!

RSI is one of the first technical indicators every new trader studies when he/she starts trading

Also, RSI is one of the first technical indicators he/she tries

Initially it seems to work but very soon "it" lands you in wrong or too premature trade!

Why does this happen?

Why do they burn their fingers?

Well because they got the meaning of RSI totally wrong!


Well they always thought RSI was "Oversold" or "Overbought" indicator!

That is wrong!

Price can continue to rise much after rsi hits "Overbought" territory!

Similarly, price can continue to fall much after rsi hits "Oversold" territory!

Rather, much of the action takes place in the "over" zones!


What really does RSI indicate if not "overbought" or "oversold"??

Well, it is basically a momentum indicator!

It tells you the force behind the price movement!

It tells you how much thrust is left in the rocket to keep moving till it starts to fall under gravity!

That is why I say that if price retreats much less than rsi, then price has lot of fizz left in it!

That is why "failure swing point" indicates that the berlin wall is about to collapse!

..and so on

In the words of Cho Sing Kum

"For many people the very reason they learn Technical Analysis is the blind obsession of only wanting to know when to buy buy buy and when to sell sell sell. Nothing else is important to them. This group of people, they will fail repeatedly. For with this blindness, this ignorance, they will never be bothered to understand the mathematics, what they measure, how they behave, basically the original intention and interpretation of the indicators.The Relative Strength Index is never an overbought/oversold indicator."

Momentum can explain almost all the behavioural tantrums of rsi and hence that of the price!

"Oversold" & "Overbought" can probably explain none!

Always take rsi as the rocket behind the price.

This will help you understand the price movement very clearly!

The behaviour of the rocket hints about the movement of the "shuttle columbia".

Things to look for in price-rsi charts

1) Where is rsi standing?

= whether near 85 or 15? If they are beyond 85 or 15 and still moving, they are stretching the rubber band which is likely to rebound sooner or later!

2) How much (of this stretch) is too much?

= there are three stages of this stretch of rsi in the over"done" territory

a) both rsi and price rising

b) rsi flat, price rising

c) rsi falling, price rising

After this 3rd stage, the rubber of the catapult hits back!

Somtimes, stage c is skipped if momentum is medium!

3) Is price listening to rsi?

= When rsi retreats say 3 steps, does the price retreat 0,1,2,3 steps? Or is it that price is moving altogether in opposite direction!!

If price is retreating too less or not retreating at all, it is in no mood to hold rsi's finger and follow blindly!

Difference of opinion of two partners signals everything!

4) Are rsi and price on work or on a picnic?

= If rsi is ranging between 75 and 25, both are on a picnic, otherwise they have a task to do / train to catch / dog behind them!

A rally is serious work, ranging is picnic.

5) Are they parting ways?

= When rsi and price have an internal fight, they give sufficient signals. Look for "divergence" and "failure swing point". No journey ends till then.

6) Are they serious?

= If the overall trend is up and both rsi and price are moving down, their march is not serious! It is a buy on dip season! Vice-versa for other situation.

Thursday, May 20, 2010

Why I prefer trading Nifty instead of stocks!

* High liquidity
= When there is no shortage of buyers or sellers for an in-demand thing, it is easy to get in or get out of its trade even in most volatile situations.

* No wild fluctuations
= When you are highly leveraged the last thing you want is a wild adverse movement! Since, nifty is the weighted average of more than one stock from more than one sectors, it ensures that there are no shocks! (However, you should always be prepared with a plan for such an eventuality)

* Luxury of mini-Nifty (not available in stock futures)
= When you don't want to take big-ticket position or when you want to enter or exit in steps, this advantage is priceless.

* Nifty is always moving
= Unlike some stocks, nifty is almost always moving. It is because it is a mix of the movements of several sectors. So, if one sector is not moving, some other sector is. In nifty you don't get stuck like you do in a sick or moody sector.

* Less margin, high leverage
= If lack of money is stopping you from financial freedom then leverage is a blessing for you! And since fluctuations in nifty are not that wild as compared to stocks, the leverage allowed is also much large (often as large as 10 times). A word of caution : Leverage is a double-edged sword. If it can crown a beggar, it can also bankrupt a king! Leverage sensibly!

* Technical indicators work best on nifty!
= Fundamental sneezes can cause pneumonia to technical charts of stocks. But in case of nifty, it is just results in mild fever. Since effect of fundamental distortions is least on Nifty, technical indicators can predict nifty movements more accurately and reliably.

* Nifty movements can be better estimated from global cues.
= All global indices are relatives of each other. Stocks are not. They are mob. So, it is easier and more accurate to predict nifty movement from the charts of FTSE or Nasdaq or Nikkei etc than predicting a stock's movement.

* Diversification is in-built
= when Satyam collapsed, those who were having all their money it, collapsed too. Similarly, those who had all their money in Aban also got badly bruised when Aban Pearl sank. That is why, wise men ask you to diversify. But since nifty is already an average of fifty stocks, it is already "pre-diversified".

* Easy to study, easy to master
= If you opt for stocks, you always have to constantly brush-up your information and analyses for dozens and hundreds of them. But if you trade in nifty, you save a hell lot of energy and time and effort! All you have to read and study everyday is Mr.Nifty. I almost remember every contour on the nifty graph by heart by now!

* Option of options
= What an option! Not so lucrative and abundant in stocks!

Monday, May 17, 2010

Aban - a Titanic dilemma?

Lets understand the repurcussions of sinking of Aban Pearl, Aban Offshore's drillship that has sunk in Venezuelan waters.

This drillship was contracted till January 2015 and was earning $358,000 per day.

Markets are presently assuming that the present contract is lost due to this accident. This can impact EPS by 30%.

Loss of the sunken drillship ($235 million) is likely to be recovered from insurance. This is a big relief and good news.

The loss of the revenue / cash flow is the main issue.

There is a strong possibility that Aban will not let this happen by resuming the contract with one of its two idle drillships - Aban Abraham and Deep Venture. This, however, is presently a speculation only.

If this happens, expect a strong rebound of the stock.

The stock presently entering gamblers' and punters' dream territory.

Either this will make you decent quick money or sink you too.

Chances of sinking are less.

There are bigger players whose investment is at stakes.

Still, risk is risk. Take your own decision.


Aban Pearl was insured for $240 million (hull policy) and the premium was around $10 million.

Aban had also taken a $100-million protection and indemnity insurance cover to meet any claims related to debris removal.

The hull policy covers physical damage to the rig whereas the protection and indemnity cover takes care of the liabilities.

Though Aban Pearl was insured for $240 million, the insurers are expected to pay the replacement cost since the drilling ship was insured for ‘market value'.

However, sadly, the rig was not insured for ‘loss of profit' due to business interruption.

Aban's officials are not revealing the name of the insurer but it is most likely ICICI Lombard along with United India Insurance and New India with stakes of 75%, 15% and 10% respectively.

However, the insurers would be spared heavy claims as they had placed 90 per cent of the risk with reinsurers, with these companies being content with only the reinsurance commission.

However, now the insurance costs for Indian energy companies are likely to rise after this accident. Fortunately, ONGC concluded its insurance programme at a lower price before these incidents.

The sinking of Aban Pearl happened when insurers worldwide were knee deep with the oil spill in the Gulf of Mexico caused by an explosion in BP’s oil rig off the US Gulf Coast.

Also, the sinking of the rig will put pressure on prices.

Media report suggests that attempts are being made to refloat the rig. In case that happens, the damage will be reduced.

Fortunately, the rig was manned with 95 workers and all of them were evacuated safely.

Sunday, May 16, 2010

Open your mouth!

When my son was a little boy I noticed that his bites were tiny!

The piece of chapatti (or rather anything) he used to put in his mouth (with 4 teeth) were amusingly minuscule!

Every family member used to laugh at the wonderful sight.

Only a sparrow could fill her tummy with that bite size!

But for him, that bite size was big enough!

Kids are not Ph.D.'s but they know by sheer "inbuilt" sense that they should be interested in only as much as they can bite!

As big as they can chew!

As big as they can digest!

Now, he has grown up from a little boy to a boy.

And his bites too have grown up.

Still smaller than bites of mine but big enough for his mouth and body!

This reminds me of the bites we take in our stock market trades!

Sometimes, some of us bite too big! too much!!

Big enough to excite our trading 'tongues'

but also big enough to embitter our peace of mind.

Often we land ourselves in a position when we can neither swallow the wrong jumbo bitter bite nor can we spit it out and get rid of it!

Afterall, it is not just food but money caught in our mouth!

not just money but (at times) our entire existence and happiness that is in our mouth!!

It becomes a choking lump in our throat.

Often killing many a "baby" and "boy" traders!

So, what to do?

Bite what u can chew

Chew what u can digest

Time the bite as per hunger, capacity and discipline instead of senselessly grazing anything, anysize, anytime anywhere!

Next time your father asks you

"Johny, your mouth"

What should come out is

"Ha! Ha! Ha!"

and not

"Ah! Ah! Ah!"

Saturday, May 15, 2010

My RSI side-notes

* Trading @ RSI 85 or 15 (rsi 14/30min, 1month chart) rarely ends in a loss.

(Obviously you short when rsi is at or above 85 and buy when rsi is below or at 15)

It will either give you sufficient indication & time to square-off with no-profit-no-loss, or
will result in medium-to-large profit.


* A strong price movement rarely stops before rsi 85/15.

Therefore, if you see a sudden &/or strong price move but rsi hasn't still touched 85/15, stay away. The momentum is likely to continue atleast till rsi 85/15 wall.


* Dull and weak price movement is generally confined to rsi 75-25 band.

This indicates range-bound movement.

For decisive rally to be confirmed rsi must first touch 85/15.

Ofcourse, RSI can touch 85/15 without rally (due to short-term strength), but there can't be a rally without rsi 85/15.

So, stay away till rsi touches 85/15 wall.


* After hitting 85/15, rsi is likely to retreat somewhat to take a second shot at the 85/15 wall.

If the price fails to make a "substantially" higher peak when rsi hits 85/15 again, the rally can be considered as near its end.


* Strong rally doesn't end when both rsi and price make their highest peak or lowest valley together, but when they make scattered ones.


* if rsi retreats but price doesn't retreat "much".

the previous trend hasn't ended, it is expected to continue; rsi has not exhausted.


* rsi and price both retreat.

enjoy the profit, atleast till rsi 85/15 wall.


* Always keep the larger & overall trend in mind.

This will help you in taking a commonsense and alert decision about the safer direction of trading.

For example if the broader trend is down, shorting at rsi 85 is safer than buying at rsi 15 and below.

The latter will demand more attentive trading.

This broader trend can be judged from sma 34/8 or rsi 14/1day on 3month or 6 month charts.


(All these rsi notes are based on observations on rsi 14/30min graph on 1 month chart on google finance.

This is because 14/30min rsi on 1 month chart is best for 2-5 days swing-cum-positional trade.

Also, rsi pattern is more accurate and predictable for nifty futures trading.)

Thursday, May 13, 2010

Uncle Chips' cool advise!

It was fine Saturday evening in Shimla.

Rain had stopped and the weather was pleasant with cool breeze!

The party had started.

But Jeet was visibly depressed!

"Why are you down today?" - Ameen (we fondly call him Uncle chips), a big time potato merchant of Shimla asked Jeet!

"I should have bought into the market when Sensex was at 7500 in 2008." replied Jeet!

"It is already at 17000 now, I really missed the bus. That's why I am sad!"

"Look, Jeet!" replied Ameen, "My Dad entered potato wholesale business in 1994 when a 100 kg bag of Jyoti variety potato costed around Rs.32/-. My dad used to make around 5-15% on each bag!"

"Today, 16 years later, the same 100 kg bag of potatoes of the same variety costs around Rs.500/-! I have taken over the business from my Dad. I, too, make 5-15% on each bag!"

"It is expected that the price of this variety will shoot to Rs.2000/- per 100kg bag in next 8-10 years and my son can be assured of 5-15% margin!"

"Trading will always be there till the fluctuation in price is there!"

"People made money when Sensex was at 100 in 1979. People made money when it was at 7500. People are making money when it is at 17000. And people will continue to make money when Sensex will be at 1 lac!!!"

"Profit of trader comes from variation and not from absolute level!"

"Businesses will continue to grow! New businesses will continue to replace old businesses!"

"Now, cheer-up and enjoy the party!!!"

"Cheers!" said Jeet!

Wednesday, May 12, 2010

Advanced Jet Trainer

When I initially started trading with rsi, i used the following "Advanced Jet Trainer" trading technique.

I used it because I wanted to gather courage to trade freely in the merciless wild world of stock market

but was afraid of the monster called loss if my trading decisions were to go wrong.

In this simple technique, there is no or very less loss but good profit!

This technique boosted my confidence like steroids and busted my fears like cannons!

The technique is very simple:

I used to buy one mini-nifty lot "permanently" when rsi 14/30min on 1 month chart exhausted in the oversold zone.

Thereafter, all I used to do was

* Short one mini-nifty lot whenever this rsi exhausted in the overbought zone

* Buy one mini-nifty lot whenever this rsi exhausted in the oversold zone.

Since I always had one mini-nifty long

my short decisions, if right, resulted in addition of value to my perma-long

if wrong, it resulted in no-profit-no-loss (as my short position was always hedged by the perma-long)!

my long decisions (in addition to the perma-long), if right, resulted in double profit (perma long as well as additional long)

if wrong, it resulted in very less and momentary loss since I always bought when rsi had already exhausted in oversold zone!

whenever I missed the shorting opportunity (rarely that happened), I never worried because I knew it will come up!

This simple technique did wonders for me.

I was rarely wrong, and almost always right!

Eventually, I gained enough confidence to trade without the "crutches" of the perma-long mini-nifty lot.

Just like a child learns to balance the bicycle without the two supporting legs with small rollers at the end!

I gradually graduated to nifty (rather multiple lots) instead of mini-nifty.

This simple "training" technique is based on the assumption that markets' have a natural tendency to go up.

They can keep going up forever but can't keep going down forever!

(Disclaimer : This is not a recommendation to try this technique. What worked for me may not work for everyone. This is just to share. Pl use your discretion.)

Why Helicoptor is better than a Microscope!

A microscope goes very close to the thing.

It almost enters it!

A helicoptor sees everything from the top.

It looks at the big picture, the context...

It sees the trend, the flow, the formation, the direction, the reason!

A microscope makes a mountain out of the mole!

The helicoptor puts that mountain in the right perspective!

Even a small vibration looks like a monster fluctuation when seen with a microscope!

And even a big move looks like a friend from a helicoptor.

Detectives should use magnifying glasses and microscopes, not traders.

I find many weak-hearted traders chicken out of a trade just because of their habit of being glued to the microscope.

Traders should look at the graph from a helicoptor.

They should see every move of the graph as part of the broader picture and pattern.

What looks like a crisis in a microscope is often seen as a mouth-watering opportunity from the trader in the helicoptor!

Have a look at the following two charts of the same situation, one as seen from a microscope and the other from a helicoptor-



Saturday, May 8, 2010

The Toy Indicator!

Here is one of my most favourite technical indicator.

I call it a toy indicator because when i am using it I feel as if I am playing with a toy!

Full of fun, thrill, happiness, suspense and challenge !

It is as simple as playing with a toy!

Absolutely no more thinking required than playing with a toy!!

It's called

"Parabolic SAR"

SAR stands for : Stop and Reverse

This indicaotr is the younger brother of RSI

because the father to both was J. Welles Wilder, Jr

So, what is this "toy" indicator?

Just look at the followng graph


Basic Rules:-

If Parabolic dots are below the price line - Buy.

If Parabolic dots are above price - Sell.

the changeover occurs when the dotline touches priceline.

Advance Rules:-

If the price is moving in the direction of the Parabolic dots, the price reversal will take place when both touch!

If the price is moving opposite to the direction of the Parabolic dots, the price reversal is NOT likely to take place!

The Parabolic SAR works well in trending markets, but generates a lot of whipsaws in ranging markets.

When this happens look at bigger-period chart and stick to that trend!

Also, once in a while, whenever in doubt, take help from another indicator.

The main idea behind SAR is that the longer the trend, the more chance it will stop.

Price like a rocket constantly needs fuel to continue to rise. With time every trend will become weak and ultimately reverse.

The Parabolic SAR is also commonly used as a Trailing Stop Loss better than the constant stop loss that does not take into account the length of the trend and the volatility of the market. This way you will never hold onto a trade that goes against you because it will tell you when to exit.

The child in every trader never grows up!

And SAR is the ultimate toy for that lovely child craving for coins!!!

Thursday, May 6, 2010

The Greasy mess of Greece

Greece government kept taking loan from banks and countries.

And kept spending on planned and non-planned expenses.

Now, its revenues are not sufficient to pay back those debts after meeting its own expenses.

It may default in its payment to banks and fellow countries.

If this happens those banks and lending countries will not be able to pay back the money of their depositors.

If their depositors' money is 'lost', they may further default to their lenders.

Then their lenders will not be able to pay back their own depositors...

This will have chain reaction, spiralling effect.

In such a situation, no bank will lend Greece more money to pay back debt, that too when Government's bonds have become "junk"!

and mind you, Greece can't just print more money to pay back debt.

Its lenders want payback in Euros! They don't want "junk" Greek currency!

So, what are the options.

One option, Greece declares Bankruptcy!

It will not want that to happen!

Other's won't let that happen!


Another possible and practical option is that European Union (EU) lends big fat loan to Greece to payback its loans to banks and countries!

EU will do so to protect itself from the chain reaction disaster.

But EU's concern is when and how and whether Greece will pay them back this bailout loan.

Otherwise the problem will boomerang again harder!

Afterall, EU nations have to pay back their lender banks and countries and control their money supply to contain inflation!

So, Greece would have to generate trust with EU that it will pay EU back.


Greece would have to drastically increase its revenues, drastically reduce its expenses and pay back.

This would mean more taxes, painful drastically less expenditure by government on welfare and maintenance expenses besides painful cutting of all grandeur and perks to its employees and beneficiaries.....

This explains why the Greeks are out with violent protests...

There is a Greece in everyone of us.

and in the world.

Rather, every country has a portion of "Greece" in it.

US, Russia, China.....

Even India....

And don't forget our "friendly neighbourhood" Pakistan who keeps getting dollar bags from US to fight "Terrorism"!

Hope this explains why good economic management of the country is critical.

This effects you and me.


Sunday, May 2, 2010

Photographs of tired RSI

Many of my Mudraa friends have asked me to explain what I mean by "RSI exhaustion".

=When a bull rally starts, price increases sharply. RSI follows too.

A stage comes when RSI hits the overbought zone.

Will the price stop rising now?

Not necessarily.

Price is not in the service of RSI.

Overbought RSI only indicates the increasing pressure on the price to slow down.

Just as the car doesn't stop the second we start pressing our foot against the brakes. It keeps moving for some more distance depending upon its momentum.

Just like a pendulum doesn't stop the moment it crosses the centre-point!

So, the price can keep rising even when rsi has hit the speedbreaker of 80-90-95-100.

So, what does rsi do in such a situation?

Cross 100?

It can't.

So it keeps retreating somewhat and keep rising again and again!

I call this banging its head in the overbought wall again and again.

A stage comes when RSI starts diverging, i.e. it starts falling while the price is still rising.

Finally, the price slows down and stops rising. And then it is all set to fall!

This is the time when I say "RSI has exhausted,tired!"

This point is confirmed by a "sell" signal by Williams%R or hints of trend reversal in MACD!

Same is true in a bear rally.

I am sharing some graphs below where RSI exhaustion during an up or down rally are marked with dark thick lines.




Invest in & hold on to these 10 stocks for lifetime!

1. Children

- yours and everyones!

2. Spouse

- your partner for life!

3. Health

- maintenance of the "vehicle" you are travelling in the journey of life!

4. Faith & trust in God

- if you don't know the meaning of what is happening in life, trust Him!

5. Guru

- someone whom you can fall back on in dark times for light!

6. Honesty and Character

- lets keep atleast our own self clean!

7. Cleanliness and Orderliness

- in the mind and outside!

8. Spirit of life

- live a lively life and let live!

9. Mother , Motherland and Mothertongue

- including Father, Bros & sisters, Countrymen, Fellow human beings, Own Culture, Animals, Plants & Environment!

10. Self

- who's this?

- don't lose yourself! There is only one on this Earth! God was not wrong when he created you!!!

Saturday, May 1, 2010

Pizza delivery experts

I love Domino's Pizzas.

Great taste, Consistent quality!

But the thing I love the most is their promise of delivery in 30 minutes or it is free!

I am still waiting for the free one!!!

whenever I am hungry all I have to do is order and wait for 30 minutes max!

Once the order has been placed, it is no more my headache!

I no more bother whether the Pizza delivery boy will come from route A or route B or route C!

I am not bothered whether he comes on a bike or a scooter!

I am not bothered whether he comes non-stop or halts at traffic signals!

I am not bothered whether he drives fast or slow!

I am not bothered whether he starts from his place early or a bit late!

All I am bothered about is having my Pizza - hot and crisp and tempting!

Preferably after 30 minutes (Ha!Ha!)!

Similarly, whenever RSI is exhausted, say in the over-sold zone

all I do is order the trade (like Domino's Pizza) and just sit down and enjoy my TV programme.

I am not bothered whether the price starts to move immediately or after a while.

I am not bothered whether the price comes straight up or zig zag.

I am not bothered whether the price comes up slow or fast.

I am not bothered whether the price comes thru "route A" or route B" or any other damn route!

All I am bothered about is that it does come.

And it always does

like the Pizza delivery experts!!!