Monday, June 28, 2010

Have you got your heat treatment?

Glass is heated to above 720 degree celcius to make toughened glass.

Sometimes, it is also immersed into a bath of molten potassium nitrate to increase its toughness.

An earthen pot is subjected to heat in a kiln to bake it and make it suitable to store water.

Cast iron is first superheated and then suddenly put in cold water to harden them.

If glass or clay or steel were living things, this process is nothing less than hell for "them".

But after going thru this "hell", all these come out as if in "heaven"

Tough, Strong, more problem!

A new stock trader is like a glass,

he breaks every day only to gather himself up, glue together the pieces of broken ego, and put up a brave shaky face next morning.

A new stock trader is like clay,

willing to let himself/herself be moulded but not strong enough to hold the water of profit under pressure.

A new stock trader is like cast iron,

total strength from outside, but sheer brittleness from inside.

Without hardening, the new trader has no future, or a very painful one.

So, what's the process of hardening in trading?

Face and conquer the heat of greed if your system wants you to.

Face and conquer the temperature of panic if your system wants you to.

Face and survive the sudden exposure to cold water of crash if your system wants you to.

Face and withstand the the temptation of booking the profit if your system wants you to.

And finally, practice stop loss 20 times when the need arises.

Learn to say "no" to your devil side.

Take the heat treatment, get tough!

Friday, June 25, 2010

A strange way of stock picking

One of my friend has a strange and unique way of stock picking.

First, let me tell you that he is not a technical trader but believes in fundamentals.

Second, he is more of an investor than a trader.

Now, his method.

He does no research before buying

no fact finding

no expert opinion

no listening to management interviews

no charts

no balance sheets

no profit and loss statements



whenever and wherever

a service or product thoroughly satisfies and delights him

whenever he is thrilled to see the customer-oriented attitude of the employees

whenever he is overjoyed at a product

whenever the service standards make his eyes bulge with surprise

whenever he is touched by the sheer commitment to customer satisfaction

whenever he finds discipline and perfection

whenever he finds the employees motivated and empowered

whenever he finds great value for money

whenever he finds trust in the air

he checks whether the company's shares are listed.

If yes, he buys quite a handleful.

"I want to be a part of this success story", he says.

Thereafter, he keeps visiting the company every 6 months.

He holds the stock till he still finds the quality and value-delivery amazing.

He keeps enjoying the value appreciation as well as dividends.

The moment his sixth sense notices a decline, he sells.

Thursday, June 24, 2010

Intention and ambition of stock price!

Every price graph has two faces

- Intention

- Ambition

Intention is "what it is going to do"

Ambition is "what it threatens and teases and bluffs to do but can't and doesn't"

Look at the graph of nifty of last 5 years


Here the black arrows are its intentions and the red lines are its ambitions.

Traders take ambitions as intentions and panic.

They take ambitions seriously and madly run after it.

Ambition is temporary.

It is flight of desire but has to return to its mother - "Intention"

Intention is closer to fundamentals.

Ambition is always different from intention.




Difference of opinion in the trader universe.

During bull runs, intention is lower than ambition.

During bear runs, intention is higher than ambition.

Smart traders keep ambition in the eyes to trade and intention in mind to not get carried away.

Intentions and Ambition theory applies equally well in long, medium and short term duration charts including intraday charts.

Intention gives the true picture of where nifty or the stock is about to go.

If we know the true intentions of the price chart, we can never get hit below the belt!

(Step-up Step-down theory, as described in my recent post, or Fibonnaci levels or Elliot waves can help foresee the intentions.)

Wednesday, June 23, 2010

The Apple & the Wire-mesh Technique

Here is a strange technique to guess the direction of price movement from its chart.

Imagine a price graph as the one made not by pencil but by bending thick copper wire.

Imagine holding that wire-mesh graph from one end (earlier date) with your left hand.

Now imagine that you have hung a heavy apple from the other end (latest price point).

If the wire mesh can withstand the apple's weight, the graph is bullish.

If it can't, it is bearish.

Crystal gazing????

Wishful rubbish????

Think again.

Being from Engineering background we used to test structures like this.

I tried this method recently in light vein but was shocked to see its accuracy.

Actually, the sharp base-points of any semi-circular price movement are like stress-points of a structure.

Any straight wire has much less strength than a kinked or bent wire.

This strange method will become easier and make better sense if you try doing a few practicals at home.

I am sure you will have a 200 watt smile at your face on seeing the result.

Efficiently Effective

Management guru Peter Drucker said -

"Efficiency is doing things right; Effectiveness is doing the right things."

In stock trading

Effectiveness means "the right trade call"

and Efficiency means "sticking to that call".

Effectiveness comes from method

and Efficiency comes from discipline.

Even the best chance of being effective can be messed up by poor efficiency of execution.

And even the best efficiency can be useless without knowing what to be efficient about.

Being efficiently effective trader is what it is all about!

Gambling is not good but.....

Gambling is not good

but if you must

then do it when the odds are extremely in your favour.

In fact, this would mean that though it is blind, it is not gambling.

It is quite safe!

So, how do I do it?

When RSI on 1 month chart (RSI 14/30min) is 95 or above I short huge huge quantity, and

When RSI on 1 month chart (RSI 14/30min) is 5 or below I buy huge huge quantity.

Sometimes I relax the limit to 93 on upper side and 7 on lower side.

I dare this on 1 day chart as well (RSI 14/2min) though with care.

And mind you, don't wait too much before you book profit.

I get such an opportunity atleast once a week, and the rewards are good for the entire week!

This is basically a small-movement-high-volume quick "pick and run" thriller!

The risk is absolutely minimum and reward is almost confirmed, and high too (thanks to high volumes).

Statutory warnings :

Bet to safe extent. Exit if unexpected happens. This is not a advice or recommendation. This is just sharing what I do for big thrill and decent money. Understand the risk before trading.

Sunday, June 20, 2010

8 paradoxical commandments of stock trading

1. Losers shall be the winners!

= losing positions need to be stopped. such losers will be rewarded.

= those who hate losing, will not trip losing trades and hence they will definitely lose.

2. Those who "don't know" shall be the winners!

= traders who say they "know all" will be humbled.

= those who, despite knowing, know that they "might not be knowing still", will be rewarded. "Experts" are humbled in the market.

3. Those who are willing to sacrifice will get!

= those who can't withstand the emotional pressure to book profit too early just because of the fear of losing that profit, will never be given big.

= those who are willing to sacrifice the small for the big (till the exit bell rings) will be rewarded.

4. Those who avert risk will be put in risk!

= and those who seek safety will not be safe!

5. Those who ride emotions will be shown logic!

= Those who ride logic will be presented emotions!

6. Those who can't wait will be made to wait for profit!

= Those wait shall not be made to wait any more for the profit!

7. Those are not willing to sweat will be made to pay in blood!

= Those who willingly sweat will be rewarded in flood.

8. Those who put money before the method will get money only after the method

= Those who put method before the money will get money immediately after the method.

Stepup stepdown theory (mother of all trading theories)

Stock (or index) value moves in circular steps, like a bouncing ball moves on a floor.

All touch-down or support points are like sharp pencil heel supports.

All tops are generally like plateau's.

As per step-up step-down theory,

if you join all touch-down/support points and see the angle which it makes with the horizontal then the following rules rule:-

1) every next angle is and has to be lesser than the previous angle. e.g. angle alpha will be always more than angle beta which will always be more than angle theta....and so on.


2) if it isn't, then it is a bluff. In other words, it is a stretched position which, sooner or later, will retreat to honour rule 1.

3) these successive angles will always decline till 0 degree where it is to take support and bounce back compulsarily.

4) if it doesn't, it is part of the outer circular step as mentioned in rule 5 below.

5) Every trend has inbuilt smaller trends which may have inbuilt mini trends. Each of this trend will obey rule 1.

6) After 0 degree stage, a stock can breach it after a brief bounce or start full-fledged next higher sojourn as per rule 1.

This theory can independently explain the best points to go long and the best ones to go short.

You can catch the bluff of the price movement to perfection.

This applies equally well in any time frame.

Here, the bluff has started from the 4th hill. Instead of making angle delta it has started going up and up. This means that it is starting an inner circular sub-trend which will again start moving as per the rules. But this is a bluff / stetched / unsustainable trend which will soon collapse after 0 degree stage (marked with an arrow).

Friday, June 18, 2010

Forget her!

I once read this beautiful story which I want to share with you.

Two young ascetics were going from one village to the next village.

On the way there was a river.

The water in the river was flowing waist high.

A beautiful young girl was weeping on the shore of the river.

"Why are you crying, young lady!" asked one ascetic.

"I can't cross this angry river", she replied, sobbing.

"Will you agree if I take you across on my shoulders?" asked the ascetic, to help her.

"Yes. Thank you!" said the lady and wiped her tears.

But the second ascetic was not happy with his helping buddy.

"You know we are not allowed to touch a female!", he protested.

The noble ascetic didn't reply.

He just smiled and lifted the young lady on his shoulders.

All of them crossed the river.

The ascetic put the lady down and moved on with his annoyed friend.

After almost a mile, he found his colleague still angry.

"Why are you angry?"

"Because you carried that female on your body! Guruji said that is sin"

The ascetic with the helping mind smiled, paused for a moment and then replied

"I carried her on my shoulders for a few yards, but you are still carrying her in your head for more than a mile!"

The same happens with we stock traders.

We are so thrilled by the nifty bull run that long after it is finished we keep assuming it even in our dreams what to talk of our trades!

Similarly, we are so terrified by the nifty bear run that long after it is finished we keep getting hellucinations about its continuation!

Lets learn to forget "her" and move forward, with the trend!

Thursday, June 17, 2010

On road to your drug discovery!

Pharma sector is favorite sector of many traders and investors.

It is neither too defensive as FMCG nor too volatile as Banking or I.T. sector.

Any pharma company can manufacture drugs but the real challenge lies in new drug discovery.

Their is no dearth of medical conditions and complications in the world.

Rather, with every passing hour, newer diseases and challenges are popping up and old solutions are becoming ineffective.

There is always a huge and urgent demand for newer drug molecules.

But new drugs are not easy to discover.

You need an army of highly qualified,talented and dedicated researchers.

Millions, at times even Billions, are pumped for research and trials.

and not to forget years and years of painful waiting....

....and after all this, many a times the end result is frustrating.

So, why do companies spend their fortunes on drug discovery?

Why do they bet their entire existence on r&d?

Why is there so fierce competition and race to be the first to come out with the new drug?

The answer is.....the mind boggling reward!

Human beings can live without anything except Food and......Medicine!!!

It may take millions or billions on the way to new drug discovery

but once the formula is in your hand

all doors to heaven open!

Unbelievable sales volumes are assured....

Cost of raw material is peanuts....

but the price commanded by the drug is......

.......whatever you ask for!!!

......and there is no competition!

Don't be surprised if you were told that a 395 rupee speciality tablet actually costs 3rupee 95paise!

Just discover it once and thereafter all you have to do is .... keep multiplying....keep multiplying!

Learning stock trading is also like drug discovery.

It is time consuming!

It is money draining!

It is frustrating....and stressful.....and painful.....and seemingly unending.....

but once you have cracked the code

once you have the formula in your hand

once you have discovered "the magical drug to your ills"

all doors to heaven open!

Just discover your "drug" once and thereafter all you have to do is...keep multiplying...keep multiplying!

Wednesday, June 16, 2010

My Swiss Army Trading Knife


One can't remember all one studies.

So,I devised this simple pictorial method to remember my most potent trading tools. Whenever the trading decision is difficult, I simply take out this swiss army knife and check!

First, just pull the plug!

My daughter returned from her school today and was excited about the new chapter she had learnt today in school.

"Papa, you know what we learnt today! We learnt how to save someone who gets electrocuted."

"How" I asked curiously.

"Teacher says, whenever you see someone caught with a live electrical wire or appliance, just pull the plug."

"Don't try to touch the person. Don't try to touch the wire. Don't try any dramatic idea. Just hold the wire, pull the plug and save a life!"

How logical, but why don't we do it!

I am reminded of the electrocution of hundreds and thousands of traders in stock market daily.

When their trade goes wrong, they are just stuck with the trade wire!!!

They get shock after shock, the intensity of which keeps increasing but they don't leave the trade 'wire' (or is it that the trade wire doesn't leave them)!

Each one of them has different reason.

Someone is so "sure" of his call that he prefers to hug the live wire more tightly rather than leaving it.

Another trader "doesn't like" loss. So he gets more into it.

Still another trader "hopes" his Almighty will save him (little knowing that Stock Market is the only place on Earth where prayers are not answered. Simply because both seller as well as buyer are praying!).

One trader was found clinging to his losing position because he had announced his trade to his friends and it was now his prestige issue!

Another trader was sticking to his trade 'wire' just because he was a "damn" (or damned) follower of his "guru" trader.

Yet another trader just puts hand on his heart and says "all iz well" (when all is actually going in the well!)

Why not pull the plug and get out of the trade when you can easily re-enter the trade in about 30 seconds when clouds clear!

One of the main difference between a struggling trader and professional trader, a trader in loss and a trader in profit is - stop loss discipline.

If you always lose small, who can stop you from being successful in stock trading.

So, whenever your trade goes wrong, as sometimes it will,

don't try touching the prayer bell,

don't try touching the ego,

don't try smart new tricks,

think later

first pull the plug!

Sunday, June 13, 2010

Take this trader test & know yourself better

Given below are 23 questions. Try answering them honestly. Note down your answer on a piece of paper. Answer ratings are given in the end.

After you are done, just total your score and read the interpretation.

Best of luck!


Q.1. You book profit
a) when the profit is too handsome to lose
b) when you feel there can't be much more profit
c) when you have a sell signal

Q.2. You book loss
a) when any more loss is unbearable
b) when stop loss is hit
c) when the loss is small

Q.3. Your position size (amount) in a trade is decided by
a) the amount you have
b) the profit you want to have
c) the loss you want to backup

Q.4. You buy
a) when others are buying
b) when others are selling
c) when there is a buy signal

Q.5. The method you choose
a) is the one you have shortlisted after trying many others over a period of time
b) is from a basket of favourite methods
c) you don't believe in method

Q.6. In your opinion, emotions are
a) good
b) bad
c) unavoidable

Q.7. You believe
a) in waiting for the right opportunity
b) in benefitting from every situation
c) in random trading

Q.8. When the opportunity you wanted is in front of you
a) you have butterflies in your stomach and wait for a while more
b) you smile and enter the trade
c) you suspect the authenticity of the opportunity and prefer to wait for confirmation

Q.9. In your opinion, risk is
a) good
b) bad
c) unavoidable

Q.10. When the market is falling
a) you like it
b) you hate it
c) you stay away

Q.11. When the market is rising
a) you like it
b) you fear it may fall
c) you wait for the fall to enter

Q.12. When people are panicking
a) you are one of them
b) you are one of greedy ones
c) you are cautious

Q.13. Trading expenses, in your opinion, are
a) most important
b) somewhat important
c) not important

Q.14. When a trade goes wrong
a) you wait & watch & expect it to stop and turn back
b) you square-off and quit
c) you have a plan B

Q.15. In your opinion, timing the market
a) is possible
b) is not possible
c) is possible to a reasonable extent

Q.16. You are in market to
a) learn
b) make profit
c) get rich

Q.17. For you, loss is
a) a slap on your face
b) a setback
c) a lesson

Q.18. For you, profit is
a) to be celebrated
b) to be acknowledged
c) to be suspected

Q.19. In your opinion, trading is
a) gambling
b) business
c) side-business

Q.20. You find trading
a) exciting
b) boring
c) frustrating

Q.21. You trade
a) long side only
b) short side only
c) both long as well as short side

Q.22. You prefer
a) timely small profits
b) untimed but big profits
c) profits (at whatever time interval)

Q.23. When someone praises you
a) you feel good
b) you feel awkward
c) you feel scared


Answer ratings:-

Q1.a)0 b)1 c)2

Q2.a)0 b)2 c)1

Q3.a)1 b)0 c)2

Q4.a)1 b)0 c)2

Q5.a)2 b)1 c)0

Q6.a)1 b)0 c)2

Q7.a)2 b)1 c)0

Q8.a)1 b)2 c)0

Q9.a)1 b)0 c)2

Q10.a)2 b)0 c)1

Q11.a)2 b)1 c)0

Q12.a)0 b)2 c)1

Q13.a)0 b)2 c)1

Q14.a)0 b)2 c)1

Q15.a)0 b)1 c)2

Q16.a)1 b)2 c)0

Q17.a)0 b)1 c)2

Q18.a)0 b)2 c)1

Q19.a)0 b)2 c)1

Q20.a)1 b)2 c)0

Q21.a)1 b)1 c)2

Q22.a)0 b)2 c)1

Q23.a)0 b)2 c)1



0 to 12:You are a casual trader. Get serious otherwise you may be knocked out with heavy losses.

13 to 25:You are an amateur who is ambitious but struggling with basic problems and shortcomings. Fear is stopping you to move up the ladder. Your trades are risky and are prone to traps. You are unsure about your trades. You are still being taken for a ride by your emotions. Reduce your position size and trade with confidence and guts. Increase your appetite for big profits.

26 to 40: You have broken that crucial resistance level in the growth of a trader! You have certain issues to be ironed out but you are aware of them. Your trading career is in advanced stage and now there is no looking back. All the best!

Above 40: You are a Pro! Congratulations!


Life lessons from RSI

* you can't keep a good man down for long

* a bad man can't keep himself up for long.

* no thing or situation can remain in highly excited state for long.

* no thing or situation can remain in highly depressed state for long.

* if things are good due to some genuine reason, expect them to get better to the extreme unless there is a change in the fundamental realities.

* if things are bad due to some genuine reason, expect them to get worse to the extreme unless there is a change in the fundamental realities.

* any highly excited state is unsustainable and unstable and is an opportunity.

* any highly depressed state is unsustainable and unstable and is an opportunity.

* before jumping into any extreme situation, wait. the biggest sting comes just before reversal.

* any wave of situation, emotional, financial, social, physical, political etc. is likely to continue till it reaches an extreme, and then it recedes.

* while receding, the situation is likely to retest and retry to regain its earlier heightened state atleast once.

* if it fails to regain it, the situation is surely dying.

* if any heightened situation remains constant but perception of the participants starts receding, it is a pause before the continuation of the severe situation.

* if the situation is improving but the perception is worsening, or when the situation is worsening but the perception is improving, the situation is likely to reverse soon.

* any situation is likely to pause or reverse at its extreme.

* excess of everything is "bad"

Tuesday, June 1, 2010

RSI-SMA double-trap technique

For those who find applying RSI difficult, try the following technique

When price on 1month chart (Google finance) cuts SMA 34 line

a) from above, short till RSI 14/30min on 1 month chart touches 20

b) from below, long till RSI 14/30min on 1 month chart touches 80

Stop loss: When price whipsaws to cut 34 SMA again.


Pl note:- "cutting" includes the crossover due to gap up or gap down

"Its all in your head, youngman!"

Many years ago I went to Kalpa (in the heart of Himalayas, in District of Kinnaur in HP) in a Bolero.

Kalpa is situated at an altitude of 2759 m from the sea level, on the old Hindustan Tibet Road at a distance of 260 km from Shimla.

Kalpa seems so high up from the Satluj below that if we were to throw a stone from Kalpa into Satluj, it would take a few minutes to reach it!

Kalpa is not too far from the China border.

Right in front of Kalpa is the mighty 6050 meter high Kinner Kailash, legendary winter home of Shiva.


When you are in Kalpa you are nearer to God and away from the world.

In those days there were no mobile signals there, and very less traffic.

Just occasional army helicoptors passing from below (we were at mountain top) taking men and essential material towards China border posts.

After dropping me at Kalpa, the driver of our company came back to Shimla by bus, leaving me and the Bolero behind.

I was to stay there for a week on official assignment and had foolishly agreed to drive the Bolero back myself.

Little did I realise that I had no experience in driving the wide and powerful Bolero in the deadly high roads.

Anyhow, I got busy in my work.

The next day, it started raining...................... and continued for the rest of my stay there.

I was thrilled at the majestic view all around including the heavenly Kinner Kailash.

Little did I realise that this would cause flash floods in the Satluj which will damage the already narrow national highway at crucial bend-points.

It is a treacherous road which chills your spine while you negotiate the narrow road with mighty Satluj river deep on one side and huge wall of the mountain on the other.


And then came the news.

The highway had indeed been damaged at more than a dozen points.

The consolation - small vehicles like jeep, cars "can cross the remaining" road, albeit very carefully!

That "remaining" width of the road was just equal to the width of the jeep.

There was no way my driver could come back to drive me back.

I couldn't postpone my return beyond 1-2 days.

Rain had no agenda to stop in the next foreseeable future!

"This is a regular thing here" I was told by a local.

In front of me stood the grand question

"Can I drive back the Bolero myself"

"Should I"

"Can I"

Should I"

"Can I"

"Will I"

The self-discussion made the fear grow in me.

It was real situation in front of me!

I delayed my return for one more day.

But next day I had to return.

And the next day came exactly in a day.

I packed my luggage, put it in the UV, tanked up the diesel and started slowly out of Kalpa

.....towards my destination

.....and perhaps my destiny!

Just 8kms from Kalpa, below Peo, I stopped my Bolero at the first point of broken stretch road.

Half of the road had slipped below in the Satluj due to incessant rains.

"nikal jaaegii", advised an outlooker, who assured me that the remaining road width was enough for my Bolero.

I felt like killing him.

On one side was a 1000 feet drop into the Satluj and on the other side was great wall of the mountain.

Had it been just me, I would have walked through.

I had to drive the beast machine with me.

One wrong move,

one over or under pressing of the accelerator or clutch

one wrong selection of the gear

one hesitation

and the jeep will fall down

with me!

I kept standing till their was a traffic jam behind me.

A elderly local bus driver came to me and looked into my eyes.

He was perhaps the only one who could empathise with me in that my situation.

He understood my dilemma in a flash.

He just came close to me and softly whispered those magical words in my ears which were to change my life for ever!

"The Bolero doesn't know that the road is broken.

Neither does it know that there is Satluj on the other side.

Its all in your head, youngman!"

My eyes went wide open on hearing what he just said.

He was right.

It was all in my head.

I recollected what he said

"The Bolero doesn't know that the road is broken.

Neither does it know that there is Satluj on the other side.

Its all in your head, youngman!"

I sat in the UV,

Carefully, selected the 1st gear,

judged the width of the road,

held the steering firmly

concentrated calmly

said my prayers

and started moving it.

It was full 40-50 meters stretch

and I cleared it!!!

It was like a new life!

It was as if I had conquered Mt.Everest.

I stopped my Bolero, got down and looked behind.

The driver was waving at me.

I waved back, my eyes full of thanks and gratitude

for the biggest lesson of my life he had just given me

"The Bolero doesn't know that the road is broken.

Neither does it know that there is Satluj on the other side.

Its all in your head, youngman!"

I sat in the Bolero again

and this time started driving with a strange burst of confidence.

On my way back from Kalpa to Powari to Karchcham to Tapri to Wangtu to Bhawanagar to Rampur on my way back to Shimla

I came across half a dozen dangerous spots where fear of death could sniff life out of you.

I crossed all those stretches with those magical words

"The Bolero doesn't know that the road is broken.

Neither does it know that there is Satluj on the other side.

Its all in your head, youngman!"

Have you come across situations in life (including trading) when

your brain tells you what to do

your gut feeling tells you what should be done

your experience tells you it won't be wrong if you do it

yet you find yourself unable to "pull the trigger"

unable to take that first step

unable to enter that "trade"

unable to act!



Fear of failure.

Fear of losing.

Fear of the pain.

Fear of death.

This fear creates doubt

and where there is doubt, there is surrender!

You leave the trade alone despite the green signal of your system and experience.

Eventually the trade goes the way you "knew" it would!

Now you can't do anything except either run after the missed bus

or see it blossom from a tiny plant of small profit into a big big tree of windfall profits!

You can't but kick yourself for not having gone for that trade!

All this used to happen with me every time.

It still happens at times.

But all I do to evaporate those doubts & fears

is to play that music in my ear

"The Bolero doesn't know that the road is broken.

Neither does it know that there is Satluj on the other side.

Its all in your head, youngman!"