the right strike price for hedging with options

ganeshji,

strike price points to be used for hedging should be such

that u strike a balance between

- the premium u pay (keep it minimum)

- the movement (delta) of option viz. a viz. movement in spot. otherwise hedge won't be effective.

- ur confidence in correctly reading the sitaution and hence the amount of risk u don't consider as serious risk.

- the more speculative u r the more u hedge out-of-money. and more sure u r be at or in-the-money.

understanding options - IV

ganeshji, the following criterea helps in understanding the operator market from options data

1. open interest

2. rate of change of open interest

3. change in price w.r.t. change in open interest

4. option activity in in-the-money and out-of-money zones.

5. identifying speculative calls or put points

6. ignoring those put strike points which are being used as hedging instead of actually taking positions.

7. put-call ratio at different strike-prices

8. interpretation for bull and bear and range-bound movement will be different.

9. nifty's effect on bank nifty and vice-versa

10. the premium, the volatility, implied volatility

11. the quantity being offered at a given price for a particular strike price (equivalent to volume in cash-and-carry)

.....besides i amalgamate this with rsi and william to be tripple sure.

pilgrimage of a stock trader

"where are you going?"
asked the curious father of a stock trader.

"dad, i am going for '3 dham yatra' "
the trader said.

"where?"
asked the surprised father.

"prabhadevi, bandra, fort."
the trader replied.

"where are these?"

"mumbai, dad."

"what kind of 'dhams' are these?!!
dad snorted.

"ncdex, nse and bse"

never travel without knowing

29/9 3.15pm

alkaji,
as per the options data for nifty for oct series AS OF NOW,
neither upside nor downside is lucrative for operators.
they have to pause and wait for red signal to turn yellow and then green.
till that time, they can afford to stroll here and there.
you may not profit mcuh, and you may not lose much either.
but the uncertainty and fear will take the better of you.
best of luck.
never trade without being sure where u want to go and where the bus of market is heading to!

predicting long distance with options

dear ganesh,

technicals are spectacles which are good for short as well as long distance vision.

but options are only microscopes
(those too with night vision and x-ray)
which help you see only what is at hand
and hidden in the dark
inside the pandora's box
by the operators.

so, can't predict about contours of october series with options.
neither do i want to.
we will take one day at a time.
also, to predict future trust technicals.

how much to safeguard?

dear ganeshji,

i am of the opinion that all ur money should be protected, not half.

2 nifty put options to hedge 2 bank nifty is what i recommend.

of course, this way you may not make money for small movement of BN,

but why play for small movement?

BN gives a move of 1000 points 8 out of 12 months.

and these moves can be gauged using indicators

(not option data of operators - one reason why technicals are indispensable).

out of 1000 move

assuming u manage to gain 800,

150 odd points will be the cost of hedging.

even that can be recovered if you can walk step by step in tandem with on-the-way fluctuations/volatility.

e.g. i booked BN profit at 9652 on 27th and bought again at 9496 yday.

this has resulted in my hedged nifty puts becoming "free of cost" till the end of october series.

i can take whatever "panga" with my godfather "mr.hedge" behind my back.

if u don't hedge all ur "wealth on the trading table" fear will get the better of you.

"never trade with scared money"

and

"never trade out of fear, never fear to trade."

who's the writer?

dear ganesh,

operators don't buy "cheap" calls.

they are people with "high nose".

but they also know

that it is they who have unlimited money @0.5% interest from "the feds".

they also know

that if they start buying options,

nobody has the pockets to write/sell that much.

they also know that it is far more lucrative

to have 30-100% assured and consistent return on a few billion dollars

than 10000% "mirage" return on peanuts that retail traders run after.............

even strangle and straddle are the toys of semi and pseudo-operators.

real operators only write options.

real retail traders only write good stories

while bad retail traders only write cheques in the names of operators........LOL

nike, deo and watch

a trader was losing non-stop.
he tried every indicator
every tips provider
every website
every business tv channel
every trick
every strategy
cash and carry
futures
options
indices
stocks
....everything!
he still kept losing!
one friday evening
his dad gifted him a watch.
on saturday
he bought a pair of nike.
on sunday
he bought a new deodorant.
on monday morning
he wore the new watch
slipped into his nike
sprayed the new deodorant
and went to the religare hub
to trade.
and he made a big profit.
he was shaken with surprise.
next day
he made handsome profit again!
he was totally perplexed.
but the next day
he lost!
then
he recalled
that he had forgotten his watch home that day,
was not wearing his nike
and had not sprayed that deo!
next day
we made sure that he "took" all three to the trading pit!
and he made big profit!!!
he was ecstatic!
he came out
jumped in the air
and punched his fist in sheer joy!
his hand hit the tubelight.
the tubelight got shattered
and so did his dream
which ended with the restless sleep!
he checked the alarm clock.
"1 hour for the market to open!" it said.
he got out of the bed
freshened up
dressed up
left the nike in the shoe rack
spared the deo
and went out
bare wrist - without the watch.
-
that evening
he made his biggest profit!
he had traded
on his own
without nike, deo and watch.

open letter to a nervous friend new in the market

dear trader buddy,

thank u for ur kind warm words.

the crucial words u said are "i am also a share market lover"

frankly nothing else is compulsary.

i too loved the market. and this love has taken me a long way.

being a "zero" is actually a big advantage because majority of info and know-how floating in the market is crap.

just start from what u know,

keep searching for whatever comes to ur mind.

i used net for this purpose.

net has everything.

i learnt quite a few technicals, then dropped almost all of them when i saw they didn't work well.

then 2-3 were left.

i observed market and charts for long long hours.

this resulted my own methods and ideas. some worked, many didn't.

one good thing i fortunately did was

that i never committed big money till i "graduated" in trading.

just master 2-3 technicals, read a lot of articles, listen to a lot of interviews on business channels,

read a lot of business mags and newspapers, visit a lot of websites and forums,

paper trade a lot and keep noting logic behind trades and learnings.....

treat trading stocks as if you had started learning trading onions and potatoes and tomatoes in a veg market

.....believe me there is not much of a difference.....

all the best....it is going to be a long journey but would be short for you since u love the market.

jagmohan

the difficulty of being a successful big trader

if u want to buy a few bathing soaps
u would obviously go to the neighbourhood shop.
what if you need a few hundred soaps?
u would need to go to the wholeseller.
what if you need a few lac soaps?
(don't ask me why would you need so many. this is just an example)
in this case u need to go to the c&f agents or the company directly.
similarly,
if u want a hundred odd shares where would u go?
and where if u want a few thousands?
a few lacs?
stock market is a market
where retailer
wholesellers
as well as c& f agents
....all go to the same place to shop.
(nobdoubt, primary market, i.e. IPO's are there for mass buying
but there aren't many, especially for the same good stock!)
now, therein lies the trap.
if three types of customers are standing in a queue to buy
hundred, thousand and lac stocks respectively
how would they buy?
if all of them place the order of all they need
at the same time.
the "few lac shares for buying" order
would shoot the prices through the roof.
or the "few lac shares for selling" order
would crash the price through the floor!
this is the reason
why big buyers and sellers
play games.
they get into the garb of "retail trader"
and keep accumulating or distributing shares
slowly but surely
without making too much of a noise.
the moment they make some noise
(there "some" may be "hell of a noise")
markets get scared!
so, when the big c&f agents go shopping
they have to shop gradually
for a long period of time before their "shopping" is done.
not only that,
after their "belly" is full
they have to see their shares go up further (if they are long) or go down (if they are short)
without much of further buying or selling.
for this
all they do it
is not support adverse movement
and support pro-movement if required.
and once their target is achieved
they have to get out
from the same door that the retailers use for exit....
slowly and silently....
lest they should trigger a stampede.
this again explains the gradual down trend.
therefore, any up or down trend
generally continues for some time.
never take a trend to be over too soon.
think from the point of elephants
who have to use the same door as that for goats.
by the way, the fluctuations and volatility u experience on the way
is nothing but the shaking of the "jar"
by the operators
to accomodate more of their greed!
on a different note, just imagine the challenge that u will face the day u become a big trader
seeing an opportunity, wanting to trade fat but unable to slip your big fat order without making a noise!

the double edged sword of operators

dear praveen,

u r right

operators' edge is funds.....they are the foster sons of the western banks. but money is not the only edge they have.

their sword is double edged....the other edge being insider information........bloody damn confirmed insider info which they pay for in many ways!!!

and there is no way u can have access to these dinosaurs! they don't like goats......

who decides the fate of traders?

dear prakash, 


yes operators decide the fate of the market instead of god.


......u have wondered if there is any use of learning technicals......well, my answer is.....absolutely! 


we do need to learn technicals......we learn technicals not to know what the market is likely to do but what the operators are likely to do........technicals of markets are actually technicals of the operators........and ofcourse, as u said a small trader seems like a fool in front of operators.....the day he becomes wise and smart, operators will become smarter and wiser and hence making the poor chap look fool again! 


it is all about finding a weak spot of operators and/or finding ur niche and staying ahead of the curve!!!

what do they say?

two technical analysts i admire and listen carefully (despite the public reactions) are

- mr.sudarshan sukhani (SS)

- mr.ashwani gujral (AG)

what i like about them is

- they don't fear to speak their mind without bothering about what people will react like

- they don't double speak, i.e. they don't speak in a way to leave escape routes open in case their view goes
wrong.
- they have a spark, an edge, raw talent. they defintiely know a thing or too that matter.

i have learnt a lot from them, including trading "mannerisms and attitude"

-

in this thread i will be sharing their views and opinions about possible market moves.

=====================


26/9 EOD

AG sensing bullish overtones and undercurrents in bank nifty
http://economictimes.indiatimes.com/markets/stocks/views/recommendations/if-nifty-finds-4750-as-support-level-bank-nifty-will-also-trade-higher-ashwani-gujral/articleshow/10127223.cms

a line that did wonders for me

"millionaires avoid safety

protect risk"

cats and operators

have you noticed
that sometimes a small event triggers a big avalanche or launch.
and sometimes a much bigger event causes nothing.

e.g. sometimes a small fed or rbi statement creates ripples
and sometimes nothing happens even when they kick hard.

why is it so?

perhaps markets wait for trigger when they want to do something.
and they ignore everything when they are not in a mood.

perhaps, it is not what the markets want to do that matters,
what matters is what the operators of the market want to do

they want to do what is in their interest.

what can happen if the 20% which hold 80% of the money
are interested or not interested in a particular thing?!!!

operators are true karma warriors,
they don't believe in fate.

whatever happens, whatever the situation, they manipulate themselves to a position of profit.
just like cats which always land on their feet whatever way they fall or are thrown!!!

the key to the code of operators

futures is based on spot

options is based on futures.

futures does what spot does.

but strangely,

option generally does opposit to what futures does.

there are many reasons for this

1. mass traders use options to speculate. (which operators don't let happen so easily unless it suits them)

2. mass traders use options to hedge (hence opposite movement)

3. smart traders use opposite options to straddle and strangle (having no net movement w.r.t. futures)

4. mass traders use options to take premature trend reversal positions (which generally don't happen)

increase of open interest in futures means acceleration of the trend of futures.

but increase of open interest in options (irrespective of put or call) doesn't necessarily mean acceleration of
the trend of options but increase in trend of futures.

vice versa for decrease of open interest.

like every mirror image

option is same as futures

but opposite!

this is the key to the cracking the code of operators.

the love hate relationship of nifty and bank nifty

strange - if bank nifty goes up,

other sectors may not follow.

but if it goes down,

no other sector will be spared.

money is the bedrock of every business.

if business of money goes wrong,

money of every business is in serious danger.

but if business of money goes right,

all other businesses are on their own merit.

bank nifty may go up faster and alone

but generally doesn't come down alone.

10 lessons i have learned from traders (Brett Steenbarger)

http://traderfeed.blogspot.com/2006/04/ten-lessons-i-have-learned-from.html

the above article is from Dr.Brett Steenbarger, my distant guru in trading psychology.
his blog is an encyclopedia of trading psychology and more....

6 passwords of day trading - VI

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of money.
here are the 6 passwords to open that vault.

--------------------------

password 6 = don't "trade"

this one is controversial, exciting, mysterious
and most rewarding!

genious and most successful traders
never look like one!

they are never conscious or excited about trading.
for them trading is a routine business of common sense.
and common-sense is nothing but emotional wisdom.
they are not desperate for money
so they don't take "hyper" decisions.

they don't"look" like a trader at all!
they look dull and pretty ordinary.
they have no hoopla or air of a trader!

they don't trade with money but their edge!
they don't trade for money but for vindication of their edge!

that they put in money
and that they get a loads more back
is just incidental.

they know emotions are the handles operators catch the small traders.
by being emotionless, they are beyond the traps of market manipulations.

when things go or don't go their way
they are not excited or scared.

all they humm to themselves is
"is it!"
"o, i see!"
"all right. so be it!"

they trade like a machine.

they don't trade with a software
they trade like a software.

for them loss is just a "pickle" with the main dish of profit.

6 passwords of day trading - V

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of money.
here are the 6 passwords to open that vault.

--------------------------

password 5 = "edge"

i am shocked to see
amateur day-traders entering trading pit
with only money stacked in both pockets of their pants!

no wonder
while coming out
they have not only lost all that money
but also their pants!

and what a relief it is
to see a trader
with money in one pocket
and a "secret personal trading weapon" in the other!

this "weapon"
may be a combination of deadly indicators
a support-resistance-breakout-breakdown gameplan
a gap opening strategy
a price-volume momentum plan
...some trick
...some secret knowledge edge!

the point is -
money is not enough to fight!
you need some method, some weapon,
some trick, some advantage,
a unique gameplan you specialise in.

all in all
you need a dependable edge
on the basis of which
you can bet your money.

trading without an edge
is like trading with orphan money
which is begging to be "adopted"
by a responsible deserving trader.

an edge is your personal specialised trading idea
that has proven to be successul for you
majority percentage of the times!

once you have got that edge
don't bother whether it works in that particular trade or not
just keep repeating it
ruthlessly
and repeatedly.

if the edge was right
it will get you money
majority of the times.

specialise and keep improving your edge!

one good one is more than enough!

6 passwords of day trading - IV

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of money.
here are the 6 passwords to open that vault.

--------------------------

password 4 = "time"

well begun is half done, they say!

so true in day-trading!!

when to enter a day-trade is decisive.

if you enter at the wrong time
even if your direction of trade is right
you may slip into loss for some time before the trade actually turns in your favour!

by that time, you may have panicked and chickened out or quit.

even otherwise, you are unnecessarily inviting stress.
you are unnecessarily cutting down potential profit.

i have seen many day-traders enter positions randomly.

even when you are on the side of smart money
even when you are mentally aligned and aware of the bigger picture
even when you are prepared for the "guerilla" war
you need to enter at the right time!

i give some examples below:

- enter only at a higher low (for a long position)
or a lower high (for a short position)

- keep intraday fibonacci retracement levels in mind.

- keep support and resistance levels in mind.

- don't enter the position without the permission of the indicators, if you have some on your payroll.

"never try to time the market" may be a rule for investing but certainly not for day trading.

6 passwords of day trading - III

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of money.
here are the 6 passwords to open that vault.

--------------------------

password 3 = "run"

day trading is not for wealth creation
it is for cash flow generation.

it is an atm.

you never retire from day-trading.

if u want to accumulate wealth
go to swing trading and then to investing.

day trading is self-employment at its best.

i have seen many day-traders bleeding to financial death
by not getting this basic password right.

they expect to become rich by trading trading
and all their trading decisions go wrong because of this.

greed of "all the money" immobilizes them.
fear of "recovering that gone wealth" freezes them.

day trading is a guerilla war.
you don't go there with tents and bonfire!
you go there on a mission
do it
and get lost!

what a paradox
that amateur day-traders
fear losing money
and hence don't buy multiple lots
but still expect big money.

this leaves them with only one way
stay in the position for long....and this traps them.

day trading doesn't mean you have to be there all day!

it is not a 9 to 3 job dammit!

as i said earlier
it is like a visit to an atm
put in the debit card of indicator
key in the amount
wait for the machine to count
take the money before it re-enters the machine
hold it tight
and go!

6 passwords of day trading - II

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of wealth
here are the 6 passwords to open that vault.

--------------------------

password 2 = "write"

there is nothing right
nothing wrong
in day trading.

all morality, righteousness, should, would and could
are taken care of
and neutralized
within one minute
of the day's opening.

the gap up or gap down eats up
all pressure of the accumulated overnight developments.

the real drama starts thereafter.

95% of the day-trading money
is in the hands of just 2% of the players.

after the opening
a game is triggered by the "big pockets"
which seems to have nothing to do
with the weekly theme being played in the market.
despite the fact that it always stays within those boundaries.

afterall the smart money is not fool money!

i have seen that majority day-traders are trapped
and stay trapped
wondering why the obvious is not happening!!!

the rope of being right
gets them butchered.

they fail to see
that if 'the right' keeps happening
nobody makes money
as everyone knows what is right!

the should and could never would
in day trading!!!

what is happening is the reality.
what should happen is the trap!

don't be caught in the dilemma of right or wrong
be on the right side of the trend.

more and more day traders are opting for options.
they buy cheap options
written (sold) at unlimited "risk" by smart money.

smart money has the money power to control
accumulation and distribution game.

this is the reason
why the option (whether call or put) on the top of the traded-volume chart
is the wrong way for that time for that day.

if you are with the trend
then you are right
even when you are "wrong".

"right" is not right in day-trading
"write" is right.

stay with the trend.....whatever.
no if, no but.

6 passwords of day-trading - I

day trading is an enigma.
investing calls every new trader but none goes there first.
many never go there.
all come pulled towards day trading like hypnotised souls.

this write-up is for those souls
who want to live and die with their obsession
the day trading.

if day trading is a vault of wealth
here are the 6 passwords to open that vault.

--------------------------

password 1 = "light"

= day trading is the refuge of those who fear the night.
those who fear the darkness.
why i say so?
well, one day is just a part of the bigger picture being painted.
not all billions in the market are taken out every evening.
if that were so, nifty to crash to zero every evening!!!
markets don't fall like newton's apple.
they just yo-yo.

market moves in cycles.
there are cycles inside cycles inside cycles.
there are yearly cycles
with monthly cycles inside them
with weekly or fortnightly cycles inside them
with one or two day cycles inside them.

while majority money stays in outer cycles
mischievous money does play the one or two day cycle.
that is where a day trader should focus to have any chance
of making money in day trading
and that too consistently.

market is overwhelmingly packed with day traders.
beeing a day trader is itself a sign that
the trader has accepted the reality
that making big money and creating wealth in stock trading
is not for him or her.

he or she has consoled the self
to focus on daily earning of bread!

these day traders
treat every new day as a new puzzle to guess and crack.
they forget that the day is only a part of
the weekly or monthly puzzle being solved.

the only difference is
that the mischievous money
cause and use day trading volatility and unpredictability
to play catch-me-if-you-can trap game.

almost all day traders
get trapped in this.

if only the trader were to realise
that this mischievous money
has serious limitation
of staying within the outer puzzle boundaries
the trader will not run like scared lambs.

"light" of this knowledge
is must.

a day trader
whatever technicals or method or tricks or strategies he or she uses
must know
what theme is being played since last few days!

once this is clear and etched in your mind
the remaining passwords will help you win.


(to be continued)

why i prefer trading in bank nifty - III

futures are kitchen knives, options are coffee house dosa knives.


in the hands of professionals with sufficient buffer funds, futures is ok. how would a guy with 50 lacs in bank feel while taking a 3lac bank nifty position in futures? he will feel no blood pressure thumps when there is wild fluctuation. he can hold his position without any ado. he can freely test his technical ability by waiting to see the market turning in the direction of his analyses. (i am assuming that this rich guy is a mature one and has undergone sufficient training and knowledge and experience with his technicals). 


on the contrary, how will that guy feel if he has just 5000 in bank account and has already committed 25000 with the broker to take a 3lac position in bank nifty futures? he can stay liquid only for 200 points adverse move. he will be like a bird that will be the first to fly at the clap of the operator. 

futures move faster than options. to counter this, one can buy multiple option lots.

future has little time decay threat. out-of-money options has big threat of this.

if the market was to remain tight range bound for some days an option holder may get dissolved in the coffee cup of the option writer.

on the other hand, playing options is like trying circus with safety net.
options are gun-against-ones-own-temple if one does not know technicals. otherwise it is the most rewarding unfair advantage in the world.

safetywise, futures trading is like bungy jumping without the rope - hoping that the parachute of technicals opens in time.
and ninty percent of the time, amateur traders forget to pack in this parachute before jumping.

why i prefer trading in bank nifty - II

a 10 rupee out-of-money option can attain 270 value on 1000 move in bank nifty in a month.

this happens 8 times in 12 months on an average.

for 500 point move, it becomes 70.

any new comer can afford a risk of 2000 bucks (including costs) for a 10rupee option.
accuracy of his or her technical ability will be tested to the full.
this will either reward new traders exremely handsomely or will expose them to themselves regarding the gap in their technical learning.

this is the best and wise way to step into trading world rather than blowing away money and peace of mind and future.

pity that some traders focus on size or extent of dare of the trade instead of focusing of technique. no amount of smartness or money power can make up for the deficiency of technicals.

why i prefer trading in bank nifty

earlier i was fan of trading in nifty.
i still am.
but recently
i have developed an affinity of trading in bank nifty.
below i share some of the reasons for the same.
movement
8 out of 12 months it gives a swing of 1000 points per month.
12 out of 12 months it gives a swing of 500+ points (intra-month)
(this is much more than in nifty)
options
options are available and have reasonably good liquidity.
(trading in futures has severe limitations)
"true" movement
since this is an index and not one stock, it has "true" movement as indicated by indicators unlike stocks where technicals are often bulldozed by various factors.
-
all you need to do is, try and time the highest or lowest point with indicator combination and with combination of charts of different time periods.
-
i strongly suggest trading in bank nifty (instead of stocks or nifty) with call options (instead of futures) for new comers who have achieved reasonable proficiency in atleast two technical indicators.

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!!!

is trading magic for mass traders?

the stock market world
is full of experts
and their clients.

those not lucky enough
to have a "god father analyst"
are half experts themselves.

rest all
are either devotees of powerful gods
or lucky guys.

when all are out there to win
who will lose?

and since trading is an almost zero sum game
the absence of losers
or the presence of difficult losers
will create a stalemate.

somebody has to lose
for somebody to be a winner!

a stalemate is deathwish for the market.

and since the market is not only alive
but kicking
and kicking hard
the losers have to be there.

and fortunately
there are losers
enough of them to make trading worth
for the pro-winners!

going by the statistics available
the number of losers are atleast 20 times
the number of winners.

this is a big skew
in the favour of winners
in the world full of experts and difficult losers!

how does this happen?

simple,
the minority winners
have money and tricks
to beat everyone else.

what if the losers too join hands
and come up with money and tricks?

there will be an underground invisible fight.

the habitual, compulsive and smart winners
will again come out with
amazingly cunning ways
to beat the losers again!

the ways of the professional winners
are magical.

and like magic
pro-winners don't let the audience have even a clue
of what really is happening.

as clarke's third law says
"any sufficiently advanced technology is indistinguishable from magic."

the trading game has always been won by magicians
and will always be.

no amount of technical knowledge can make you a winner
if you are not on the side of the winner.