Monday, June 15, 2009

Disciplined trading : Do exceptions prove the rule

Pi asks:
a. while looking at levels or charts, should one look at spot levels or futures levels. quite often they would be in tandem, but not so at time. i mean what is the technical analysis theoretical view on this.

My notes:
Always look at the spot levels when doing analysis. If you trade futures, then use the futures levels when determining actual entry and exit signals. As an example: today, June 15, my Nifty end of day chart has given a cycle turning signal suggesting that the up trend may be changing into a correction / consolidation. Now, attempts to go short / buy on dips / sell on rallies, will be made with 60 minute futures charts.

There is one more question:
b. if one is trading a quant system, is 100% discipline must or can one in limited circumstances use one's discretion based on levels or charts or market conditions? If so, when ?for example in a trend following system i was long on friday, but having seen that mkt reversed twice earlier frm arnd here i booked and took a short. that infact was a deviation from my quant system, but a very good call to take. later in the day the system itself turned short.

My Notes:
The correct answer should be: Man's brain is still superior to the machine. Your perception of external conditions will usually be superior to the system, as you found out now and probably many times again. The problem lies elsewhere. Suppose, you exited and then the trend reasserted itself. Then the trend picked up and the system went on to make a 200 point profit. Remorse and decision regret will take over. Worse, if you went against the system signal, now you find yourself losing while your system is (theoritically) making money. Now, how do you get out? Believe me, when I override my system, 8 out of 10 times my sense is correct. The other 2 times, literally kill my performance compared to the systems.
Therefore, let your system trades be. Take an independent discretionary trade. Apply exit rules and trade it seperately. Those 2 out of 10 times, you will hav the courage to take a loss and get out becuase you know that your system trade is making up. This is what I do.

Rishi asks:

If I buy 500 BEEs @ 460 = 230000/- &
SellJul 4600 Call @ 255/-
Case 1 if nifty closes at 4600 on ExpProfit/Loss = ?
Case 2 if nifty closes at 4800 on Exp Profit/Loss = ?
Case 3 if nifty closes at 4400 on Exp Profit/Loss = ?
Of-course wot will be Break-Even-Point (BEP) (BEP) (BEP) (BEP)?

My notes: many readers here will be very good at these calculations. if I get it wrong, please leave a comment.
case 1: nifty closes at 4600. You make 255 points.
case 2: if nifty closes at 4800. You will still make 255 points. (Surprise!)
Case 3: if nifty closes at 4400. You will make 55 points.
Break even point in all scenarios emains the same: 4345
Now I can suggest one more possibility. What happens if the Nifty closes at 3800? Think about it.


Ashish said...


Global market correction has started. Time to fill in the gaps..


Sanjeev said...

Discipline override all the worries. So, Never override this rule while trading.

devesh dikshit said...

dear sir i have cap of around 3 lk and i want two trade in nifty futures so what should be my voloume should i trade 10 lots in intraday

gurvi said...

My predictions:-
Market will see the new HIGH in next 2 i'm looooong in this market. I'm buying on dips.

Scunge said...


I have a question related to discipline in trading.

Suppose I have a trade which drops after I enter, and it reaches my stop-loss but is still giving a "Buy" signal under my trading system.

With discipline I will then sell, but then should immediately buy back in (since there is a "Buy" signal!). However, if I save the sell-and-rebuy trading costs and simply hold instead, I am risking more of my capital than the stop-loss intended and so what's the point of having the stop-loss in the first place?

So I have a contradiction and am unsure how to best handle this situation.

My question is thus: in this case do you abandon your discipline by overriding your stop-loss signal and holding (up to what point?), or do you sell as per the system and so at which signal would you start considering buying back in?

Many thanks for an informative blog.

Krishna said...

Trading = "Vyopar"
Trade = "Sauda"
Stock Market = Bazar

No more skill than to run a grocery shop is required to handle the stk mkt..because it is also a "vyopar" & "intelligent guess" is still the tool used to make decisions…. And it is just like a shopkeeper using his experience for managing his shop. His knowledge about local mkt & the right choice of item (sector) in demand makes his business profitable.
Logic of "BUY at low & SELL at high" holds good in all it stk mkt or be it a small shop....!!

During the inflation shopkeeper wud buy at high & sell at even higher and this wud require him to arrange for bigger working capital for earning almost same profit….similarly when nifty moves up we require bigger capital to earn almost same percentage of return…

I am serious…just think with a cool mind…trading in stk mkt is nothing different in concept than running a grocery shop..
So those who can run a grocery shop can perhaps handle stk mkt also…true or not…I dont know..!!