Do one thing and do it well

From CrossHairs Trader

Excerpts from the book, Hedge Fund Market Wizards:

Schwager:  You have seen a lot of traders.  What are the characteristics of traders who succeed?

Clark: They all work hard. Nearly all the successful traders I know are one-trick ponies.  They do one thing, and they do it very well.  When they stray from that single focus, it often ends in disaster.  In the hedge fund world, you will see traders who do one thing very well, make a lot of money at it, and then think, This one thing is very boring. I can do other things because I am a genius. So they start doing other things.  You had a number of great macro traders decide to branch into multistrategy funds.  It didn’t work too well in 2008 when they were all exposed.  One well-known macro trader wrote to his investors in 2008 that he had made them money, but it was the other managers in the fund, trading an assortment of strategies, who lost all the money.

Lessons in Humility

The Market is a great teacher. As soon as a trader develops a sense of over confidence, Mr Market comes and puts the trader in his/her place.

Silver broke out of a trading range yesterday, giving a buy at 54785. I went long, then added to this position when Silver dipped to 54300. Then, in the evening, Silver broke out above its resistance at 54860. So, I added some more. I felt that the breakout in Silver is finally at hand. This is likely to be a profitable trade - which is what came to my mind.

Pleased with my trading skills, I went for my evening walk. I do not take any trades (entries or exits) after 9 PM. At 9.30 PM, I switched on the screen just to find out how much money I was making. Silver was at 54000.

As I said in the post heading, every day in the market is a lesson in humility.

The Wall of Worry

Adapted from A Dash of Insight

Selected Quote:

Investors, business leaders, economists - Most of them feel more confident about their personal circumstances, but they are worried about everything else.  When it comes to the stock market, the fear is palpable.

The single biggest source of investor profit relates to evaluating what many call "market fundamentals" and others call "headwinds."

Readers should note that worries and headwinds are not quantified.  Anyone can deal in words and anecdotes.  It requires some expertise to include data.  Those of us who have been data-driven have beaten the anecdotal crew by a wide margin.

If you are an investor who is not mesmerized by fear, you will be able to join me in doing two things:

1. Finding stocks that  have strong anticipated earnings and cash flow.
2. Finding stocks with strong dividend yield.

The Wall of Worry is a difficult concept to explain, and even tougher to appreciate in real time.  The daily stories seem so tangible --- often augmented with TV video.

UnQuote

My Notes:

Investors who can identify the wall of worry should make above average profits buying when everyone is 'worried' with shares available at below normal prices.

Are we in India currently facing such a wall? Technical Traders like me, base our buy and sell decisions on hard, tangible charts and not on 'what I think may happen'. As of now, long term charts are NOT bearish. This may change, but I am describing the current scenario.

The Nifty gets a breakout

After remaining in a narrow range for 11 trading days, the Nifty finally broke out from the 4950 resistance. The pattern targets for this up move are 5100 approximately. Only the markets can determine if the Index will reach these targets, but, as traders, our job is to follow our setups. My trade was to go long on a breakout. I anticipated this breakout by actually going long in the Nifty on Friday itself. The position was disclosed on CNBC-TV18 at 2.30 PM on Friday, when Udayan asked me about my Nifty views and positions, if any. It was repeated today morning at 8.20 AM.

Readers can ask this question: Is it wise to anticipate a breakout and take an advance position?

The answer is: No. Never anticipate a breakout / breakdown. Let the market first tell us where it wants to go.

In all fairness, the second question should be: why did I take the trade? Well, I have been trading for many years, I have the discipline to correct myself if I go wrong. And, the rounding lows pattern being made in the Nifty after a decline of 800 points did suggest that the Index would move above 4950 resistance.

What I am reading this weekend

Citi's Panic-Euphoria model predicts stocks gains

This model suggests there is a 90 percent probability that stocks are up in six months and 96 percent probability that they are up after twelve months.

My Notes: While the report refers to U.S. stocks, I assume there will be a ripple effect all over the world. Also, even 90 percent is quite good odds.

11 brilliant investment insights

My Notes: Of these 11, number three says "Read, read, read....". Here is a quote: "I have said that in my whole life, I have known no wise person, over a broad subject matter who didn’t read all the time – none, zero."

My Notes: Reading is life. I do not know what I would have done without the written word! Please read all the eleven, make it compulsory reading this weekend.

A view on the Nifty

The Index may have made a short term low at 4788. A rally from this low is not an immediate requirement.

Index may chop around for some days or even weeks, although I would expect a test of the 5050 resistance levels before long, and, chopping around after this test.

IF the low holds at 4788, then the Nifty may be setting up for a decent pre-diwali rally.

Exiting a Profitable Trade

From The Stock Sage

Another problem that regularly comes about for a trader is to follow the plan through to the end and allow a winning trade to fully work in ones favor. Jeff Gundlach was on Bloomberg this morning and was asked an excellent question by Tom Keene:

Keene: (On Gundlach’s call to go 100x short $AAPL and long natural gas $NG_F which is +24% since he proposed it) “How do you get out of a trade like that? When does Jeff Gundlach know when to exit a successful trade?”

Gundlach: “The biggest mistake that investors make when they’re in a winning trade is to get out too soon…”

This is absolutely 100% true. What makes investors get out of a winning trade too soon?

#1. Fear of losing the profit

#2. Psychological need to be right, taking the profit satisfies a deep-seated intellectual need to be “right” even though it may end up being the wrong thing to do

#3. Paying attention to some extraneous new piece of information that may or may not be material to ones trading plan

The Bullish case for new highs

New Highs are bullish. This very simple rule can enable traders to take many profitable trades (go long at new highs) and also avoid losses (never short when prices are making these highs).

On Thursday, the Nifty drifted down. Then around 11 AM, Nifty futures crossed 4843 which was the day's high till then. Remember, new highs are bullish. So we went long at 4843. In just an hour Futures were touching 4900 which was out target. Wow! Great trade.

Do all new highs succeed? The answer is a categorical NO. I think 2 out of 3 new highs will pullback, often act as tops. The one that succeeds compensates for the failures.

What happens when we buy new highs? We are going with market flow. That is always a good idea.

Risk and Reward

On Tuesday, I had taken a breakdown in the Nifty which I discussed in this post.

The trade was to go short and cover at 4820 which was a pattern target. Since the market was closing, we exited at 4830.

A question was asked: why did we exit if the market remained weak. We should have carried the position overnight.

Here is my answer:

First, consider my rules. The rules have a profit target. We must follow our rules honestly.
Second, I could have waited for the next day since my target of 4820 was not achieved. To obtain another 10 points of rewards (4830 minus 4820) I was likely to incur significantly higher risk. The risk reward ratio was quite unfavorable.
Third, It is my perception hat we are entering a choppy market. If this is so, we will see lower close and higher open, then higher close and lower open. For this reason, it is best to trade with care.

Trend Day today

Today was a trend day, the Nifty broek its 15 minute low at 4925, never went up to cross the 15 minute high. By the end of the day, it was giving a gain of 90 points.I had a bullish bias in the morning, so I did not take the opening range trade  - (my mistake - when we do not follow the market, we lose out). Then, towards mid-day, 60 minute futures chart suggested a breakdown from a trading range. We closed our long positions, went short and then covered towards the end of the day. Chart below:

Is the Market bottoming out?

Just two days ago, on Friday May 18, the Nifty made an intra day low at 4789. The Index has bounced back to close at 4906 today, Monday. A 110 point gain from the lows is a sign that at least some of the selling momentum is waning.

At 4789, the Nifty also entered a strong support zone between 4700 and 4800. This gives some reason yo assume that the Index may have made a low at 4788. This low may be the final low in a correction that started from 5630. OR, it may just be a support point in a developing trading range. And, the possibility exists that the low may not hold at all.

Assuming that the low holds for now, the interesting question will be: Is the decline over? The Nifty should begin to make a pattern of higher highs for us to start thinking of a rally. The first step should be to look for a close above 5040 which is a minor high made earlier. If the Nifty does this, we will begin to evaluate the trend of the market with a bullish bias. Till, then assume the market is sideways.

Making the same mistake, twice

Trading is mainly a mind game. Traders often make a mistake, then tell themselves - how could I have been foolish to have done such a thing. I will never do such and such, again.

Traders will take thousands of trades over their trading life cycle. It is quite likely that many trades will be mistakes of some kind, and,some of these mistakes will occur again and again. Why worry about it?

In the book, 'Market Mind Games', the author says "Knowing, not controlling, your emotions can be your secret weapon'. She says that our mathematical approach gives us a natural desire to be correct, causing discomfort when we realize we have made a mistake. There is no need to 'control' our mistakes. We just need to be aware of them. Once, the trader is aware that he has strayed from his chosen path, his mind will slowly bring him back to the road. A deliberate attempt to control our emotions may be counter-productive. Just be aware of your emotions.

My Notes: If this is a bit difficult to read, do not worry. Read it again.

Traders guide to being contended

‘He who is contented is rich.’ ~Lao Tzu

 ‘Be content with what you have; rejoice in the way things are. When you realize there is nothing lacking, the whole world belongs to you.’ ~Lao Tzu

(taken from Zen Habits )

Traders probably trade well when they have a feeling of contentment. Much of our trading problems come because we have this fear of missing out, of exiting too early or too late, of not having taken a trade or having taken a trade that we are stuck with.

So much better for us traders if we accept that all we have to do is follow our rules, that the discipline is enough and we are not missing out if we do what we should be doing.

Nifty has a reversal day

The Nifty had a bullish reversal day, today (Friday, May 18). The Index opened with a down gap, moved lower, then rallied to close the gap and actually close higher than yesterday. Chart for the Nifty is given below.
Bullish Reversal days suggest at least a short term up move may be coming.
But, the reality of the market is different.
In the chart below I have marked two earlier bullish reversal days at A and B which did not have any bullish follow through. The pattern by itself (without further context) has limited forecasting ability. Today's reversal may well have some follow through because the Nifty is deeply oversold.

Here is the Nifty chart.

 

Sesa Goa - Base building?

This blog does not discuss individual stocks because the purpose of the blog is to focus on the Indian stock markets and principles of technical trading.

Yet, a few days ago I discussed the CIPLA chart which had a potential bullish head and shoulder. Today, I am writing about Sesa Goa, another stock with potentially bullish patterns. Probably just a coincidence.

Here is the daily chart for Sesa Goa which shows a potentially bullish head and shoulder pattern. There are any number of ways in which chart patterns can be traded. Readers should consider the method that suits them best.

 

The chart shows the two shoulders and the head are complete. A breakout above the neckline at 195 should give a target of 216 approx. A stop needs to be placed below the low of the latest bar - 180. For me, this stop is too wide, so I would place it at 188, which is the mid point of the latest bar.

Can the Nifty decline to 4500?

In December 11, the Nifty fell to 4531. A remarkable rally started which took the Index to 5630 before a decline has taken the Index down to 4858. This is the story, so far.

The Nifty has been exhibiting strong momentum on the downside. Given this momentum, and, the complete absence of buyers, it is possible that the Nifty may slide down to the earlier low of 4531?

Readers should know that such questions do not have any 'yes' or 'no' answers. There remains a strong probability that the Nifty may go down to test the earlier lows. Thus, traders should be mentally prepared to see the Nifty go down towards 4530. Maybe this will not happen, but, then again, it may. So, be prepared, strengthen yourself psychologically for this event.

Cipla - bullish possibilities

The daily chart for CIPLA shows a bullish nead and shoulder under process. The pattern gets confirmed if prices close above 330 neckline. There must be many other ways to trade this setup - in anticipation of breakout, on a dip after the breakout, with options, and so on.

Here is the chart:

Given the down trend in the Nifty, I would wait for a close above 330, a rally,  then a pullback to take a long position. But, I am sure that many other strategies are possible. I request readers to provide their own strategies to trade the setup in the comments section.

U.S. Markets confirm Major Tops

Peter Brandt, says in his post here, the NYSE composite Index as well as the Russell 2000 have confirmed bearish head and shoulder patterns.

Please read his post for full details. I am giving below the chart for the NYSE composite taken from his blog post.

Nifty remains in a down trend

I turned bearish when the Nifty broke below 5300. A pattern target for the decline was given at 5050. Since then, the Nifty has touched 5050, and fallen more, currently trading at 4900.

The trend is down. Traders MUST trade with the trend. The bigger picture for the Nifty remains difficult for the bulls. The up move from 4500 to 5630 had a 61.8% retracement at 4950. That support has broken down. Once we see a trend retracing by more than 61.8%, doubts arise if the retracement is a pullback or it is a new move.

So far, the downside momentum is strong. Except for one day, the day to day trading has been dominated by sellers. I will not call them bears because we do not know if the sellers were exiting or creating short positions. But, they have been selling.

How will the down trend end? The Nifty will find support, then chop around the support level, then test the support. After a successful test, the markets will begin to rally on some days. This will create bullish reversal patterns. All of this will take time. And, remember, it has not even started.

Can the Nifty fall to 4500 or even 4000?

Well, yes. This is a market. Anything can happen here. I am not looking at downside targets, as of now. Just following the momentum, which remains down.

Have Fun!

Active Investing - Part 2

This is the second and concluding part of my notes on investing. The first part was published here

My own observations over the years are summarised below:

-->It is not possible to identify multi baggers in advance.

--> Investors can identify themes and invest prudently in shares of such theme businesses. Here also, there will be significant danger of the theme falling apart. Therefore, prudent investing requires investing only small portions of the capital in any given theme. These theme stocks will not be multibaggers. The expectation is that they will be market outperformers. Examples of such themes have been: PSU Banks, Mid Cap IT, Large Cap Pharma. Themes that may emerge in the coming months include Capital Goods, Mid Cap Pharma.
All such themes require an exit strategy. Investors cannot buy and forget.
Such investments are in fact Position Trades.

--> To obtain gains from the market, the wise course of action is to invest in Index Funds. Investors who buy Nifty, Bank Nifty and CNX IT through Index Mutual Funds are likely to get a significant advantage over investors who try to buy individual stocks.

--> Investors should consider trading in stocks and investing in index funds.

Infosys in the year 1994

A favorite example given by colleagues from the fundamental analysis area is Infosys. They tell us - "if you had bought Infosys in 1994, see how much you would have gained! This is the reason you should always stay invested in stocks".

I have many problems with this analysis.

--> This statement assumes Investors 'knew' in 1994 that Infosys will become a multi bagger.

--> For One Infosys that became a multi bagger there were 500 stocks that did nothing or even vanished. Given to choose between 501 stocks to invest, Investors would discard 500 and select the only one that moved up.

--> The analysis is history. Suppose you did not buy Infosys in 1994. Now what? Does this mean this one mistake has closed all doors for investing in the future?

--> Together with Infosys, there were many other IT stocks that promised a great future. Two of these were Pentamedia(delisted, share price became almost zero) and Satyam (share price is much lower than original investment). What was the reason to choose Infosys and not satyam?

--> The key question is: what should the investor do now. This question remains unanswered except for a general idea to remain invested in stocks.

--> Not all stocks give returns. Even top quality stocks can remain flat for years. Hindalco was 110 in 1994, still is 110 after 18  years. (Prices are adjusted for bonus etc,.. We are comparing apples with apples). Hind Unilever remained in a trading range for 10 years. How can the investor say: this is a good quality stock but it is not going to go anywhere, while this will be a multibagger.

--> It assumes that multi baggers can be forecast in advance.

--> It also implies that the listener is probably a fool if he did not identify multi baggers and buy them. Well, I must be a fool, then.

Reader comments are welcome. This is the first part of my views on investing. A second, concluding part will follow.

Srinagar Investor Camp

In my account at Google+, I have posted some pictures of me at Srinagar. The camp starts today. Have a look.

Edit on 13/5: Go to google. Search for 'Google+ Sudarshan Sukhani'. You will get my google plus page at the top of the search results. Browse to this page, and, search around. Cheers.

Nifty at a Fibonacci Support level

The Nifty is at a significant Fibonacci support level - 4950. This number represents the 61.8% retracement of the up move from 4500 to 5630.

Now, I am not a big fan of Fibonacci retracements. Markets move on momentum. Why should a market stop falling when it comes to 61.8% of the previous up move? Prices fall when buyers do not buy. So, buyers will not step in to buy  just because the price has fallen 61.8%.

But, Fibonacci retracements are followed by many traders. Elliot Wave users swear by it. So, we keep a watch when a significant level comes about. At 4950, then, the Nifty is at a stop or fall situation. If the Fibonacci support holds, then this is the low. If it does not, then we are probably looking at a free fall.

We will have to wait for market action to tell us if the support holds or is breaking down. So, it comes back to momentum, doesn't it?

excerpts from book - Market Mind Games

Reality points to a very big gap between where the numbers leave off annd exceptional performance begins !

Logically , if you have a probability that you know will only apply for a limited period of time annd by definition that probability tells you that you have some signigicant chance of being wrong, even while it still applies, how much do you really know?

The truth is : PROBABILITIES TELL US SOMETHING  - JUST not everything.

Market performance emerges form owning the need to always be improving our judgment

We can't actually apply math or logic, let alone do other analyses, make judgments, or decisions, if we lack feeling annd emotion.

In fact, the only true thing we have to fear, at least when it comes to decision about uncertainty, is a complete lack of fear.

No matter how you analyze a market or a trade, noo matter what your timeframe, the only "thing" you are ever trying to deduce is if other market players will value the asset in question differently in the future.
Every single price at every single moment now and fowever will be only a perception nothing more and nothing less.

If the real question is , "What will other player's perceive in the future?" then quantitative analyses make sense in their right context - as clues but not as answers.

From the Book - Market Mind Games'

Scope for judgement in Trading

From Trader Psyches:

Hopefully this doesn't sound like an old broken record because it feels to me like I need to say it again.

Trading is not precise.

And this begets a whole number of downstream realities.

1. Your brain demands a judgment call in imprecision.

2. Your plan needs to leave room to make that best judgment call.

3. Improving your results comes from making better judgment calls.

4. Avoiding just your worst judgment calls (no "oh what the hec, oh I will just risk a little" trades) will make a big difference in your bottom line. The fallout is too great - lost capital, debited psych capital, revenge trades, wasted commission and lost time spent in mental recovery.

My Notes: Trader Psyches is a company offering psychological coaching to traders, based in the USA. Denise Shull, promoter of Trader Psyches has recently written a book on trading psychology - Market Mind Games. I am reading it.

The theme is: trading requires discretion. These decisions are judgement calls on current market behavior. This is similar to what I have practiced for some years:  to have a view on the market every day, for day trades. I make a judgement call on likely market behavior, before the markets open. Most readers know this since I discuss the call on CNBC every morning, pre-market. This makes it easy for me to use mechanical methods to trade during the day, since I know which side of the market / with what anticipation, I am trading.

BHEL is at 2008 Lows

Even amidst the carnage that we are witnessing in the stock market, BHEL stands out as an exceptional disaster. BHEL, one of India's best public sector companies is now trading at the 2008 bear market lows. In 2008, the Nifty had touched a low of 2200. Currently, it is around 5000. While the Nifty is much above its bear market lows, BHEL at 215 is almost close to its 2008 low of 197.

True, there are other large stocks which have actually broken their 2008 lows - RCom, RPower, Reliance Capital, but they cannot be compared with BHEL. BHEL represents India's manufacturing abilities, a Navratna, the finest PSU.

Like the country, I am also going through these mood swings. There was the India shining period, then recession, then Bull market tops, then big sub prime declines then optimism, and now again - a sense of despondency - where are we going?

Please remember that my mood swings do not affect the market. We analyze the markets without emotion, using technical methods, but still...

Markets in Decline

I have been bearish on the Nifty when it broke below 5300. A target of 5000 was set for the decline. On Monday, May 7, the Nifty fell to hit 5000. After a brief one day rally, the decline has resumed.

As I write this, world markets are falling. Suddenly, 'Risk Off' is the new buzz word. Not just equities, we have the precious metals also in a decline. And, commodities, with Brent Crude falling from 128 to 112.

Markets are in Decline.

This could be a deep correction, which is the most likely scenario. A correction of the up move from 4500 to 5600.

The less likely scenario is this: The rally from 4500 to 5600 was a correction in an ongoing bear market which started in November 2010 with the Nifty topping out at 6330. Now, with a descending triangle marking an intermediate top in the Nifty and Bank Nifty, the bear market has resumed.

There is no way to ascertain which of the scenarios will work out. What we should do is to follow the momentum. That momentum is down. So, stay short, avoid buying in such free falls.

Trading your Plan

Today morning, on CNBC (as well as in this blog!), I had given our trading plan for the Nifty. We were short, and, planned to close our short positions when the market opened. The reason was an expected gap down in our favor. When markets give a favorable Range Expansion (RE) in our favor, our trading plan says that we should exit.

Now, Markets do what they want to do. Just because I close my short positions , the market will not stop going down. But, my plan is to exit, so I should exit. As luck would have it, Markets opened at the lows and then rallied to close almost a 100 points higher. They could easily have done the opposite. But, my exit in the morning would still be the correct action because I was following my plan.

Nifty 5000

Over the past two weeks, I have been suggesting a downside target of 5000 in the Nifty. This is not rocket science, technical traders should have identified bearish patterns, trading range breakdowns and come to similar targets.

Given the bearish mood in international markets, together with Indications by the SGX Nifty, a decline of 80 points from Friday's close of 5080 is likely, bringing the Nifty to 5000.

The first time we touched 5000 in the Nifty was in September 2007. Time flies, but the Market did not.

I expect some support to come in at 5000 levels. Then, the market has to take a call on the next move, it could easily be towards 4800 or so.

80% of our short positions were closed around Nifty futures at 5100. The balance 20% are likely to be closed some time today. When we have range expansion (unusually large moves in our favor), as traders, we take profits and wait for new patterns.

Identifying a Low

Extracts from Alan Farley's book - The Swing Traders Toolkit

In a downtrend, the sequence of lower lows will finally end when price forms a higher low. The higher low could also be a double bottom.

Downtrends oftern accelerate as a series of lower lows prints on a bar chart. The trading crowd notices and  expects the fall to continue unabated. Then suddenly the last low appers to hold. The crowd takes notice and bottom fishers slowly enter new positions. Apparent price stability triggers more players to recognize the potentatial pattern and jump in. 

Being right at a bottom can produce the highest profit for any trade. But picking bottoms can be a very dangerous game. Swing traders must weigh all evidence at their desposal before taking the leap annd exercise strict risk discipline to ensure a safe exit if proven wrong. Losses must be taken immediately upon violation of the prior low.

Manage risk defensively - bottoms occur in downtrends.

Gold Moving to new highs

Kuldeep.rk asks:

"I am of the opinion that GOLD is breaking out the resistence line ( upper trangle line ) on daily / weekly charts. Have initiated initial long positions today. Can you check n confirm whether my observation is correct?"

Kuldeep is correct in identifying a breakout on the weekly Gold chart. There are two patterns - an ascending triangle and a rectangle consolidation. Here is the weekly chart, showing the rectangle, which I am tracking, and, my own trading plan.