Learnings from Trading Course

Some observations from my trading course conducted successfully.

1. Two participants having good educational background attended the course.
   
2. I am really pleased to have them as co-learners. We enjoyed mutual sharing of knowledge.
3. One participant who traded forex has very good feel for charts and Elliot wave, Fib retracements. This has shown me the importance of trading niche and individual style. Another participant has feel for Correlation trading.
4. I enjoyed interacting with them and we could observe the market real time making good inferences.
5. Another point that came to the fore in my discussions is individual risk tolerance levels.
   

Index Futures Trading by Newton Linchen

Insightful observations as usual by my friend and SpecList Author
Newton Linchen. I take liberty to post here.

Dear Professor,Namastê.Honoured to be mentioned in your post.
About your question: it is - at least in Brazil - for the retail trader to perform well in such arena of index futures.First of all, there is the "easy" path of the mini contracts, ideal for the undercapitalized trading as well for to put some new ideas to work in the markets with low exposure.
When you go to the "big" contracts, you can count on the institutional hedgers and arbitrageurs as LIQUIDITY PROVIDERS, (Market Microestructure - an idea from "Trading and Exchanges".All "mean reversion" traders, all arbitrageurs, all "pairs trading" traders will act as liquidity providers for the DIRECTIONAL TRADER.I myself am a directional trader. Always been, and perhaps always will be.
What one must understand, however, is that index futures may contain more intraday noise, but, as a good side effect, it is more influenced by international environment (such as Gold and Bonds trading), wich makes it easier to trade in the context of a CORRELATION STRATEGY.And, as a benefit, the LEVERAGE acts to smooth VIG and SLIPPAGE.
Regards
Newton Linchen
October 25, 2009 4:42 AM

Newton Linchen on Insider Trading

Newton Linchen had read my mind. Recently I am toying with the idea of shifting to Index futures. Trading in individual stocks I may be at a disadvantage due to informational asymmetry. Company managements are accessible 24/7 to large funds. I have witnessed how the inner circle operates when I am a sell side analyst in a brokerage firm. The only hesitation in my mind of the suitability of Index futures to a retail , independent trader is Institutional activity in Index futures for purposes of hedging and arbitrage. Is it possible to a retail trader who is doing predominantly directional trading not to be overwhelmed by the Basis ( discount / premium to the spot index). Does the independent trader has the necessary skills to combine it with Index options for proper hedging. Where as apparently it seems individual stocks show a clean trend ( sometimes!)

Insider trading is what made me turn my trading activity to index futures and to market microstructure. I don't depend on large moves to make money. I really don't care were the car is going - and what car is, who is the driver, etc - for I'm trading on its mechanics, it's engine, it's structure.

For example, my day target is 30% of the day's bar range. Achievable and reliable.

Regards from Brazil!

Newton Paulo Linchen

Notes on Insider trading

These are further observations on Insider trading.

1. In depth post on Insider Trading


2. I held a view earlier that Insider trading improves price discovery and infact compiled an article for Analyst magazine of ICFAI way back in 1996.


3. Now I lean toward Prof . Gordon Haave's point of losing an edge to insiders.


4. Insider trading is so rampant and considered as common place like corruption in Markets like India, many market players are not surprised about it.


5. Average players should take care not to foray beyond well covered stocks ( Nifty Junior), where there may be risk of Insider trading and pump and dump schemes.


6. I have seen traders taking pride on their inside info and connections to operators in a stock as their edge and source of folowership.


7. Retail traders I discuss with cannot digest the futility of trying to gain inside info and the wisdom of concentrating on liquid and index stocks basing their views on market generated data.


8. Rampant trading by promoters of small companies through fronts and benami names are not considered as a surprise in emerging markets like India.


9. Broker-Promoter nexus before fund raising, creeping acquisitions,major corporate announcements,squeezes are well documented in India.
   

Identifying Significant Price Levels

One of the challenges faced by beginning or junior traders approaching the market is identifying significant price levels. These levels give a reference frame to understand price action. When I started to trade I am unable to place market movement in a framework and make sense out of it .However tentative it may be it provides a discipline and allow the trader emotional control.

1. As I gained more experience and paid the market for the tution and education I found more resources which helped me to find the reference points.


2. Following Dr Brett , I reduced the data visible on my screen to Open, ATP, %Chg, Volume. I am trying to focus more on PDH and PDL rather than day high and day low .


3. VFMDIRECT is another resource to identify significant levels like PIVOT POINTS, R1,R2 and S1,S2. Moving averages are also given.
4. JustNifty gives lot of data to understand price action for Nifty. These levels and their explanation puts into perspective the apparently random movement of the market.
5. ICharts is another good resource for various screeners and price levels. When I chat with traders they repeatedly assume and express their feelings without reference to objective levels or data points. I may feel the market is gioing down or up but unless data ( MAs, Trendlines, Sector strength etc) coorobarates my view I am simply hallucinating and acting randomly.
6. My inspiration for this post comes from the God of Modern Trading Psychology
7. The concept of hard vs Soft levels in trading using volume traded at that level at SMB Capital. I think experienced traders distinguish betwwen levels like a shepherd distinguishes between each of his sheep where as for an external observer all sheep are alike.
8. Round numbers also provide mangnetic attraction. Watch round number 5000 on Nifty and stocks like HDIL at 400. More on round numbers from my friend and DailySpec member and author .
   

Insider Trading and Research

For a brief period I have worked as a Equity Research analyst in the sell side for a Brokerage House. Some of my Observations are

1. This is relevant in the context of allegations of insider trading by Galleon Hedge fund managed by Raj Rajaratnam.


2. Information is the most precious commodity in Dalal Street or Wall street.


3. Infact Satyajit Das mentions in his interesting book " Traders , Guns and Money " how Brokers at BSE wonder about maing money without previeliged information.


4. In my experience what is most important for the analyst is his contacts with company managers and excutives. Networking abilities were found to be more in demand than analytical abilities.


5. Because only incremental information affects the stock prices what is not discounted is valuable to the analyst.
   

Educational programs for Traders

I am working on putting together a training program for active traders in Hyderabad.

1. My inspiration for educational program for traders here from Dr Brett
2. I wanted to integrate real time reasoning in the market rather than power point presentation.

"This is enough for a technician to say: “See? This setup works!” (I always wondered how can technicians give training courses using – at least in Brazil – only Power Point presentations… I.e. only selected material!)

(In our training program, we don’t use Power Point – we use the real chart software – so the student can see by himself other data than the “selected”.)

So, it’s always easy to collect anedoctal evidence to support any trading idea."

- Newton Linchen

3. Ongoing dialogue and discussion between the trader and trainer is one important component in the educational program.

4. Dr Brett on structured trading curriculum

5. How to find the best Teacher by SMB Capital

Monday's Trade in OFSS

Some of my notes regarding my trading on Monday 12thOctober

1. I had a Nifty Short position carried over the weekend on the premise of weakening breadth and sectoral weakness. My stop loss was hit at 4970 which is around friday's ATP
2. I had entertained a view of strong market above 5020 which is PDH
3. Breadth measure ( A-D) were strong from the open.
4. I had entered an impulsive trade in the open seeing softness in OFSS at 2090 . My execution is poor as I had to put my trades through phone . Opening session speed and volatility need to be taken care where slippage is hurting me.
5. Stopped out at 2150. Saving grace is only one fourth of my trade size. OFSS hit a day high of 2198. Seeing the broad market strength I hesitated to take a trade till 12 am.
   
6. OFSS continued to slowdown and traded below ATP around 1255. My idea here is that stock made a high for the day and showing that it cannot make a higher high. Naive contrarian traders ( Me included) trying to sell previousday's 7% move were squeezed out.
7. This morning high can give a reasonable stop and typically market makes Dayhigh / low in the first hour and highs or lows made in the afternoon tend to sustain in the last hour in the same direction on an average.
8. As the Vol of the stock is high ( High-Low range of 110 or 5%) I had kept a SL of 2165. Entertaining the idea that ATP should not be taken out and Volumes were high only in the morning.
9. Seeing the stock's softness relative to Nifty arond 1.30 added to my position. Further added after stock retraced to 2i44 from short swing upto 2160.
10. Overall the afternoon trade exploited stock's divergence from Nifty. Closed the position around 2120. As it is my full position I could bring it to breakeven.
11. Moral of the story is I should avoid fading against the Intraday trend.
    

Stockmarket through the lens of Scientific Method

Markets can be viewed and traded in hundreds of ways. Participants can choose and manufacture their own risk and time frame. Ultimately the instruments we trade facilitate us to express our opinion with in the chosen risk parameters.

1. My understanding of markets and price action remained hazy till around 5 years ago without any real education .
2. I came across the Giants in the field of markets & Speculation Victor & Brett which opened my eyes to Scientific method & Counting and I started an endless journey.
3. My interest and fascination to understand statistics started from DailySpec and EdSpec
4. Interesting and educative in the tradition of DailySpec by NewtonLinchen
5. Quantitative and Systemic thinking from SohamDas. Fascinating reading . In his words Mathematics appears like Literature.
6. I believe for a starter 2 readings of Investments, Trading& Exchanges, EdSpec will provide solid base of operations to have a framework for viewing the markets.
   

Innovation at StockExchanges

I am pleasantly surprised at the information available for the independent investor at free or very small cost.Exchanges are improving their service for the benefit of investors & traders.

1. Excellent and further simplified trade verification from NSE. You can also download to Excel. I routinely use this to verify my trades. It brings transparency and all traders must utilize this.
2. Colorful view of sector strength, best and worst performers in the sector. Yet another visualization tool from NSE.
3. Useful data from BSE . This shows the democratisation of financial markets where tools available only to institutions are within the reach of independent investors at free of cost.
4. Stockwatch from BSE to get comprehensive information.
5. Live Sensex view from BSE
6. Interesting charting application from BSE. Though I could only get line charts. I would prefer Candlesticks.
7. NSE's charting application available only to member brokers. I think they will release to investors at a later time.
8. Though this is not related to exchanges another useful tool from Volumedigger. Here you can see heatmaps of sectoral indices as well.
9. Market profile like charts here.
10. Real time Advance - Decline chart here . This is one data point I use for assessing the day structure . The day developing structure of Trendiness or Ranginess can be gauged to some extent by this information.
    

Stock Selection for Shortterm Trading

Most active traders face a dilemma regarding choice of stocks for Trading. With experience they may gravitate towards their favorite sectors or familiar names.

1. Useful stock screener at Icharts
2. Most actives list at NSE on the previous day
3. I personally prefer stocks fronm Nifty as midcaps may have wild movements intraday
4. Atleast if the stock is in F&O there is some sort of balance through options
5. Significant news on the stock. I try to avoid trading on the breaking news unless I already have a position and a view on the stock.
6. If the stock behaves whackily , try to avoid it for intraday trading ( eg Everonn, Educomp)
7. I try to distinguish between morning, afternoon, evening movement in the stock.
8. I try to fade extreme reaction of the stockspecific news ( Extreme is gauged by 2 sigma movenent of the stock's return in the previous 250 days )
9. Avoid small and midcaps as they are jerky and force the trader to shift timeframes
10. In the earnins season, I have to be careful of trading the results announcements after 2.30 pm ( I had a bad experience trying to fade JSW Steel at Q1 results )

Trading in harmony with the market

"Instead of focusing on what we're doing wrong and trying to prevent ourselves from doing it (which only keeps us problem-focused), we instead craft solution patterns out of our best trading." - Dr Brett Steenbarger

I am trying to identify when I trading with positive approach to the market.

1. Well prepared before the market Opens :Reviewing previous day's market action, Analysing NIFTY Chart for S&R ranges, Significant levels ( Chart based pivots),Volume action,Price wrt 20DEMA,50DEMA,200DSMA.


2. Waiting for the right spot : Patience to let the opportunity present itself, waiting for good prices. I have learned not to fade intraday highs unless there is good volume and market made a identifiable top on the chart ( Lower highs, Lower lows, at least one candle in my time frame ) . Taking into account the time of the day ( most important for intraday traders)


3. Establishing Stoploss levels : I am most comfortable when I have logical stops to execute against ( ATP, Open, Chart based pivots, Volume spikes, Signals of traders caught in one direction)
   

NCFM vs Trading Course

Many students of financialmarkets queried me on the difference and suitability of NCFM and Trading course such as the one offered by me.

1. NCFM deals with Market Structure and Market Design
2. NCFM is mandatory for employment in Brokerages/ Subbrokers
3. NCFM does not deal with market decisions
4. Trading course teaches one what and when to Buy/ Sell
5. NCFM gives additional knowledge and strong base of Operations in trading the market.

One to One Mentoring for Traders in Hyderabad

"The challenge for the trader is not so much one of making market predictions as refining trading hypotheses as market data unfold. The effective trading mentor models this reasoning process, but eventually needs to let junior traders try out their own reasoning, with prompt review of solid and flawed reasoning. That is why sound mentoring has to occur during the trading process, just as effective training of physicians has to occur at the bedside or in the clinic." - Brett Steenbarger

How to implement the idea of modelling the reasoning process by hand holding beginning traders in Hyderabad? I came up with this idea after attending some trading seminars where the speakers are discussing Charts, Indicators in Isolation and analysing historical charts by hind sight.

I wanted to reason out the markets along with the learning traders. Here all the participants are both teachers and students. By trying to teach others my concepts and rules will become clear and I will be able to better understand my method which is a mixture of knowledge gleaned from great personalities mentioned in this blog.

Trading Course in Hyderabad from Saturday October 10, 2009

GANGINENI DHANANJHAY's



Stock market Course for Active Traders
     http://www.hilotrader.blogspot.com/

gdhananjhay@gmail.com
Mobile : 09391319721         






Module1 – Basics of Trading -


Trading Vs Investing Vs Gambling, Types of Trading, Players in the Trading Industry, Orders and Order Properties . Why People Trade ( Utilitarian Traders, Profit Motivated traders ),Cardinal Rules of Trading
FA,TA, Traders Mindset.,


Module 2 – Understanding Candlesticks & Indicators:


Candlesticks, Simple patterns ( Doji,Bullish Engulfing, Bearish engulfing etc)
Indicators – trend following ( SMA,EMA,MACD)

Momentum Oscillators ( RSI,Stochastics)




Module 3 - Tools of Trading –


 How to identify the trend of the market ? Larger time frame (20DEMA,50DEMA,200DSMA)
Intraday ( 20 EMA, Open, ATP, UpTrend(HH,HL), DownTrend(LH,LL),Swing High, Swing low, Chart based Pivots)
Determine the strength of a trend ( ADX,A/D, Sector Behavior, MACD,RSI),
Low risk entry into the trend (Pullback to 20 EMA,ATP, Open, Volume action)




Module 4 – Preparation for the Trading Day:

1. Identify intermediate term trend ( Uptrend, Downtrend or Range- 20DEMA, No of Stocks > 20DMA, Basket of Stocks (5 each from 8 sectors) strength)
2. Yesterday's Price stronger, weaker or in range wrt previous day (Hi&Lo prices across sectors, Indexes, DoD Changes)
3. Special Circumstances likely to affect today's trade ( RBI, Economic numbers, Holiday period)
4. What are relevant Price target Levels and Reference points ( PDH,PDL, Previous day ATP, Intraday Pivots S1,S2,S3/ R1,R2,R3)
5. Close of previous day and Open of today
   ( Near the top of the range / Above yesterday 's PP – Strong. Near Bottom of range/ Below PP – Weakness , Around PP/ Mixed A-D in early trade – Range)
6. Global Cues - S&P 500, US CBoE VIX, USD Index, CRB Index, Crude Oil, Gold, Baltic Dry Index, Nikkei, Chinese, HangSeng, SGX Nifty )
7. Writing down all observations and Opinions in a Notebook and reflecting daily.
   
   
   
   
   
   
   
   
   
   
   
   
   
    

Module 5 – Intraday Trading strategies

1. Identifying Stocks in Play for Intraday ( Stocks in News, Earnings, Policy announcements, Most actives, Contrary Behavior) ( Less than 3 to focus on )
2. Keep track of key levels and inflection points on SIP
3. Know what sectors are in play, and what stocks within those sectors are strong or weak.
   
4. Look at different time frames, 1min, 5min, 15min, 30min, daily, monthly and yearly.
   
5. Make one good trade and not necessarily one profitable trade
   
6. Stick to one stock on the open, Avoid
   Flipping
   
7. Focus on Buying supports, shorting resistance, playing held bids, held offers, consolidation and ranges
   
8. Trade in the direction of intraday sentiment ( A/D,ATP,Open)
9. Start with profit targets: range extremes, pivot prices, and R1/R2/R3 and S1/S2/S3 targets. First figure out where you think the market is likely to move
10. Don't chase price highs or lows. Make the market show you that it is making a higher low (uptrend), a lower high (downtrend), or holding support/resistance (range).
11. Stop loss level ( logical stops, random noise, Small position size with larger stops adj for Vol)
12. Catching the late day volume surges
13. ATP as an evolving estimate of fulcrum/value
    
14. Characteristics of a trend day (Breakouts from short-term ranges ( previous day's range, multi-day range, opening range) on strong volume; Strength in market's leading sectors, Confirmation from correlated markets, Extreme readings in the day's advance-decline readings)
    
15. Understanding price Spikes
    
16. Sharp Moves vs Mild moves ( mean, SD of a Normal Distribution)
17. ORB Strategy
18. Opening one hour / Closing one hour ( DH/DL made in first hour ?)

 


Module 6 – Best Practices in Trading & Trading Psychology

1. Reading Inter market Themes (Pro Risk Vs Anti Risk, Dollar weakness, Interest Rates )
2. Reading Volume ( Volumes, Delivery %, OI)
3. Reading Sector themes ( Strength in metals, Oil , Commodities)
4. Stresses for Traders : Excessive risk taking, Changing markets, Unrealistic Expectations, Departures from prudent risk management
5. Trading Mechanics( Dr Brett , ETP page 140), An Observation Checklist(ETP,page143)
6. Mechanics of Risk management ( ETP, page 145)

Mixing Volatility Regimes

I had an interesting conversation through the blog on Mean reversion of Volatility with SohamDas

1. While searching DailySpec on the same topic a good post here
2. Bernanke on why crashes happen in October
3. A dash of insight on the same topic
   

SohamDas on Volatility and Mean Reversion

I take pleasure to post SohamDas's thoughts on Volatility

Historically, VIX is strongly mean reverting, hence we should be able to fit a standard mean reversion model (usually I gravitate towards Ornstein Uhlenbeck, but I couldnt fit properly) to some extent.

So, if we are indeed able to form a consensus on the "low"-ness of the present VIX, we should be seeing a run up very soon, how soon I dont know.So yes, it would be better to go long in ATM straddles.

About VIX, consensus
The point is exactly that! Is it obvious to market participants that VIX is low? And low doesn't give any information. I would rather say, are they discerning, if its historically "out of whack". I might be wrong, but I dont think many people will think that way. So I would say, it is a fantastic opportunity to apply a trading strategy which is totally different from the usual market strategies, i.e less $$$ are chasing it.
Everchanging Cycles?
Umm...The cycle behaviour is not that pronounced, cycles are mean reverting but all mean reverting signals are not cyclic. So, as it becomes non intuitive, you know...

How to detect a regime shift?

Well, VIX shooting up wont really be a full scale regime shift, because it again reverts back. But if we want to detect/predict a rise in VIX,MA-GARCH modelling might help {I did some work in it, but didnt really exploit it commercially yet}