Tape Reading at Indian Brokerage Trading Rooms

Good posts on Tape reading and order flow caught my attention.

1. www.tradeorderflow.blogspot.com
2.http://traderfeed.blogspot.com/2009/07/trading-order-flow-lost-skill-important.html
3.http://www.smbtraining.com/blog/?p=1547


A topic which I am thinking of for a longtime. Being a trader in Indian markets, Brokerage trading rooms do not have access to charting and indicators for retail traders. I have observed that some experienced traders watch order book and other info like VWAP, Open. Being forced to form opinion from order book in the initial phases helped me in the market rather than going for Charts from the start. This gives the trader a feel for the market color. Combining this with some microstructure aspects ( Trading & Exchanges by Larry Harris ) will give the Short term trader an advantage. I have seen some scalpers purely depending on Order book to hypothesize on significant levels.The intutive understanding of markets in the absence of technical tools made many old Indian traders that much formidable.

Newton Linchen & Soham Das

I am previleged to be quoted by two fine quant traders & system developers.

Newton Linchen of http://newtonlinchen.wordpress.com
Soham Das of http://jumpup.wordpress.com

I have enjoyed their clear expression of ideas and energetic nature.

Some thoughts on my Trading

Today is a range day in the markets, masking stock specific action.

1. Delay in F&O segment orders on NSE caught me on the wrong foot in HDIL futures. As there is no order confirmation, I have sold two futures short and increased my trading size dramatically.
2. On hind sight I could have waited for my level of 273 as discussed in the previous post which is ATP + one SD. It could have minimized my heat on the trade.
3. On the cash segment also I have gone short increasing my exposure. Luckily I am able to scratch the trade on weakness around 12 am.
4. I should not violate my own concept of shorting a stock above open and ATP and sector RS as DLF and Unitech are showing strength.
5. Power failure irritated me and gone to brokers office and scratched the trades.
6. Scalped some trades on DLF and Tata motors trying to fade after results announcement.
7. Dr Brett has good posts on respecting size in trading and how drama leads to trauma in trading. He elaborates on how the trader becomes a different person when he puts on the trade and when he is managing the trade
8. Lot of tension and release on HDIL as it closes at 275. Most active list. Results on 29 th.
9. Anouncements on Share holding, FM announcements on Real estate.
10. Look to see the stock reaction tommorrow. I want to be prepared to fade any post results strength. RBI policy may also affect rate sensitives.

HDIL

Stock price of HDIL has gone up 50% in 10 days.

1. Real Estate stocks showing relative strength compared to market.
2. HDIL has strong resistance in the 269-273 zone.
3. I know traders holding large positions relative to their risk tolerance or financial position
4. High beta of around 2 .
5. Quartely results on july 29
6. F&O settlement on July 30.
7. My assumption is overbought in the short term ( till expiry ) based on only 50% position limits, and only 1.5% OI increase not displaying bullish expectations.
8. Rate sensitives including banks and real estate may be in focus next week on the back of RBI Monetary policy on 28 th.
9. I would like to trade on the short side assuming a range bias at best. My stop loss around 275 given high volatility of 7%. ATR of Rs 15.

How not to run a trading Operation

I would like to further submit some observations from trading in Brokerage Offices from India.

1.Engage in lot of conversation,personal mockery of other traders with lot of unrelated arguments of political nature or other wise
2.Keep CNBC with constant shouting and comments on breaking news,worse still keep shifting channels for cricket and Romance to keep you out of Boredom in seemingly slow markets
3.Always be on the look out for others random opinions and commentary with out any reason or data.Try to win them over to your point of view even when the market is open.
4.Give and recieve unsolicited, free opinions during market hours
5.Keep looking into other traders positions and get emotional excitement
6.Criticise others for trades not taken when they have gone your way
7.Express opinions on others trades when they are still on and get influenced inevitably by their intentional or unintentional commentary on your positions mostly negative
8.Ask for dealers opinion, Consult your broker for trading advice
who is looking for churn and maximising turnover ( Forget the Stock Brokers aim is to convert client’s Networth into his own)
9.Be intolerant of any small adverse excursions of price against your position, Be jubiliant of any small profitable movement and close the position to realise the profit ( Forget that the ” Speculator’s aim is to take reasonable losses or reasonable gains “)
10. Keep your trading room noisy with constant ringing phones and uncomfortable and crowded so that you are always under pressure to trade.
11.Take lot of breaks from trading terminal to chat with other traders,lunch breaks,attending to small personal works.
12. Invite friends and relatives to your trading room to engage in conversation
These are only a few along with many others exist in Brokerage Offices.
I feel fortunate in finding this forum of intense intellectual discussion with nothing spared in helping me to protect from some of the above.

Bewildered looks from other traders are common when I try to make some cryptic remarks like
a)Respect vig, spread,getting into huge positions
b)Why do you quote long term fundamentals and brand name of the company as a crutch for short term trading
c)Price knows al the published facts and much more
This forum helped many a trader exorcise his trading demons. I always keep my copies of EdSpec,PracSpec,Trading&Exchanges,Enhancing trader Performance handy to refer , chew and digest in times of market turbulence and frustation. They protect me from deep losses and show me the path to survival.

Concepts of Short Term Trading

As I have struggled to understand markets , my concepts mostly came from a synthesis of ideas from Brett from Traderfeed and The Chair's forum at Dailyspeculations. Here I will briefly outline my idea of approaching markets which is a never ending work in process.

1. Understanding the Day's Structure : As a short term day trader I want to form an initial working hypothesis as to whether the unfolding day is Trending, Rangebound. This has to be continuously revised in a Bayseian approach as new market generated information is taken into consideration. Data I normally consider are Advances vs Declines, Sector strength ( what sectors are leading, percentage movements ), Correlated asset price movements like commodities , currencies, Asian Markets, European Markets, US Futures data.
2. Observing VWAP or ATP : One of the useful practical technique I have learned from Traderfeed is tracking the evolution of ATP ( Average traded price). This is volume weighted average of price. Trader can form his opinion on how the price is reacting to vwap. Whether market is taking support at VWAP or rejecting VWAP and going lower thus effectively VWAP acting as resistance.
3. Reaction to Opening Price : How the instrument is reacting to opening price. Is it rejecting open price with volume or finding support at opening price.
4. Concepts derived from DailySpec: Always many approaches from posts in DailySpeculations act as a conceptual background. some of the examples are

• Market Overshooting to extremes as form of maintaing Ecology
• Market trying close the door if you have only one Exit
• Market's technics of Torture
• Survivl techniques when in a bad position, crying for help
• Not Panicking, Proving to be difficult to be devoured by market
• Market being more bullish on extreme negative mews and vice versa
• Reaction to news and economic announcements
• Deception and camouflage trying to lead you in the wrong way

These are some of my observations . I will keep posting as new ideas develop.

India's Financial Markets Book

A very incisive and thoroughly researched with lot of empirical data in this book by Ajay Shah, Susan Thomas & Michel Gorham. I have compiled microstructure articles in a book with ICFAI University Press and is published http://www.flipkart.com/indian-equity-derivative-markets-players/8131421635-tu23f957q4 . I have always got deep admiration for the crisp comments of Dr AjayShah on CNBC and his formidable grasp of Indian Financialmarkets.

Books for My Daughter

I would suggest the following books my daughter Gangineni Hita who understands my efforts at markets & Trading. I would suggest her to read the following when she grows up as presently she is 11 years old studying class 6.

1. Trading & Exchanges - Larry Harris
2. Education of a Speculator - Victor Niederhoffer
3. Practical Speculation - Victor Niederhoffer
4. Psychology of trading - Brett Steenbarger
5. Enhancing Trader Performance - Brett Steenbarger
6.Daily Trader Coach - Brett Steenbarger
7. Fooled by Randomness - NN Taleb
8. The Black Swan - NN Taleb
9. Dynamic Hedging - NN Taleb

IntraDay Trading

Intra Day trading offers the most exciting opportunities and also risks with it. In my discussion with traders I came across lot of misconceptions. This is an attempt to clarify some of those.

1. Intraday time frame players are generally large speculators and moves are deceptive. As Victor notes in DailySpec " In Intraday price inevitably tend to go to the traders point of ruin".
2. Trader keeps his trading position when it goes against him for the next day. Trader rationalises and moves his stop further increasing his stop loss.
3. Anecdotal evidence of some stocks returning after 1 or 2 days to his buying price. This may be selective memory and market teaching you the wrong principles of speculation.
4. Inability to distinguish between Investing, Speculation & Gambling.
5. Entering into the arena of Gambling unknowingly aiming to speculate.
6. Having a fixed bias overriding price action.
7. Assuming ability to interpret news as positive or negative to stockprices instead of companies.

These are some of my observations in discussions with short term traders.

The QIP Trading theme

Lot of trading activity around QIP theme in the market today 30/6/2009. Nice article on trading secondary offerings on www.smbcapital.com/blog .
1. HDIL selling off from important price level of 260.
2. I've seen how traders disregard risk and concentrate heavily on one scrip tempting the BlackSwan.
3. Too many instances of mistaking Correlation for causation.
4. Taking anecdotal evidence as definite relationship in the market.
5. It is unnecessary to search for reasons in the market which are evident only expost.

Ajay Shah's blog: The BPO path to international finance

Ajay Shah's blog: The BPO path to international finance

Market Review 26/2/09

Today is F&O settlement. Market remained subdued till afternoon. Volatility picked up in the afternoon session. I think some of the factors played out in the market today.

1. F&O lot sizes are increasing in March contracts. Any short/long positions have to be squred off.This played out in some of the heavily shorted stocks like DLF, TataMotors
2. Banking sector weakness is a prevailing opinion so I doubt whether this will continue
3. Weakness in L&T. I am able to recognise this as the stock is weak against market showing strength and unable to cross ATP and Day high.
4. There is a very good article on mental flexibility of the trader from the ever favorite Dr Brett
5. I wonder how traders feel the regret and bias of knowing after the fact.
6. Intersting post on Day trading and arbitrage from Dr Ajay Shah

Stocks in Play

Trading stocks in Play is very important for the Day trader.

1. See a good post in SMB Training on stocks in Play.
2. stocks that might be in play for 24 th feb in Indian market are ABB, TechMahindra, Satyam, M&M, Matrix
3. ABB is short covering on the cards on the back of decline pre results ?
4. Bank stocks may be in Play = ICICI Bank, Axis Bank ( watch for US market and Bank stock movement there, expectations of RBI action, Considerable decline in stock prices as a back drop, Small short covering can lift )

Preparation for the Market Day

Active Traders must prepare for the Market Day. Here I compile some guidelines for participating effectively in the market.

1. Identify a Stoploss level for the Day. Identify a stop loss level for each trade depending on no of trades derived from that.
2. Identify major world events that are currently in Play ( eg Bank recapitalization in US,Expected announcements, Gold as a risk aversion trade, weakness in Metals & Crude)
3. Check Asian Markets ( Nkkei, Hangseng, Kospi, China)
4. Check the movement of Macro data points ( Oil, Currencies,Precious metals)
5. Check overnight movement in Europe and US ( Focus on Intraday movement and sectors in Focus eg Bank Stocks, Shipping etc refer to Bloomberg, Reuters )
6. Filter the News items - News that affect your positions and stocks
7. Focus initially on one stock at the opening.
8. Try to identify the structure of the market day - Range bound, Up trending, Down trending
9. Which sectors in Play?
   
10. Which stocks in Play? watch levels . Support resistance
    

DELAY in Market Moves

Markets delay the moves to frustate traders and force them out of their positions.

1. Stock price delays moves. This is an important characteristic of the market. Price movement will not happen when you are anticipating it.
2. Price moves when it is inconvenient for the trader.
3. This is recently observed in EDUCOMP.
4. The movement we think random may be in the scheme of things for traders on the other side.
5. This is the reason why for active traders path dependence is important.
6. If the stock price hits my stop before making the favorable move I am forced out of the position.

Trading at Brokerage Office

For Active Short term traders there are lot of lessons while trading at Brokerage office.
Of course this is my personal experience.

1. Aviod taking advice from VOODOOS
2. Lot of opinion floating around which is random impressions . This tends to confuse and panic the trader out of his position at exactly the wrong moment.
3. Psychological Capital is more important to a trader than financial capital.
4. Cramming more traders to one terminal creates a sense of urgency to trade with shouting of orders by other traders and noise
5. Comments on your trades and their opinion disrupts your equilibrium.
6. Engaging in social chatter
7. Constant phone calls & attending to personal work during market time resulting in loss of Concentration.

I think a post by Victor on How not to run a Trading Operation is must for all speculators.

Indian Market on 20/2/2009

Market opened with a gap around 2750 Spot Nifty .However there is no big sell off.

1. I had a long position on Feb Nifty at 2790. Luckily I hedge it with Short 2800 call @ 38
2. Closed my NIFTY @2740. Opened fresh short @2743
3. Closed fresh short on Nifty with a trailing stop @ 2720 and also call @14
4. Market remained listless with little volatility till 2 pm.
5. Market searching for intraday bottom and taken out stops around the round number 2700 by dipping to 2690.
6. Closing saw some covering of short positions ahead of long weekend and recovered to 2630.

The lesson I have learned is to be ready with what - if scenarios and use appropriate type of orders for the market conditions and opinion.
For e.g If my opinion is for the market to gun for stops below round number 2700 I have to be ready with a deep limit order around 2690 with a stop of 20 points.
Another way to trade may be wait for a botom confirmation and enter Nifty on the market with stop at the day,s low @ 2690. Ofcourse all this appears easy with hindsight. Action in the heat of markrt battle is always hazy and fraught with uncertainities.

Learning to Trade

The education needed to effectively participate in Markets is wide and intensive. In this post I will discuss my observations regarding the beginning trader starting with a clean slate and resources available to him on web 2.0 for self development in the Indian Context.

1. Start with a very good introduction to markets from Trading & Exchanges by Larry Harris
2. Good resource for observation of market data like volumes, price history from National Stock Exchange.
3. The short term trader can concentrate on Most active Securities and Top Gainers/ Losers list.
4. Active Day traders benefit from a market scanner like FALCON software.
5. For general understanding of trading psychology there is no better resource than Dr Brett Steenbarger
   

Market on 15/12/2008

• Market opened with a gap of 40 points on Nifty taking cues from SGX NIFTY.
• Resilience of the market on Friday after US auto bailout news. These actions are bound to be resolved or reversed but the beauty of the market mistress to take out the chips from weak hands is once again demonstrated.
• Harmony of Commodity, currency movements has given strength to market bullish bias
• Nifty 3000 is a psychological level has reached and sold off keeping large number of intraday participants on the wrong side.
• I think diversification in trading time frame is needed
• As Victor Niederhoffer says in daily speculations the market will block the only escape route you have.
• Traded NIFTY, LT
• It is frustating to see unprofessional behavior in brokers trading rooms . This adds to individual traders losses.
• Uncalled for vague comments affect the traders' psychology
• Very good post in Dailyspeculations on How not to run a trading Operation.

Market Intution

Watching how markets work is fascinating. As Victor observes " The speculator hastens the price to its inevitable level ".

1. Bear Stearns : Market's Intution about impending revision in buying price of $2/ share proved right.However perplexing market's moves collective intution reflected in the market price reigns supreme.

2. Lobogala in Orchid Chem : Orchid Chem lost 50% in 3 days from Rs 240 to Rs 110 due to Bear Stearns collapse and hedge funds sale of stake. "Lobogola Move " according to Daily Spec is witnessed in the next one week as it retraced its path to Rs 240. Fascinating to watch second level movements in the market.