Long Volatility Trade in October

I have tried to look at monthly volatility of NIFTY Index.

1. The inspiration for this post here.
2. Average Monthly range is taken as proxy for volatility ( Ln(H/L))
3. Data from 2003 to Apr 2009 is available - 76 data points
4. Most Volatile month is October at 18.94%.
5. Least Volatile month Feb at 8.83 %
6. October has highest correlation of volatility with previous month at 0.98. Even though volatility clusters this is pretty high

What are the Implications ?

1. Given that Volatility is low till now can we expect increase in volatility or this time it is different?
2. India VIX low
3. Will the low IV s signalling a blowout run in Indian markets ?
4. If the hypothesis of October expected to be volatile can we set up a options strategy being Long straddles

Trading Education Framework

I am taking up a project to launch real time training for short term traders in Hyderabad.

1. The motivation for this program came after seeing lot of trainers selling tips, Blackbox system sellers.
2. My aim is to provide a framework for understanding market activity.
3. Taking market microstructure as a base ( Trading & Exchanges by Larry Harris ).
4. Topics I am going to discuss and share include Charting basics, Trading Psychology ( drawing inspiration from Dr Brett ) , Qualities needed for a Speculator ( EdSpec by Victor Niederhoffer)
5. How to Understand Intraday Action ( SMB Capital is my Inspiration )
6. Basics of Derivatives ( Understanding Volatility and Options )
7. Combining all the elements into a framework ( Concepts of Auction theory and Market Profile)
8. Utilizing Fundamentals and Macroeconomics as a handle for Trading decisions

I am going to release ads offering this service as fully refundable if not satisfied after one week of training and mentoring the traders. This is my way to share what I have learnt . I dont claim to be perfect though. I feel this knowledge is necessary for any trader.

Trade Tiger of Sharekhan

My friend opened a franchisee of Sharekhan. I got to see their TradeTiger Platform.

1. It has good charting facilities. Chart updation and clean screen impressed me more than ODIN Diet 9.1.0.5.
2. Tick, 1,3,5,10,15,30,60, upto monthly charts available and fast updation on the platform.
3. I am unable to keep ATP on the Market watch ?
4. ATP is coming as a fixed line on the chart. Can I see the building up of ATP in real time. I am not sure. One popular indicator with American markets is VWAP and its MA.
5. I felt brokerage charges are bit high ( default of 0.05% intraday) for my style of trading.

TA & Price action

My idea of understanding Technical analysis found resonance in an excellent post by Newton Linchen in his characteristic clarity.

1. Earlier I struggled with Charts having huge number of Indicators , Filled with lines. But now I feel simplicity is the best and understanding of price action is more important than indicators.
2. Basics of candlesticks and how they are forming is intutively appealing.
3. I find Maoxian's illustration of charts worth studying.
4. Illustrating how the process of arriving at a trading decision and the details of building evidence before the trade is the hallmark of good trading educator.
5. After the fact the patterns appear to be very easy and to see the Seminar gurus keeping on explaining the left hand side of the chart is irritating. The trader has the challenge of deciphering the the hard righthand side of the chart.
6. In many cases market moves by surprise and with violence. What you see on the charts might have happened in one bar or spike. The trader studying static charts with indicators does not realize this.
   

Trader Education

I have noticed increased interest in Trading Education. Yesterday I attended a 1-Day Course on Trading by Mr Vivek Khemka, CA and CFP by Qualification. Some of my observations

1. Youth are increasingly participating in the Trading of stocks. Business Line also reported on a Google survey .
2. Online trading increasingly democratised access to financial markets.
3. IT & Software employees are increasingly being attracted to Trading the markets. This is anecdotal evidence of my observations.
4. Youth is adapting currency trading diversifying away from stocks.
5. I have observations of Women Traders also actively trading in Hyderabad and even special branches of Brokerages for women in Hyderabad.
6. Some of the trading educators in Hyderabad whom I have come across are Mr Ajay Kumar, Mr Vivek Khemka, Mr Damodar Sai. Their focus is on TA and Chart patterns with a bit of Trading psychology and money management thrown in.
7. Some times I wonder what is the prerequisite for a trading educator. Because there is no curriculum or Common body of Knowledge as in other fields. Lot of opacity and non verifiable track records in this field.

Intersting Readings

I had the pleasure of going through the following readings in the weekend.

1. Trading lessons from Newton Linchen, my friend and a SpecList Author
2. Best Practices in Trading from Dr Brett
3. Deepaksingh 's way of keeping track of Global Cues

Fundamentals for Intraday Traders

Understanding of fundamentals cannot be brushed aside for intraday traders. This came to the forefront in the ABAN trading.

1. My colleagues at TCSS used to have an excellent handle on fundamentals. When he prepares a spreadsheet the numbers used to be at his command. That fundamental handle of working out the value of the company from basics gives the trader an edge in designing the trade.
2. In the ABAN situation, first there is a rerating of the scripand there is a valuation surprise in the analysts estimates of rig rentals. This may not be adequately appreciated by a retail trader .
3. Another microstructure factor of ABAN fresh positions banned in F&O led to short squeeze.
4. Thistaught me the importance of market design issues and keeping multiple time frame participants actions in mind .

Being Stubborn

It's almost ten days since the last post. Meanwhile I had endured roller coaster ride of P/L reminding me the mistakes.

1. I learnt the danger of hoping and being stubborn in a trade and going against my own rules. Very important article by Brett on trading rules. Having short on AxisBank in the morning trade , I refused to scratched when it violated my rules ( Normally I don't keep a short position if it crosses above both open and ATP) and paid the tuition for education to the market.
2. My trades should start working within short period of time. If it is taking longer than normal, some part is suspicious. I should review the trade.
3. You cant scare the market twice on the same factor ( China Scare).
4. Tomorrow I would like to watch how the second time invasion of HDIL in 300 level pans out.
5. Though there is brader weakness today in Banks, I failed to keep settlement week pressures and other market context in mind.
6. Axis bank OI up 52% any corporate news or short squeeze in the offing?
   

Fading UNITECH

Today I tried to fade UNITECH's Strength in the opening. My thought process behind the trade is as follows.

1. Unitech is near its monthly high of Rs 98. This may be overhead resistance or supply area.
2. US markets flat with Asian markets marginally negative.
3. Market Context of 4600 Nifty and 7% move in Unitech and Real estate stocks yesterday.
4. Anecdotal evidence of large number of retail traders entering real estate stocks on Thursday.
5. Futures data suggest mild Open Interest Increase ( + 9%) which does not indicate explosive follow through IMHO
6. India VIX stable ( Not down )
7. Volumes moderate ( Rs 90000 Cr)
8. Anecdotal evidence of traders faked out of their shorts in Real estate counters at the closing yesterday.
9. Unitech's inclusion in MSCI Index may already have been in the price discounted by smart money.
   

Though I could close the trade for 1% gain

1. I entered large size ( 10 times normal ) trying to come back from previous day's draw down of 2% of my account.
2. I should always keep in mind Brett' s advice of "Drama Creates Trauma "
3. However I have taken solace from reading EdSpec where Victor comments about Losses and Comebacks and going right after a losing trade with size.
4. I always try to visualize how Victor would have traded that piece or Read relevant Chapters from EdSpec for guidance and inspiration. New meanings and previously hazy material comes to life each time I read perhaps reflecting my incresed struggle to make sense of market movements . It is a constant companion for me.
5. I regard Victor Niederhoffer, Brett Steenbarger as my two Dronas while I am their Ekalavya student according to Indian Mythology.

Forecasting EPS Projections

This is a writeup I prepared when working in Equity Research for TCSS.
http://bullstocks.blogspot.com/2008/10/forecasting-financial-statements.html

Looking for Proximate Causes

Today after the NIFTY closed around 4400, many traders are asking the reasons for the fall.

1. Media and analysts are citing proximate causes such as Monsoon
2. I think as traders our job is not to ask why and search for reasons. Trade the price action reasons will come later
3. Market focuses on whatever it wants and whenever it wants according to its Path of Least Resistance. Who are we as traders to ask the market to give reasons for a particular path.
4. Following my method in the set risk parameters and in my time frame taking least possible heat in the trade, minimising the vig, trying to articulate my edge and looking for disconfirmation of my hypothesis will allow me to survive in this game.

Indian Market Wizards

When I used to work with ICFAI, I had an idea of editing a book on Indian Market Wizards loosely modeled on Jack Schwager. Some personalities on Indian Markets I follow very intently. This is not a comprehensive list of course.

1. Devangshu Datta : Columnist in Business standard. Very incisive and fluent analysis in Monday special Smart Investor. His two page analysis is worth reading, chewing and digesting. I specially like his way of explaining his thought process behind the trade recommendation which Dr Brett always advises.
2. Udayan Mukherjee : Excellent commentary on Daily Stockmarket movement. I have many times benifitted from his themes and macro views. I think the traders' job is to synthesise various sorces of market information, opinion, analysis, recommendations, commentary and form his own trade hypothesis. Trader should always remind himself that nobody is responsible for his P/L except himself. Blaming others comes easily . I particulary admire the way he negotiates the short term daily fluctuations and ties them in a thematic frame work. His questions to Market analysts are striking compared to similar channels.
3. Ajay Shah & Susan Thomas : Two finest Financial Economists in India. Ajay Shah's writing style is fluid and I read him very closely. His trade mark logic on business channels is worth watching which is packed with data and statistics rathe than anecdotal impressions.
4. Sameer Arora : Sameer Arora 's ideas are very miuch packed with lot of analysis.
5. Ashwani Gujral
   
6. Deepak Mohoni : The man credited wiyh coining the term SENSEX as a short form of sensitive Index.
7. JR Verma : The academician and SEBI SMAC Chairman and author of my favorite DRM book which I used to teach DFE at a B School in Hyderabad.
8. Ruchir Sarma : Morgan Stanley
   
9. Shankar Sarma : First Global
   
10. Devina Mehra
11. Mukul Pal at Orpheus Capital

This is a work in progress list. I verymuch welcome suggestions and additions to the list.

Understanding Pain & Regret

Pain & Regret are two powerful emotions in Trading. Market always ferrets out traders' weak points and exploits them to extract maximum energy.

1. I think after all Fundamental and technicals , the edge of a trader lies in his observation of other traders and self observation of these two emotions.
2. Pain of a position going against the trader, Regret of exiting early from a profitable position these two emotions can be used to the traders' advantage.
3. Today I have traded IOC trying to fade consensus bullishness in the stock. Traders are citing reasons of Oil India listing as trigger for the stock. I had a hypothesis of price already reflecting that news.
   
4. IOC opening was weak relative to market and also in the context of price appreciation in the previous days, I shorted the stock for a 2% gain.
   

Fighting the vig in Day Trading

Brokerage and Taxes form a very big part of any day trader's P/L .

1. 50% of p&l is being eaten away by commissions and taxes . Even with low commissions for high volume traders taxes form an amount equal to brokerage.
2. It is difficult to fight the vig if the trader is fixated on the market gyrations and start over trading.
3. Dr Brett has an excellent piece as always here on Over trading.Comments to the post are also very readable.
4. Vig, Spread and slippage are the three enemies of any Day trader. I have often seen upwards of 25% spreads being routinely quoted and being bought in Options market particularly in stock options. The trader is being butchered alive in the stock option market with these spreads.
   

Options Trading by Retail traders

I have observed many retail traders trading options purely as a directional bets. Most of them are not aware of the basic properties of the Options Instruments they are trading.

1. NSE has to its credit prepared a freely downloadable material on Options Trading Strategies
2. How many retail traders are aware of Volatility trading and Caluculation of Implied Volatility
3. Sharekhan has a nice caluculator based on Excel here
4. What I observed in Indian Brokerages is lack of basic market understanding which is a prerequisite for market participation.
5. The best antidote to this situation is a thorough reading of Trading & Exchanges by Larry Harris available at any college book store at hugely discounted price of Rs 300 ( $6) in India. This should be made mandatory before any trade is entered.
6. I think many trading demons can be exorcised with good reading as suggested by Victor and also repeated in this site. My favorites are the two by Victor & Laurel, the three by Brett and one by Larry Harris which are minimum for any educated speculator.
7. Excellent discussion of Options Trading here
   

My Trading Plan

1. Review Yesterday's Most actives, Top gainers / losers and any headline news in BS/ ET for zeroing on Stocks in Play.


2. I keenly watch 9.00 am UDAYAN's show on CNBC TV18. Useful insights and synthesis of market action. The way I use this info is writing down all his observations in my note book so that they go through my internal processing. This covers currencies, commodities, asian, US markets and corporate developments.


3. I narrow down to 4 or 5 stocks as possible trading candidates for the day and then look for more info on these stocks.


4. Using websites as vfmdirect , I check for useful indicators like 5DMA,20DMA,50DMA,200DMA, RSI . These indicators are not absolute but has to be used as handles only. Review intraday, weekly, Monthly charts for any eye balling of Support and resistance areas. Remember reading charts is not rocket science. After all it simply tells us where price had travelled in the past. Also remember Victor 's remark " Why the market has to give money for knowing how to draw lines on a chart ".


5. I use NSE website for stock volume, delivery positions and OI data on the futures.


6. I would like to form a tentative opinion on the stocks at the time of market open. I may further narrow down to 1-2 stocks to have more focus in the first half hour.


7. Once this hypothesis is formed, I start observing the market generated data to implement my idea. As Dr Brett often observes market mechanics and execution is very critical part.


8. I watch for ATP, Open price as crucial pieces in my execution.


9. The Chart should be in my mind once I am at my trading terminal.


10. How the price and volume behaves as it approaches Open and ATP is a clue. In my experience Day high and Day Low are not as significant as Previous day high and Previous day low. Day high and Day low are obvious points for shaking out intraday players.


11. I try to assess the likelihood of reversion to ATP or building distance from ATP and try to play the odds.


12. All this information has to be seen in the context of Trend day / range day structure.

Random Thoughts on 6 th Aug

1. " As expected/ As predicted " is one of the most frequent phrase used in analyst comments/ Media reports. But Market movement is probabilistic involving both luck and skill. Only in hindsight we attribute market success to the competence of the trader. Read NNTaleb's Scandal of Prediction.


2. When I am working with TCSS as equity research analyst one of my tasks is to prepare a Daily Report in the morning which is a combo of Previous day's activities, Today's forecast. This is where I used to have a bit of dissonance later when I look at the market as a trader. I felt some conflict between my stated opinions in the report and need for time decisions in the market.


3. My recollection of Taleb's ideas such as " Scandal of Prediction " used to trouble me in forecasting.


4. When you trade a stock on both long and short side, you get to know the stock's significant intraday levels. This levels can be used for next day. This I have observed in ABAN's case. The level of 1200 proved to be a good resistance and stock behavior is with less conviction. Laboured pullback to around 1198 yesterday convinced me to short on the open for 2% down move.


5. I tried to trade metals weakness via Tata Steel and the fund raising plans also helped me on the short side. But for risk management purposes, I have quickly closed the trade.

EUPHORIA needed

NSE Nifty crossed the round number 4700 to close @ 4711.

1. Though the market registered significant gains ( YTD up 50%) we are yet to see euphoria.
2. I doubt strong markets correct easily without making euphoric moves though we are seeing some of it in midcaps ( Bharat Forge, ABAN ? )
3. Market Overshoots as a way of maintaining ecology ? ( DailySpec)
   
4. Excellent post on Invasion of Stock prices by Victor
5. Volumes remain low = Energy in the market is low. More energy has to be extracted by the market from the participants. What is the best volume path to achieve this ?
6. Real estate is lagging the market. Will new set of stocks ( Power, Education sectors ) lead this move.
7. Market may not wait for inflationary pressures to manifest. It will react first. Watch Autos, Real estate
   

Trading ideas beyond TA

1. I think every trader has his own unique style or Niche once he has gained sufficient experience in the school of hard knocks. This is becoming apparent to me when I try to frame a trading idea.
2. When I try to synthesize all the fundamental information, Technical levels I often doubt how this will give me an edge? ( Which is in the public domain). As Victor often asks why the market should give any one who knows to draw a straight line money ( Technical analysis )
   
3. The edge comes from framing in the concepts of Round Numbers, Lobogola, Tension and release, Market torture, Traders being forced out of a position, Markets volume path or Path of least resistance etc which I learned and continue to learn from Giants like Victor, Brett.
4. This is the secret sauce of Legendary traders.
   

Round Numbers in Indian Market

Attraction of Prices to Round Numbers is a concept discussed in DailySpec by Victor.

1. Today Indian markets are close to round numbers BSE Sensex near 16000, NSE Nifty above 4700.
2. US Markets are nearing round numbers . Nasdaq at 2000. SP above 1000.
3. Newton Linchen has a nice post on Round numbers which is an inspiration for this post.
4. I have traded reliance today based on attraction to round number 2000.