Afraid to Trade Options

I had interacted today with many option traders who apparently know nothing about the concept of Volatility. I shiver at the description of their trading strategy confined to directional option bets. Disregard or lack of understanding for Time Decay or Implied Volatility.

1. Interesting post on Options


2. What are the parameters to look for in deciding whether option is attractively priced ?


3. Are we aware that Option is a non linear convex instrument unlike stocks or Futures ?

Simplifying Your Trading Framework

Active Traders internalize market lessons through exposure to patterns, pain of market losses, learning forced by the market.

1. There are many stages in the development and evolution of a trader.


2. I believe it is always difficult to predict the market as it appears mostly random. But a trader with clarity of his approach and trading framework is not surprised by the market moves . This progressive elimination of being surprised by the market makes him resistant to being fooled by randomness.


3. The trader should be able to explain his approach on the back of a visiting card in three steps.


4. The trader can reduce most of the trades to three approaches . Thus the concepts of trading are superior and of lasting edge than a single trade idea.


5. I would admit most of the trading experience and knowledge can be distilled in this excellent article by Brett Steenbarger.


6. When the market movement cannot induce surprise in the trader most of the negative power of the market is reduced. As the greats in trading say " In the expert's mind there are only few possibilities where as an amateur sees many possibilities".

Trading and Econometrics

I have been reading a bit on Econometrics recently sparked by my registration at NISM workshop.

1. My friend Newton Linchen has interesting comments on Trading and Econometrics
2. Econometrics of Tape reading where Newton Linchen discusses Strategies and Models. As pointed out trading is more about skill than knowledge.
3. Good posts by SohamDas relating to Quant and Econometrics, Basics, Concepts
4. As Newton Linchen rightly pointed out , Insightful analysis by Victor in DailySpec, here
5. Thoughts on Trading Price levels

Econometrics for Finance at NISM

It's has been almost three weeks since I posted . My aplogies to the readers and my friends.

1. I am eagerly looking forward to attending Econometrics program at NISM, a prestigious institute by SEBI.
2. Presently I find Chris Brooks book on econometrics interesting.
I look forward to post some interesting notes on the econometrics workshop in the coming days.

Lessons from ANACONDA,the movie

Some of the points that struck me from watching the Anaconda movie today

1. Deception : How the snake hunter practices deception leading the others in the Amazon Jungle. Parallels to market where traders are mislead by the hidden motives and apparent movements to one direction sharply reversed in the other direction
2. Insearch of Risk : My favorite analogy of a trader in search of risk is the snake hunter in search of Anaconda where other people are afraid of the snake. When I encounter questions about risk of a given trade, I wonder why they are in the market if not in search of risk
3. Preparation : Jon Voight is well prepared to catch Anaconda. He is anticipating and longing for it to show up. Instigating it with his monkey bait. He is ready with ropes,net, gun with anaesthetic etc. Proper preparation with his trading framework , significant price levels to watch for, trade structure, awareness of context is essential.
4. Timing : Acting decisively when the snake appears. The trader is not surprised. Extreme agility to time the trade not missing the shot at the right time is critical.
5. What are the signals similar to the trembling Monkey: When big predator is around the market weather changes. The prey gets the signals. Monkeys holler and make unberable noise. What are similarities in markets. I have witnessed trembling in leading stocks in leading sectors before a panic sell off or Squeeezes. Can we look for trembling and howls in VIX, Int Rates, Gold, Oil, Dollar Index, Baltic Dry Index, Credit Spreads.

what shows fear before big predators make a move in markets ?

Fading Other Traders' positions

Assuming Day Trading is a fight between participants in the trade, Is there an edge to fading other traders positions ?

1. Trading floor used to give advantage of reading other traders or Tells.
2. Can similar edge be gained in brokerage trading rooms where novice traders positions are displayed to all?
3. What are the characteristics of "fadeable" traders ?
4. I am surprised to find sometimes the positions of other traders overriding all indicators, TA patterns will give a clue to short term positions.
5. If daytrading needs flash opinion on a stock what better market tell than an injured trader on the other side?
6. This may sound cruel but the practice of deception is the nature of the market.
7. Some characteristics of the trades I can fade are

• When there is a random stop on a losing trade
• Trader has taken a position rather than voicing his opinion
• Revege trading is visible
• Trader is trying to break even
• Cursing or exhorting the financial instrument
• Entering into trade to avoid regret
• Lowering stops on a losing trade
• Avoiding when the trader is strong or profiting in the trade
• Quick and random profit booking by the trader for emotional reasons
• Larger than normal size by the trader
• Timeframe of fadable trader should match your own

Can these observations of traders strength or weakness in a particular trade give an edge at least for entering the position and relying upon TA and indicators for managing and exiting the trades ? I had lot of anecdotal evidence of Stockbrokers fading the positions of their clients when they run their prop books.

Can the daytrader use this as a shortcut cutting across opinions , news, TA and Random noise?

Newton Linchen on OVERTRADING

Newton Linchen , SpecList Author has nailed the issue of OVERTRADING. I take the liberty to post here.

Dear Prof.
Overtrading is the greatest issue for a trader with internet dealing access (home broker).
Really nothing prevents the trader to enter another trade, to his own misfortune.Some time ago (it seems in fact another incarnation!) I can say I was the master of overtrading. Really! My brokerage statement showed up to 25 + "trades" for the day. The results were quite poor.As I developed as a trader, I learnt some key aspects of market behaviour, which allowed me to enter trading in very good trading opportunities.My overtrading stopped completely when, after doing this a thousand times, I asked myself: "wow, I just bought the downtick in the first trade... what were the other 19 for?" "Couldn't I just be quiet with that first entry and enjoy the move?????????"
The breakthrough came remembering Larry Williams approach to day trading: find a spot, enter and hold till the close.In my case, hold till the close doesn't work very well, but I manage to discover key levels where to scale out the position - now doing just one or at tops two trades per day!
The real point of overtrading, I realized, is that intraday charts has much NOISE - and this NOISE gets you out of the trade if you are:a. Following price action tick by tickb. Using moving averagesThe fix I use was to identify entry and target points, so, once the trade is begun, I minimize (yes, shut down!) the trading screen and put alarms to the price levels (stop and targets) - and then go play chess with my work colleagues, so that we are not shaken out of our position by market noise.Once the alarm rings, (I just love Nelogica!), we see whether we were stopped or profitable.With this simple solution our ration fell to one, two trades a day, and our sharpe ratio is in the vicinity of 5.
Regards from Brazil,
Newton Paulo Linchen.
November 21, 2009 3:59 AM

Identifying Overtrading

What are the parameters to identify Overtrading by Active Traders?
Some of the following can be of help.

1. Number of Trades
2. Total Trading Volume
3. Vig to Trading Capital Ratio
4. Number of Instruments Traded
5. Duration in the Trade ( minutes held)
6. Number of Orders Placed / Cancelled Orders
7. Number of Unplanned / Impulsive Trades ( which are based on " Breaking News", Based on Other Traders's Positions, Reacting to Opinions of Other Traders )
8. Position Size in a single Trade ( Above Avg Size)
9. Number of positions at a particular point of time ( More than two ?)
10. Tight stoplosses ignoring the Logical stops ?

As I struggle to cut down overtrading , I understand the Broker's ( Market Infrastructure's) way of turning thr trader's networth into his own through VIG, SPREAD, SLIPPAGE.

NSE Adv- Dec Line : Identifying Day Structure

As an Intraday trader, I want to arrive at a working hypothesis of whether the day is trending or ranging? For this I use the following proxies inspired from Brett

1. NSE A-D Line ( ADL): I would prefer a calculation from the open . As an intraday trader the overnight situation may be misleading . As of now I could not get ready caluculation.How this Adv-Dec is developing as the day progresses is an important factor in my decision to fade strength or trade for breakout moves. This will also guide me in position sizing, adjusting the tightness of stoplosses, Necessity for taking scalping profits or scratching the trade.
2. SECTOR BEHAVIOR : How the leading sectors are behaving. What the leading stocks in these leading sectors doing. I am taking 5 stocks from 8 sectors ( IT, Pharma, Metals, Realty, OIL, Banking, Auto, FMCG)
3. CORRELATED ASSETS : Behavior of USD/ INR, oil, Interest rates and commodities

Interesting Readings

The quality of the information available free in web for any willing and hardworking trader surprises me. What are the incentives available for traders to share so much information and insight so freely ?

1. Newton Linchen 's insightful post on Trading Behavior
2. Another great piece from Newton on Fun in Trading
3. Dr Brett on Trading Education

Few Queries

In my quest to learn trading , I had great teachers in Dr Brett, Victor, Newton Linchen, SMB. Their thoughts continue to light my path towards finding consistency in trading. In following their articles and discussions , I had a few queries in Indian Context.

1. Is there a similar indicator as NYSE TICK ?
2. Any trading platform allows caluculation of % Change from OPEN ?
3. How to get Adv- Dec line caluculated from OPEN instead of Previous Close ?
4. Market Delta and Market Profile how to access in India without high cost for retail traders

I would highly appreciate responses from fellow traders to share their nowledge in this area.

Interesting Readings

I found the following interesting for the weekend reading.

1. Newton Linchen on the trading process. Infact a whole trading course can be designed on these SIX elements. Trading structure beautifully contained in these six bins.
2. Brett on Preparation for trading . I find this a common occurence with me as I frenetically search for trading ideas when I am not fully prepared for the trading day.
3. Lot of interesting trading concepts on Stocktwits. This can act as a model for thinking about setups and distilled wisdom from experienced traders. Must watch for professional traders to imbibe the thinking process and the language of the protrader.

Falling In Love With TradeTiger

As a small speculator earlier I did not have access to real-time intra-day charting. It is a bit expensive for independent traders and infact not possible to access in crowded brokerage trading rooms.

1. Many retail traders are forced to trade with tape reading and their own imagination from the screen.
2. Tradetiger of Sharekhan really a good tool for prepared traders.
3. Multiple time frame view of price action ( 3D,5D) helps traders to form a opinion about likely support & resistance areas.
4. Using this tool I could form a likely supply area for DLF at 487 in the morning trade. Combined with a range trading day hypothesis , me and my co-learner in the trading course decided to take a short trade. We covered for a 2% gain when other indicators started to deteriorate.
5. How many retail day traders can access multiday view of price action of their stock in real time? I would presume not many.
6. Chart based viewing of price action also helps traders avoid impulsive reactions and they can view with respect to a reference frame.
7. I am trying to illustrate my trade ideas and decision making process using Tradetiger in the trading course.
   

Fighting the Isolation of trading

Trading is based on Individual Opinion synthesised from various sources. But ultimately the trader has to decide and execute on his own. Trading is isolating in a way so as not to be biased by others random opinions.

1. In an effort to interact and share my opinions I have started my blog. I could form friend ship with excellent market participants and human beings like Newton Linchen, Soham Das, Sushil Kedia
2. I started to comment on market related blogs and in this process found myself approval from DailySpec , Newton Linchen, Jumpup
3. For the past one year, my thought process has got refined and I could explain my framework as a combination of ideas to beginning traders.
4. Initially I used to work from home but I shifted to my friend's office which made me more in control and reduced my overtrading to avoid boredom and frustation.
5. When I keep a trading student with me and start explaining trading setups to him and my process becomes more evident and my trading more responsible.

Newton LInchen's Observations on Course for Traders

I take liberty to post my esteemed friend, SpecList Author 's observations.

"Dear Prof.
I read the comment before your answer to it.I must tell you it has great merit to maintain such an aggressive comment in your blog, and it takes great humility and courage to answer it openly.I don't know the trading background of this person, but I'm suspicious of everyone who claims trading to be an easy task.Anyone who claims trading to be easy - surely doesn't make a living from trading. (That's why I don't like very much Dr. Brett books... It's clear to me that he is not a trader in the full meaning of the word. I rather to learn "trading psychology" from traders who really live from trading - In that matter, I would recommend an excellent book by Mark Fisher (the man who trained Paul Tudor Jones pit traders) - "The Logical Trader" (you find it at www.avaxhome.ws).You know, I also had my ugly ups and downs."BEEN THERE, DONE THAT, BOUGHT THE SHIRT"I started searching for guidance and I first found it in the person and work of Larry Williams (www.ireallytrade.com). Then I started to read other authors, (including Victor).The point is that I spend many years just to develop a conceptual framework for trading!!!! Many years just to understand (although roughly) the INTELECTUAL part of trading.Now, imagine my position, some time ago: being a market encyclopedia - and trading poorly.When I had enough bad trades, I realized that INTELECTUAL knowkedge of the markets wasn't enough.And... no "psycho trading" books were of ANY help.ANY. AT ALL.The first good "trading psychology" advise came from Larry Williams (I will quote it in my blog, next post!). It was something like this: "It's not the positive feelings that generate good trades...It's doing the right thing that generate good trades - and the good trades generate positive feelings."SO, there I was, stuck in the middle of bad trades - but "knowing" a lot about the markets. In sum, my TRADING didn't correspond to my KNOWLEDGE.Then I realized a trading METHOD that just solved every trading discipline issue I had. And it worked well for my students and for everyone who started using it. (I can disclosure it for you via skype).But, the point is: one struggle a LOT to achieve a minimal understanding of the markets - then, one have to struggle EVEN MORE to make this knowledge "work".I can see you are definitively in the path of making your knowledge work... And if I can be of some help in this process, I would be honored.
NAMASTE! " - Newton Linchen
I believe we all get resilience and humility from the exemplary path shown by the Chair Dr Victor Niederhoffer.

Why A Course for Traders

A reader commented on the blog about teaching trading without being a super trader. I will summarize my thoughts on this in response to his observations.

1. I am a co-learner in this course for traders. Each participant is a student as well as a teacher including the mentor.
2. I humbly accept that I had my highs and lows in the never ending journey called Trading ( " Hilotrader")
3. My effort is to find my own fusion of academic finance and trading.
4. I am not teaching a canned system but a thinking process.
5. Can I emphasize Mechanics,Tactics and Strategies thereby accelerating the learning curve of beginning traders.
6. My own learnings from 2003 onwards in the tradition of DailySpec, Traderfeed, Fooled by Randomness will give a framework to approach trading.
7. The course fulfils my desire and need to express myself and find flow in the feedback of my co-learners.
8. My effort to integrate Pivot points, Day Structure,Sector Themes, Preparation for the Day, Risk management,Trading psychology into a coherent framework will definitely protect beginners from blowing out before market allows them to learn to be competent traders
9. To put things in perspective, I have never blown my account in the past ten years of my active trading. Never panicked in a 10% move in Index, 70% down move in my stock ( Unitech in Oct 2008) in one trading session and always manged my risk.
10. An approach to markets, relentless drive to find your own trading style, Discovering your niche are the points I drive home in my course.
11. As for being a supertrader, knowledge is necessary but not sufficient, Risk-taking capacity is also needed. I try to trade within my risk parameters avoiding entering into Gambling territory.
12. I thank the reader for helping me clarify my thoughts on the course for Traders

Horse sense in the Market and Underestimation of VIG

Allow me to quote from Daily Spec

"This reinforces T@leb's argument that life is becoming over-optimised, reducing the slack in the system that's necessary to absorb the impact of the unforeseen. I have seen this myself recently, having interviewed a kid who was near top of his class at IIT and IIM, top of his class at a top tier MS in quant finance, straight As and a bonafide mathemagician. But he had zero intuition about the mechanics of the market, the vig or anything else. Everything was an equation to be solved where one simply cranks the wheel and spits out the answer." - Nick White

I have encountered situations where learned people under estimating the market realities and friction ( transactional costs).

1. One stockbroker explaining to me how high brokerage costs doesnt matter . It reminded me of Victor's anger when he was given dubious quotes on the floor of the exchanges.
2. Dealers buying 5% spread for customers and buying at the market in which there is scant volume.
3. Inappropriate use of Order types in the market situation.( Stop loss, Limit Orders)
4. Need for recognising how the " Obvious therefore Dubious " ( Courtesy GM Nigel Davis of DailySpec) more often than not as evidenced by Indian Market on Friday ( Nifty opening at + 110 points and closing at -40 points). Am I hearing Victor's admonition here ( You can find any example retrospectively in the market to fit your analogy )
   

My Friend a Fantastic Teacher, Trader & SpecList Author

Today I had wonderful conversation with Newton Linchen. I am all ears to his most incisive explanation of edge in market microstructure and Index futures trading.

1. I believe Newton Linchen 's constant encouragement enabled me to succesfully launch the " Active Trader Course " in Hyderabad.
2. I am very excited for the past two days looking forward to this conversation. We had a good time ." Trading & Exchanges " is a book that has to be digested many times over.
3. The excitement with which Newton Linchen described Round numbers and their relevance still resonates with me.
4. As the saying goes " When the student is ready, the teacher appears ".
   
5. I look forward to more conversations with Newton and India - Brazil Connections .
6. The effort to meet the Stock Exchange authorities to discover the edge is a lesson I always keep with me.
   

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