Rupee Symbol in Color

M Jagadish
The Rupee Symbol, which will officially stand for the Indian Currency Symbol  has been launched. Here it is in colour. Spread the word, spread the cheer! Tell your friends and relatives.

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Bad Start to Trading

M Jagadish
If you are a day trader and have a bad start (assuming you are not an opening gap specialist,) what do you do when you have a bad start? Suppose you keep $2000 as your worst case loss for the day and for some reason you violated something and ended up -$1800 in quick time, what should you do?

--> Take a break, have some coffee.
--> Breathe deep and analyze the real reason why this happened. Do not justify anything.
--> Promise yourself you will not violate anything for the day and hopefully from this point on.
--> Make sure you keep in mind that you have just $ 200 to go. Do NOT take another $2000 risk.
--> The most important thing. Cut down the trading size drastically. If you were trading 500 shares, try 100 for the rest of the day.

Overleveraging

M Jagadish
What do you do if you saddled yourself with more shares/contracts that your money management formula allows and you are stuck at the wrong levels?

OK, here's what I really mean. Just for example, you are a day trader (this applies even to swing, position or other traders as well). Your money management formula says that at this particular time, you are allowed to go long 1000 shares of ACME. As usual, you saw a "golden" chance and banged out 1000 shares immediately. The stock moves up a wee bit. After a few minutes, the stock starts sliding down. Sounds familiar? OK, now even though your first doubts creep in, you look at your buying criteria (could be gap, indicators, price, tick, anything) and then you feel you are still right and you add another 1000. The stock slides another few ticks. Ouch! Now what?

Here's a simple analysis:
--> There is nothing called a "golden" chance really. Or, at least, a trader should not allow onself to believe there ever can be one
--> Don't violate Money Management
--> Never average! If you do want to average, average towards your direction, which means for buying, buy higher, not lower. This just means that the stock is moving in the general direction of your bet.

The first thing you need to do to correct is to immediately liquidate the extra shares that exceed your Money Management formula for the moment. So, in this case, sell the extra 1000. If by the time you do this, the stock is down to your first stop loss, follow your risk management criteria and remove whatever quantity should be removed at that point (say for example, 500). Keep the remaining 500 and again apply Risk management if the stock slides to your next stop loss level.
-->

Are you in a Trading Slump?

You are now an experienced trader and your results are not that volatile, you are disciplined but you still don't understand why you are experiencing a slow and irritating draw down.

Relax, Trading is clearly a state of mind apart from all the other things that it already is!
I have some interesting observations about this. I play Chess on a leading Chess server that has a range of players that I can play against. I usually choose players at my own strength or slightly above (for that extra challenge). I am always surprised at how the charts of my performance behave as if they are price charts. Forget the patterns (its even more bewildering,) even just the price movement mirrors the state of mind. Many rising waves last a good amount of time, and similarly slumps last an extended period sometimes.

What this explains to me is that the human mind moves in patterns and trends and it takes a while for one to end and the other to start. So make sure you preserve capital while you are in a slump, try different things and you will be on track again after a while and then the whole profitable should hopefully last for good time.

Increasing Quantity in Trading

You must take extra care while increasing trading quantity. More often than not, novice traders, recklessly increase trading size and lose the small amounts gained in a few lucky trade. The reasons for taking cautions are mani-fold:

* - Psychological pressure of potential, bigger losses and hence not keeping enough stop loss.
* - Cost of slippage is usually higher
* - Blotter looks ugly when in drawdowns

Suggested Remedies:
Make sure you increase quantity gradually.
Measure performance by comparing with a set benchmark, even against smaller size trade results.

Strategy during Falls in the Market

One Strategy you should seriously consider adopting in falling markets is to buy into defensive stocks - FMCG (Fast Moving Consumer Goods) and Pharmaceuticals. They usually tend to move up and worst case, outperform the Index significantly.

Traditionally, FMCG and Pharma provide a buffer to the markets in falls. In any case, FMCG should form a part of your portfolio, but a bit more in falls. If you notice, even Warren Buffet has good holdings in this sector.

Never Question why the Market Moves in a Certain Way

It is never wise to speculate too much on the market movement and why it will move in a certain direction violently or otherwise. On the contrary, listen to the market and do what it is saying. If you catch a good wave, just concentrate on riding it with risk and money management.

In the short term, markets move under the influences of demand and supply. You do not need to be an expert of Fed Rate cuts, Dollar Movement or any other external factors. I have observed that novices spend endless amounts of time trying to dissect economic, technical, and many other sources of information. What is baffling to them is that they still get in at the wrong time leading to losses.

Relentless Slide

Why does the market relentlessly slide sometimes? What to do if you are caught on the wrong side in one such slide?

The market moves in one direction, is hammered (in a fall) constantly, and keeps making new lows. This is typical in what is called a 3rd wave fall. In Elliot wave theory, the 3rd wave is the most persistent and longest lasting among the 5 waves in the major direction. You do not have to be an expert to escape or catch a 3rd wave, but you can definitely avoid wrong moves or make use of such opportunities.



As you probably experienced by now, averaging down (for a buy side strategy) is not such a good idea. Most buy side funds get caught in the 3rd wave down after buying into the 2nd wave thinking that a new high will be made. The simplest clue that the market gives before a 3rd wave fall is a lower top or a double top. This is usually a hint at an impending fall. Look for this. If the fall is of the a-b-c type, the lower top will never be close to the absolute recent top. This means that the "a" wave is sharply down and the "b" (upward wave) is nowhere close to the top. Look for this formation to avoid getting caught in a 3rd wave fall or to make use of a 3rd wave up to invest.

Trading in tough times

Let's pause for a while and think about the events happening right now. The only words you hear these days are bankruptcy, take over, rescue package, jobless claims, and so on. Lehman goes bust, Washington Mutual taken over by J P Morgan, AIG almost going bust if not rescued, Merril Lynch gone, Investment Bankers become house cats.

What can a trader do at such times? Well, the answer is definitely not in black or white. Never keep an open position without a stop loss. Do not expose yourself to a huge loss. At the same time, volatile times are best for making profits once you set a good stop loss order. Make money but at the same time, play safe. It is definitely possible.

Stochastics

The Stochastic oscillator compares where a security’s price has closed relative to its price range over a specifically identified period of time. This is a predictive indicator in that it gives advance signals for buying and selling.

The indicator has been developed from the basic observation that prices tend to close near their high in an upward trending market and near their lows in a downward trending market. Further, as an upward trend matures, price tends to close further away from its high; and as a downward trend matures, price tends to close away from its low.

How is Stochastics Used ?

This indicator is often used to predict trend reversal. The indicator tries to determine when prices start to cluster around their low of the day for an up trending market, and when they tend to cluster around their high in a down trending market. Lane's theory is these are the conditions, which indicate a trend reversal is beginning to occur.

The stochastic indicator is plotted as two lines. They are the %D line and the %K line. The %D line is more important than the %K line.

Ranges

The stochastic is plotted on a chart with values ranging from 0 to 100. The value can never fall below 0 or above 100. Readings above 80 are strong and indicate that price is closing near its high. Readings below 20 are strong and indicate that price is closing near its low.

A very powerful move is underway when the indicator reaches its extremes around 0 and 100. Following a pullback in price, if the indicator retests these extremes, a good entry point is indicated.

Reversal

Ordinarily, the %K line will change direction before the %D line. However, when the %D line changes direction prior to the %K line, a slow and steady reversal is usually indicated.

When both %K and %D lines change direction, and the faster %K line subsequently changes direction to retest a crossing of the %D line, but doesn't cross it, this is a good confirmation of the stability of the prior reversal.

Many times, when the %K or %D lines begin to flatten out, this is an indication that the trend will reverse during the next trading range.
These are just some of the important and popular oscillators and indicators. There are many more. You need to study and pick the one that best suits your personality, apply the indicator and specialize to maximize profits.