TCS

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