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Dear YK

Your market analysis was a good read and I agree with all that you say and yet I must raise a few points in order to have a meaningful debate on the topic so that we all would benefit from it ultimately. Your argument about the so called “big fat men” with deep pockets and a manipulative zeal is lucid and convincing but then, they have been around ever since the markets started functioning and will continue to be there when our grandchildren would be trading on the bourses. My point is that, we have accepted day trading as an important part of our lives despite these fat men and their manipulations; we are here despite knowing that the odds are stacked against us. We are here even after realizing that we small traders will never get either the proper opportunity or the proper timing to enter certain trades that give seemingly impossible returns in such short time-spans. I also agree that at times we get caught on the wrong side of the market because these big fat men lay there beautifully constructed traps for us and we willingly walk into them.

What can we do? U seem to have developed a knack of smelling these traps and hopefully we will all benefit from your expertise through this forum. Many of my broker friends too have developed these “pointers” which seemingly indicate such grey areas in the market functioning and they try to outsmart the big fat men. I have watched quite a few of these friends of mine from close quarters and must confess that they are good at it but also I have seen them make humungous errors and incur huge losses at times.

So, I come back to my original question; what can we do? Personally am not good at “instincts” or “sixth sense” or such other phenomenon. So I look at more scientifically acceptable techniques and that brings us to – Technical Analysis. TA is not perfect and we all accept that at the very outset, so to answer Asahai’s question as to why TA or chart patterns fail at times; it is because it is bound to fail! As simple as that. The fact of the matter is that market analysis is not a linear logic (& thank God for that!). So, when a TATAMOTORS announces its bad results, markets still give it a thumbs up (to the chagrin of our TV analysts and anchors). But, eventually all of it gets discounted and that is why we must be smart enough to understand not only the reaction of the market but also the timing of it.

Unfortunately day trading is a “zero sum game” and we must be willing to lose capital as much as gain capital. A medium term investor is less likely to lose money and by same logic a long term investor is even less likelier to lose money because as a civilization we are still growing and expanding (like the Physical Universe which is still expanding) and till the world starts shrinking we will continue to grow. This simple logic is at the core of Warren Buffet’s market theory despite all the mumbo jumbo we might often hear.

Unfortunately, again, we are day traders and not investors and we will gain some and continue to lose some. Only about 3 out of 10 of our analysis of scripts are correct and we must only try to trade on them and even then we will go wrong in terms of timing. Entry & exit points are more important than picking the right trade. Despite being correct at every level we are bound to lose money and that is where these “big fat men” come into picture. Thus, the chances that we lose money are higher than the chances that we make and yet we continue to indulge in day trading (or short term trading) because;

• It gives us a kick

• It is the only short cut to make a fast buck

• It appeals to a baser instinct in all of us – the gamblers psyche

• We do make decent enough profits in the longer run.

All of these or any of these reasons are true.

It is a globally (& historically) accepted fact that if we make money on even 50% of our trades, we could still end up making decent enough mullah. That is by letting profitable trades run and by cutting losses in loss making trades – again entry & exit timings.

In pursuit of such a perfect trading system I have come quite a long way. There was a time when I thought that building that one ultimate formula on MetaStock was my life’s ambition and I tried hard to bring in more & more sophistication (there by adding more complexities) to MS trading, until one day I realized that there is only so much one can do with OHLCV data. So, the moral of the story is that the simpler basic indicators and chart patterns are good enough to generate signals that one can follow. That is the primary reason why I hate black box indicators and password protected formulas. The more open and testable a formula is the better results it gives. The only way we can improve our trading techniques is by adding filters to them. One of the best filters I have discovered over the years is to bring in fundamental analysis into picture and take trading decisions in cohesion with FA. One of the problems is finding reliable financial data of a company and that is just the tip of the iceberg. Hopefully a part of that problem is being solved with MetaStock 11 which is now available.

YK, you have pointed out a case in time about RCOM and that is in continuation with your thought process, I believe. That (the RCOM) example was a typical case of the contrarian view that succeeds. You add the 3rd dimension to market analysis – The psychological analysis and we are all fortunate to have you amidst us in the GBC forum. One of my weaknesses is lack of instincts and psychological understanding of the markets and hopefully you being here in the forum would cover for that handicap. Together we can combine our know how and profit.

The summary of this long unwinding essay is my unflinching belief in TA & its ability to give results despite the big fat men with their deep pockets.

Pradeep,

I read your long essay and though you addressed my question I know that no chart analysis is perfect. Stop losses exist because a trade can go either way and TA only gives a probability.

The manipulators have always existed and they have their daily targets- just like we have ours. They shall remain in market till the last of small invetsors are gone. It may always be possible to ride tidal waves. In current scenario FA is definitely taking a back seat. How else do you justify the valuations. A stock price is valued based on the future earnings plus price appreciation. How many stocks fit that formula? Take out the derivatives  from the market and evaluate the trading.

If there was a  holy grail in TA therw ont be experts selling their black box systems.

Statistically you need to win more than 50% coz . Theoretically you win and lose half the time.

Finally I welcome your essay. Its good to have such good reading material here. Espcially on weekends a wrap up would be welcome. Its vey quiet here then.

well written buddy, my thought process is very similar to urs.

just to add to that- markets are always driven by humans, thus human psyche had and will always play a vital role in the way markets move. yes there r people out there with enough money and knowhow to benefit from this - but thats were u got to learn, "how to change ur psyche to achieve sucess in markets" !!

if u study Dr van tharp in trade ur way to financial freedom - he says trading system is 10%, discipline in trading nd ur mental aspects form other 90% of trading sucess !!!

ultimately, the markets are a voting machine -  were everyone votes with their money ! so naturally in moneybags got more votes than us! but in long term it all comes to valuating the scrip - but it also has a danger in form of unknown ! how can u predict the future so long ! as i read someday back :- "the only use of financial analysis is to make look astrology appear respectable"-  warren buffet ! (may have erred a bit in quoting).

The bottom line is - u got to make do with what u got ! just be careful in ur picks nd wait for oppurtunity to present itself & follow good money managemen rules ! thats the only way to make moolah in markets !!!

good luck to all on this endeavour.

Praveen ji

Nice to be accepted and invited!

I i've stated in my earlier post  that i'm diehard student of TA. And i'm very new, comparatively, in this field. Still read a lot of books on TA. Still trying for some more books which i'm findind hard to get. Several advanced fundas of TA are still not clear to me.

Lol - I'm not a psycologist. I'm a pure science graduate with MCA. Yes, in this process(trading) learning about psycological analysis too. Which i think very important.

I seldom see news (stock specific news). Chart tells me itself in advance ( as my experience is ). Yes, i always take care of the news related to general economic conditions and about the mkt triggers.

Yes, i'm very poor in FA ( in reading the financial statements of company).

FOR NOW - what i will say that a OHLCV chart tells all the story. It only needs a Connoisseur. Reading chart is a very tricky thing. That's why people fail and fall in the trap.

Later i'll come up with more inputs.

Happy trading.

Allo at 11:45AM on Sep 01, 2009

Pradeep,

I read your long essay and though you addressed my question I know that no chart analysis is perfect. Stop losses exist because a trade can go either way and TA only gives a probability.

 

The manipulators have always existed and they have their daily targets- just like we have ours. They shall remain in market till the last of small invetsors are gone. It may always be possible to ride tidal waves. In current scenario FA is definitely taking a back seat. How else do you justify the valuations. A stock price is valued based on the future earnings plus price appreciation. How many stocks fit that formula? Take out the derivatives  from the market and evaluate the trading.

 

If there was a  holy grail in TA therw ont be experts selling their black box systems.

 

Statistically you need to win more than 50% coz . Theoretically you win and lose half the time.

 

Finally I welcome your essay. Its good to have such good reading material here. Espcially on weekends a wrap up would be welcome. Its vey quiet here then.

"Statistically you need to win more than 50% coz . Theoretically you win and lose half the time."

i think u missed a point, cause actually u dont.

most of the trend following systems have a win rate of 30-40%. so how does one make money being "right" only 30-40% of time ? well, its decided by ur stop losses. e.g. u trade a Rs 100 stock with sl of Rs 5. if u make twice the loss i.e. Rs10 every time, then after 10 trades with a win ratio of 40%, u will be have made Rs40. but u also have made a loss of Rs 30. net-net, ur still up by Rs 10.

Dear Maxxji

Very good statistical argument u have placed. It should be an eyeopener to a green in TA. True that most of the indicators we follow or have - tells about what has happend in past. And taking example of past, we speculate what should happen next. Where mkt is more or less random.

What i feel is that every day/month year is not suitable for trading. It depends upon trader to trader that with whose trading system what chart is convincing. Otherwise, one should keep out if mkt. is not fitting in his/her trading system.

According to several traders' trading method mkt/chart becomes dumb. Even up on that they do not leave mkt. They try to create some other magic while twiking/turning their old promising system. And this is the place where they get trapped.

However I am of different nature. Many of you will disprove it. But why one should incur loss after getting in?

I mean to say - one shuld devise a trading system/method with timing such that if not profit then why loss? What not at cost?

Happy trading.