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How to do SIP (Systematic Investment) in Stocks?

“History is written by the winners” -Napoleon Bonaparte I won’t be writing about the SIP which is already covered in the public doma...

Thursday, November 29, 2012

What is Life - EMIN∃M

Life.. by Marshall Mathers
What is life?
Life is like a big obstacle
put in front of your optical to slow you down
And everytime you think you gotten past it
it's gonna come back around and tackle you to the damn ground

Warning: Uncensored full song lyrics ahead..



Life.. by Marshall Mathers
What is life?
Life is like a big obstacle
put in front of your optical to slow you down
And everytime you think you gotten past it
it's gonna come back around and tackle you to the damn ground


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What is money?
Money is what makes a man act funny
Money is the root of all evil
Money'll make them same friends come back around
swearing that they was always down
What is life?
I'm tired of life
I'm tired of backstabbing ass snakes with friendly grins
I'm tired of committing so many sins
Tired of always giving in when this bottle of Henny wins
Tired of never having any ends
Tired of having skinny friends hooked on crack and mini-thins
I'm tired of this DJ playing YOUR shit when he spins
Tired of not having a deal
Tired of having to deal with the bullshit without grabbing the steel
Tired of drowning in my sorrow
Tired of having to borrow a dollar for gas to start my Monte Carlo
I'm tired of motherfuckers spraying shit and dartin off
I'm tired of jobs startin off at five fifty an hour
then this boss wanders why I'm smartin off
I'm tired of being fired everytime I fart and cough
Tired of having to work as a gas station clerk
for this jerk breathing down my neck driving me bezerk
I'm tired of using plastic silverware
Tired of working in Building Square
Tired of not being a millionaire

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I'm tired of being white trash, broke and always poor
Tired of taking pop bottles back to the party store
I'm tired of not having a phone
Tired of not having a home to have one in if I did have it on
Tired of not driving a BM
Tired of not working at GM, tired of wanting to be him
Tired of not sleeping without a Tylenol PM
Tired of not performing in a packed coliseum
Tired of not being on tour
Tired of fucking the same blonde whore after work
in the back of a Contour
I'm tired of faking knots with a stack of ones
Having a lack of funds and resorting back to guns
Tired of being stared at
I'm tired of wearing the same damn Nike Air hat
Tired of stepping in clubs wearing the same pair of Lugz
Tired of people saying they're tired of hearing me rap about drugs
Tired of other rappers who ain't bringin half the skill as me
saying they wasn't feeling me on "Nobody's As Ill As Me"
I'm tired of radio stations telling fibs
Tired of J-L-B saying "Where Hip-Hop Lives"

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You know what I'm saying?
I'm tired of all of this bullshit
Telling me to be positive
How'm I 'sposed to be positive when I don't see shit positive?
Know what I'm sayin?
I rap about shit around me, shit I see
Know what I'm sayin? Right now I'm tired of everything
Tired of all this player hating that's going on in my own city
Can't get no airplay, you know what I'm sayin?
But ey, it's cool though, you know what I'm sayin?
Just fed up
That's my word

for complete lyrics

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Saturday, November 17, 2012

Ten Basic Rules of Stock Trading

I believe just this kind of listed rules is not good to follow. There is a heirarchy for rules. For money management, trade management, filtering stock lists and loss management. After these some more rules for emotional management. Separating that way will make a good foundation for every trader/investor.

One simple but very crucial rule is to pay ultra caution to a position for which you have huge exposure. If your exposure is not much to the market or a particular stock, let it swing as much as it can. This is very important and should be integral part of your trading psyche. Once you master this one, the below ones will show their positive effect.

Ten basic rules of stock trading:
  1. Always follow stop losses. 3%, 5% or 20% or 40% based on your strategy. Never let a fast moving stock get past the loss limit. If you keep thinking, you will be made to wait longer before a recovery if there were any and the longer you wait for recover, the longer you will be expected to wait. So be early, the loss is just a number. But the loss of time is real –ve number. Just like unexpected loss, believe that unexpected profits too come.
  2. Don’t buy on dips
  3. Never do averaging down
  4. Average up as the stock trends upwards
  5. Always avoid stocks at all time lows (or those that have fallen a lot)
  6. Avoid stocks that have fallen below moving average and off by 30% or more from recent highs (unless the stock starts moving up fast)
  7. Follow the pace of the trend. Uptrending stocks should move fast up. It doesn’t matter if it happens rare but we should wait as long as the stock doesn’t move down by a big % in a single day. We wait tolerating daily little % moves up/down/concurrent till it makes a single day big % gain. The idea is to never miss these big +ve days and always avoid big –ve days even if it means to exit a good stock. It doesn’t matter if it goes up or down afterwards. This is the logic of the stock market. You can certainly avoid big drawdowns, if you always quit stocks that go down badly (big –ve %) in a single day.
  8. Always stick to stocks that are at all time high. This is another logic of stock market. How would you see a stock in its early days of uptrend before you know that has gone up to greatest heights? Every time it goes up it keeps making new highs and it looks like it is at all time highs. History is made after the fact. But a stock trader doesn’t gain anything after the events, but only journalists, news websites and Moneycontrol/TV18 does. A stock trader takes chances while the situation is developing. A journalist’s goal is to capture an event without becoming a part of it. But a stock trader’s goal is to capture an event by becoming a part of it. You participate in one big event and you get to talk about it for the rest of your life.
  9. Don’t do second-guessing after the events happened. Losses and missed opportunities cause lot more pain that goes over and above the compensating experience of +ve trades. This happens because of second guessing. We keep thinking if I didn’t do that, if I sold it there, if only I avoided buying there etc. The only way to get over this is to convince yourself what you did could not be avoided as per your strategy. There is no way one can do well in all situations, unless you are a superman or are on NZT. So get over second-guessing and move on to next good bets.
  10. No matter what kind of market you face any time, always keep your commitment to trading with all above rules in mind. You do not need to give much of dedication but the commitment to act when the time comes, the time windows can even be very short for you to take decisions, so be committed to be on alert. It won’t cost your time. If you avoid second-guessing you will also not get mental fatigue. Always keep in mind that once you get into a lucky streak, there will be no looking back.

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Saturday, November 10, 2012

My Second Quarter Trading (Q2FY12-13) and Some Lessons from It

I had a dramatic stock trading cum investing experience in the last quarter (Q2Fy12-13). I haven’t traded in more stocks than in Q1 but ended up with more sale transactions and the buy-above-high-and-sell-for-stop-loss trades, that pushed me down in the first month itself. Those trades costed 1300 in losses and more than 300 in nsdl charges (each sale transaction has a fixed nsdl charge, so it is better to sell all in one go when trading low quantities). In between there was annual maintenance charge for Sharekhan. Not sure how that is deducted. Lets assume it is approximately 400. Nevermind, all these fixed charges don't scale if the capital is scaled.

Looking at the transaction report till date (its hard to separate q2 alone now, I haven’t hired an accountant :) ), my gains before fixed costs stand at 3093.48. Apart from the above mentioned fixed charges, some money went somewhere. Those could be more fixed charges which would be insignificant as capital grows to higher levels in the coming quarters. So I didn’t yet check them out. May be these all eventually make the case for hiring an accountant. Let us see.

Note: Recently a friend pointed out the low value of capital in my trading. Well, once upon a time, I traded what could be considered a lot of capital by my friends at work. I thought about starting where I stopped, but the more I thought, the more I realized that once you take a break from trading, you should not start with the same capital that you paused at. You need to get back on track by following systematic investment plan and scale capital as profits grow. Note that in all Ponzi schemes it is the early birds that gain the most. But that doesn't mean if you start now you are going to be the bottom of the pyramid. When you can't tell if it is the end or the middle, you should take on a systematic scaling plan. Scale your exposure based on your recurring tolerance of loss as well as increasing profits. The recurring tolerance of loss is suited for jobbers who get steady income which is not a privilege of full time traders. However for any trader, the systematic scaling strategy (getting back to business) is to increase exposure only when profit increases, step by step. This ensures in case you were starting at the top of the bull market, you don't get caught by a bloody surprise. Blood baths don't happen all the time in the market but when they do - there's no need to talk about it (2008 showed what it was).

Meanwhile, the real profit based on incoming and outgoing flow of cash, is lesser than the larger figure above. It stood at 1239 for the combined quarters or till date. Discounting net gain of last quarter 989, it is about 250. I wish I could show better. But there are no ways to cook books here. Atleast I showed bigger figure in the previous paragraph. Of course that’s one way to cook. I don’t have stakeholders or shareholders here, that’s why I comfortably share this third paragraph. However one should note that this is small profit because of fixed costs. As the capital scales, the larger profit (3093) is scalable and at one point is the real profit (as the fixed costs become insignificant).

Average capital for the quarter was 50k, 150% up from last quarter :). The capital infusion rate per quarter remains the same as per my systematic investment plan. It is going to experience some dramatic jumps in the future as per my unsystematic investment plans but it won't immediately go into stocks. Or may be not as I rethinking about unsystematic plans to convert into systematic. Also percentage-wise Q2 net gain doesn’t make much of a story. Also I haven’t bothered to separate the stocks traded in this quarter, so no relative comparison table. Those are the not the important things anyway, so lets move on to important stuff.



The Distribution of Gains

There is no better way to evaluate a stock trader than plotting the distribution of his/her gains vs. their frequency. I have plotted below my distribution graph for the two quarters combined.

There were lots of losses around 250. That’s the black body of the last quarter experience. As July progressed, the bull market that started with the second bottom of June continued into the second quarter. From my earlier experiences, I felt the urge to increase the exposure as the market continued the uptrend. Only the scaling strategy was wrong. There was still more to learn about trading and the markets (broader and inner). It wasn’t too many trades, just few. But I wasn’t clear about my strategy yet.

My gains in the first quarter were dominated and predominantly determined by one stock - Varun Industries. The strategy there was bottom fishing. You can only bottom fish before the bottom happens. Once market went into uptrend, the opportunities are gone. Then I went onto new high stocks. You just can’t shift so fast between strategies. It needs skill. Skill to identify the really strong ones from those that are just moving up because of the broader market winds. The rest of the quarter revolved around changing my strategy dramatically from bottom fishing to the best strategy I followed till date (I did that in 2007 too) and finding the best ways to filter the stocks to trade for the chosen strategy.

In between I got introduced to reading books by Nassim Nicholas Taleb, the hero of randomness. His books Fooled by Randomness and The Black Swan, are very intellectually entertaining. When I say they are amazing, you can bet on their face value. There are no coincidences in life. Its all random. Random doesn’t mean chaos. Random because it is beyond our capacity to predetermine the entire sequence of outcomes. Well, the world is the way it is. We try to think we understand it, but we don’t. It is what it is. It may be multidimensional and non-orderly world. But we try to map it onto one dimension and make it simple and try to find order. These books have given me the perspective I needed for a long time.

I had eventually switched from bottom fishing strategy to pyramiding strategy. Stopped watching stocks that are going down to hell and started watching stocks that are going up to heaven. I found the statistical justification for the latter and practical justification for the former. Now my strategy has become more robust. I also understood the reality of non-linear gains. Earlier I perceived the market to have randomness of Gaussian distribution, but my perception now switched to randomness of Mandelbrotian distribution which is more realistic for the today’s world. However I could see that on a lower scale, like intra-day trading, one could still distribute one’s gains to Gaussian distribution with positive mean. However if you remember what I have written in last quarter report, I wasn’t trying just to get a shifted Gaussian distribution but rather a Mandelbrotian distribution which has most significant gains on the extreme right and all insignificant ones scattered anywhere around the center. Well, actually its not exactly that distribution but a one sided version of it (+ve sided). Of course, I am open for further evolution of my strategies and distributions as time passes. But only for evolution, not for change. Change is like a circle - merry-go-round, evolution is like a spiral, each time you make a round you arrive at a new level.

The distribution, however doesn’t look as good, having booked single largest loss from a stock so far. It was 675 in Varun. I had to end it up with a loss because I just couldn’t know its upper limit on profit. Its more likely to continue downtrend. But things got better by the end of the quarter by following the new strategy and buying into Shasunphar and Bergepaints and few insignificant others. The gains have merely shifted from one stock to another. As we are already in the middle of the 3rd quarter (sorry for the delay in getting Q2 report out), I could tell that those gains too are merely shifting from Shasunphar to other stocks. I am out of Bergepaint though with a little gain. This way, I would be booking losses most of the time, so hopefully I might not have to file these in my ITR again, unless losses are too large and I want to take the benefit of offsetting them against future gains.



On MC Tracker

This is how my portfolio looks on moneycontrol tracker as on the first trading day of this quarter. My greatest profit was in one stock that had also gained most in %. In between you would notice Atul with 15% which is a side effect of trying a short term trading strategy on 52 week high stocks. I will write about the details of strategies later. I got a bit of surge to scale up the position in Bergepaints too early before it proved its hold-worthyness. That was a classic mistake, though it wasn't costly. However I am now seriously continuing with my strategy. I still see the effects of broader market winds on the elasticity of trends in individual stocks and sector rotations and all kinds of strange things that keep happening randomly in the stock market. Random because I don’t have the capacity (nor tried) to determine its order. The overall gain looks too positive because unlike the first picture from Sharekhan, it doesn’t show the closed trades.

From here on my performance wouldn’t be based on net gains as they are very much influenced by the continuation of the trending stocks which in turn are influenced by the sector or broader market winds. Hence my goal is to focus on getting the distribution right without getting let down by the rare and significant negative events. After a pair of rare and significant positive & negative (in any order) events happen, then you can see the true score.

This quarter I have taken some very good lessons. I have to correct some of the last quarter ones as well. But I feel too lazy for that now. I will continue that in the next post that will come soon.

Update from Q3 (time travel): Things are looking better in Q3. Also I discovered some new effects of my systematic pyramiding strategy that I myself hadn't expected.

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