iCharts Discussions

[mikky]

Most traders have heard the statistics…”95% of traders lose money,” “Only 5% of traders can make a living at it,” or “Only 1% of traders make money.” Whatever the particular number is from recent studies, the fact is, many traders will lose money and it simply cannot be avoided. All sorts of reasons are given for it, such as money management mis-haps, bad timing, bad government policy, poor regulation or a poor strategy. These are all well and good…and some of those do definitely play a role in individual trading success…but there is a deeper reason. A deeper reason as to why most traders will lose regardless of what methods they employ. I purport, that even if all traders knew how (keep in mind knowing, and doing are two very different things) to trade successfully based on current conditions, still most traders would lose over the long run.

The Market is Not Independent of Us, It Is Us
Why most traders lose money and what traders often fail to realize is that the market is the collective movement of their actions and reactions to their own actions and to other people’s actions. Sound confusing. Consider this: You tee up a trade, close your eyes and hit “enter” (open the trade). You have no idea what the market is doing (your eyes are still closed), but you begin to react to your action–you wonder if you made the right decision, if you should adjust your stop or if you should have gotten in earlier or later. That continues to occur after you open your eyes and see how your action (trade) is acting in relation to others people’s actions and reactions. Even seasoned traders can go through these emotions at times, it never totally goes away.

In other words, the market is a giant feedback loop, showing traders (and anyone who views the market) a thermometer reading of the social mood under which traders, and by extension society, are operating.

Most traders seem to think of the market is something that has some external value outside of the price attributed to it by traders. I prefer to think of it as a real-time gauge of a societies view of their own productive capacity…or more simply put–social mood.

When markets are understood, the idea that everyone can make money is not only inaccurate, but impossible and laughable. Everyone making money means there is no market, because who would be taking the other side of the trade?

In addition most traders feel they can move with the crowd to make a (paper) profit, and then get out before the crowd to turn that trade into a real profit. In theory this is sound, but remember everyone else is setting out to do the same thing. It is this crowd movement which allows traders to make money at times. Without a large portion of traders coming to the same decision markets simple would not move. It takes conviction by many traders to create a trend, then it takes euphoric acceptance that “this is the new norm” to end it and “bend it. ” It then takes mass disillusionment to crash it the other way.

Only Individuals Can Beat the Market, Not the Crowd (and the crowd is the 80-90+%)
Consider for a moment if every trader followed the rule of not risking more than 1% of their account per trade and used similar strategies toted by professionals. Stops would trigger all over the place and prices would inflate and deflate… just as they do now with people adhering to their own (and different types of) strategies! In other words, everyone trying to do the same “right” thing creates the same market movements as everyone doing their own “wrong” thing.

This is why most traders lose money and it is the paradox traders must overcome, for as Master Oogway proclaims in the movie Kung Fu Panda “One often meets his destiny on the road he takes to avoid it.”

Luckily, just as it is almost impossible to convince a bull to be a bear once he or she has taken a position, it would be even more unfathomable to convince each trader to trade a certain way. The point is, it doesn’t matter how people trade now, or if everyone traded the same…most would still lose. The attempt of the masses to avoid this (or to created profits) creates the very noose they end up hanging themselves with.

[rk_a2003]

In final analysis we may say 1% or 5 % is an exception.

We may add one more point which is worth considering. In casinos who is the final winner?! Casino management and Govt. through the taxes paid by casino. In gambling dens too it's the gambling den management who always win.One may win some times and one may lose some times but there are few other sects who are winning always they are the management and Govt.

Now coming to the trading in the stock market in the same way you may win some times and may lose some times but the brokers, exchanges and the Govt are always winners, they never lose.

The bottom line is.... the more you trade the more the brokers and Govt get.All the money finally flows to them.( Review your account for a year, derive your losses in an year and derive the taxes you paid to Govt,stock exchanges and the brokerage you may wonder that both of them could be tallying or major portion of your losses are taken by them.....yes you are not that bad trader.. )

So resort to investing and selective trading (When ever you feel that most of the odds are in favor of you, If you almost always feel like that... no one can help you ) to escape from this trap. If you are a compulsive trader you are a compulsory loser.

The game of the giant institutes is altogether different, they are the actual market makers. This discussion will not cover them though they are the one who attacks common traders quite often. Their main activity is investing and their trading activities are with a specific plan meticulously executed for each expiry month and are solidly supported by their grand investment plans and their huge kitty's....

[mikky]

Hold on RK... not yet done on topic.... this is just a beginning.... will complete it over this weekend. It will not teach any trick for trading success but help out if anyone thinks like trading in crowd will help in making profit.

I will also cover, how these mutual funds and big investors make horrid mistakes. They too make big mistakes. They are not profit making machines.

For the time being just soak these 2 initial topics.

[pkholla]

rk is right as the market is a zero sum game. and we have to review just one trade as under:

BTST/ STBT/ Delivery trade:
seller gets market price X no of shares -brokerage -20 items of Govt. taxes/ levies*
ie seller gets some 1-.005 = 0.995 of actual trans. on NSE

buyer gets market price X no of shares + brokerage + 20 items of Govt taxes/ levies*
ie buyer pays some 1+.005= 1.005 of actual trans. on NSE

Approx 1% of each transaction gets siphoned off by brokers and Govt

*my broker gives me monthly ledger statement to help me check my position and each day Govt. levies/ taxes amounting to some 20 items are charged for each client. Any one interested, I will upload an extract from actual charges in my account

Around 5-7 years back, UPA needed Communist support in Lok Sabha. They demanded a quid pro quo including a 2+1=3% surcharge on other taxes. This levy was never repealed even though it is a nuisance AND Commies withdrew their support!!!

[yoginishreyas]

Thank god commies withdrew their support, If I am investing even this 1% seems like big money if I am into short trade, If this would had been 3% then it must be almost impossible to win in this markets.

thanks
Shreyas

[mikky]

Not Understanding the True Nature of Markets

With experience traders can learn to move with the crowd, and also realize the crowd’s fickle nature (and their own fickle nature as well). Traders may also finally learn that social mood dictates the markets and the news. This is directly opposed to the commonly held view that the news and the market dictate social mood.

Successful traders find something what works and stick to it, not letting others pull them away from their strategy. This is where most traders go wrong and why the crowd loses money. Despite most people’s best efforts they can’t pull themselves away from the crowd when it really counts.

When all your friends are buying stocks and talking about oil going 8000 (or whatever the number of the day is) and analysts are all over TV saying it is so, it is hard to take a contrarian view. After all, if you make a bet against everyone else and you are are wrong, your friends laugh at you because they are thinking their paper profits which continue to expand are going to be cashable at the bank soon. You experience regret for missing out on making some money and also may feel some social sheepishness. And heaven forbid you are right and people hate you because you just made money while they lost their shirt. Sound ridiculous?

Consider the public uproar during the Occupy Wall Street protests, or people feeling great resentment for the hedge funds and traders that made billions by seeing the housing price collapse and taking advantage of it! Or the manager who is resented for getting to keep his job while several of his employees are laid off. Winning traders and correct analysts are often “crucified” during major market turns when the majority lose. (Remember markets are a reflection of society and a leading indicator of the economy, so when stocks are moving down the economy is teetering or already in decline and thus people are already “on edge” themselves).

It is very easy to say “I will follow the crowd and then know when to get out.” Actually doing it is something entirely different…which is why crowds move together. This could largely be due to the human tendency to Extrapolate Trends. Trend extrapolation is the tendency to project current conditions into the futures, often assuming all else will remain equal.

And make no mistake, most hedge fund and mutual funds are no different, most take hits along with retail investors and traders, although usually not to the extreme of the uneducated trader who is more likely to completely wipe out his/her account when things go bad.

What is really interesting is that while a hedge fund may make an average of 20%/year over the last 20 years, the average investor in that fund has a high propensity to make far less than that. Why? Because they invest and pullout their funds at the wrong points, just as they do in the market. The hedge fund or mutual fund is a (micro) market, where investors/traders can deposit and withdraw based on how they think the fund will do.


Side Note: Traders and investors must also be aware of “survivorship bias.” We are likely to hear more stories of people making a killing than hearing about people losing everything because the people who lost everything are gone from the public eye and are not talking about it. The few who make money are sure to let everyone know about it and thus create a sort of illusion–intentionally or unintentionally– that anyone can do what they did/do.

Also realize, everyone sets out to be an individual and trade their own way, and by doing so most end up being with the crowd that loses money (remember Master Oogway). Why? Because each person let’s it happen..unwittingly. Their social mood, whether it be optimism, greed, fear, etc is likely being fueled by the same social mood prevalent in society. It is no mistake that individuals begin to like the same sorts of fashions that everyone is wearing. In a quest to change, the majority of society ends up changing together, moving towards similar desires and away from similar dislikes. Therefore, what the market is offering provides the exact thing that will lure the trader into the crowd.

For example, someone who has little experience investing in stocks wants to get involved because everyone else in their social circle is, ads are all over tv and even their nightly newscasters are talking a lot more about how the market is so good. In this environment you can be certain there will be lots of “helping hands” to welcome this investor to the crowd, teach them to be a part of the crowd and initiate them into the world of the blind leading the blind.

[mikky]

Extremes Require Nearly Everyone to Get Onboard

While it may be starting to come clear, you may still wonder how it is possible most people lose money and how they seem to join the crowd at exactly the wrong time.

When a social mood, such as…oh, let’s call it “bullishness” takes hold of a society or a person, it can be very hard to see the movement for what it is–something that will pass! Everything passes (just like our moods oscillate)… just like the craze over tulip bulbs. So people buy and buy and buy, and then other people see this and buy and buy and buy.

Then there are the people who hold out, and say “No-way, I am not doing that again. And anyway, I heard 80% of analysts are already bullish so it can’t go any higher.” But the market keeps ticking higher and so a few of the stragglers join in and buy. Some still hold out and the market keeps ticking higher. Finally, 85% of the population is bullish, and there are still some stragglers…and the market keeps going up. People are proclaiming their achievements and chanting that boom and bust cycles are a thing of the past. Finally pretty much every person has become a bull, owning stock, and if they decided not to buy, they have given up (or been told to shut-up) on trying to warn others not to buy…and market plunges the other way.

Since action is more important than talk, when fund managers have almost no cash on hand it means they are “all in” on the market and that means a reversal is likely to occur soon. The problem is that the market does not generally reverse lower until the funds/investors are all in, and it doesn’t move significantly higher until money has been pulled out of the market and most funds/investors are holding lots of cash to reinvest.

The market is unlikely to reverse to any significant degree until almost everyone is on one side. Which means almost everyone who joined that party late is going to lose. A bunch of people may just decide to wait, but so will the market. And if people are divided then the market will move in a ranging fashion.

People are the catalyst and without people to create an extreme the market won’t hit an extreme and reverse–remember the market does not act on its own, we…the people… are the market. In other words, the boom and bust cycles will not end. We progress and regress and then progress again.

Attempting to legislate the boom and bust cycles away is nothing more than political pandering, and is the result of the same mental processes which creates booms and busts in the first place. Again I refer back to Master Oogway’s comment in Kung Fu Panda “One often meets his destiny on the road he takes to avoid it.”

Political attempts to stop market crashes is nothing more than meeting our destiny on the road to avoid it, another problem is simply created or a bubble/crash occurs somewhere else. Markets are nothing more than the social mood of society’s participants expressing their view of their own and the collective productive worth. This can be further simplified by saying that my own productivity is largely determined by my overall mood. If I feel hopeless I don’t work as much or as hard, and I sell stock. If I feel good I work hard, play hard and buy stock. This applies to almost everyone and while individual experiences vary, on a societal level it plays out in the same way.

Until almost everyone (who is watching that time frame, and has the ability and interest to trade it) is in the trend, it won’t stop. The trend will keep going, enticing more people in, and when it reaches critical mass (which it can’t do without pretty much everyone on board) a reversal occurs. This change in fortune (for the worse) causes concern and then panic as a full reversal occurs. And as the mood of society continues to grow darker people feel more hopeless and give up fanciful notions of making money with assets and so the assets continue to drop.

People then blame and pick fights with others because of their misfortune…blaming politicians and successful traders who have no more control over the situation than anyone else. This is a result of a another human tendency to confuse cause and effect with events that simply happen in conjunction with each other.

It was society’s own social mood which created the situation, and the social mood of the society which they (we) themselves were a part of, helped create and bought into.

The reversal then reaches a bearish extreme where people see no hope, but there are still shares out there and gold to buy and so a few start to buy and the whole process starts again creating waves of smaller and larger degrees across time.

[mikky]

A Simple Numbers Game

Financial commentators will make statements such as “Most professional money managers can’t beat the S&P 500 benchmark….blah blah blah.” True. But it is not the professional money manager showing their ignorance, it is these critics who understand nothing about market movements.

Most market movement is created by professional money managers who are managing trillions of dollars in assets, and also by other professionals/businesses who need to transact or hedge risks to carry on their business. Therefore, if the market is up 10% in a year, it is because these professional fund managers have on average bought the market up 10%. Therefore, it is impossible for most professional money managers to make more than 10% that year, because it would be equivalent to asking someone to beat them self at a game of tennis.

Returns will be spread out from negative returns to triple digit returns, but on average they will have made about 10%, minus a management fee and expenses which means most fund managers will under-perform. If the market is up 10%, the average hedge-fund return may be in the ball-park of 8 to 9% after fees, possibly lower.

The majority of investors and traders will not beat the benchmark because they themselves create and are a part of that benchmark!

Does this means the market adheres to the Efficient Market Hypothesis. Not at all. Certain traders do manage to outperform consistently. Also, recall the “survivorship bias” briefly mentioned earlier? Many traders and novice investors come to markets with a handful of bills and then lose it. There is a steady and continual stream of these people. They feed the kitties of the those traders that are successful. Also, the very fact that so many people pile into (out of) market tops (bottoms) means their are favorable opportunities for those that can keep an objective eye on the market.

Since most traders trade on a shorter time frame than investors, consider this example. On day 1 the market is up 1% and on day 2 is down 1%. Most traders will be very near flat and then deduct fees and they are in the hole. Some traders will be up significantly, while others are down significantly. Which traders are profitable and which are losers may change from day to day over the next several months as similar up and down movements occur in the market. Consistent losers will drop off, contributing to the large number of traders who lose money. Traders who are profitable sometimes, but not very often, slowly move toward eventually sliding off the market grid as well.

Also consider this. In order for the glory stories to happen..such as traders making a 100%.. 500%…2000% returns (whether in one day, one year or several) how many traders must lose their shirt (or give up profits) for that to happen? Lots! Look at it a different way. That day trader that made $6,000,000 last year got that money from somewhere. Since small retail traders compose most of the total number of traders (high in number, small in worth compared to professionals) it was likely that $6,000,000 was taken right from those retail traders several thousand dollars at at a time. Someone lost money (giving it to this successful trader) or gave up profits (allowing the successful trader to profit). For a day trader to make $6,000,000 in a year, that means about 1200 people lost $50,000 each and/or gave up $50,000 each in potential profit!

That of course this is not a direct relationship, there is more to it than that, but it does provide a perspective not often considered.

In other words, the very thing which lures people in droves to the markets (big returns) ironically means that most of those people will be on the losing end of that exchange. In another ironic twist, when people clamor into the market all at once out of greed and a belief that a new era has begun they, bring about the exact opposite.

[amitagg]

I was part of a trading symposium recently wherein it was commented by a speaker that this bull run( so to say) is to weed out the HNIs ( since the retail is already out) .... Once that is done over the next 3-4 years .... The " real bull run shall start from 2019 etc...."

As per turtle ( I charts) using gann theory as I understand , markets making new highs is not a bull case if the breakout does not happen on " major trend gann pattern" particular time frame.....

As per one theory ( refinement of buffet method) the Daily MAs ( including 200 dma currently < 7000) need to further inter twingle before the next or real bull run....

The above observations would go to highlight your point.

[mikky]

As Individuals Apart From the Crowd

The crowd is not a crowd until most are involved.

Crowds can’t create strong trends until most are involved.

A trend won’t stop until nearly everyone is on board with the crowd.

When everyone is on board, it reverses.

Since it was likely the “big money” (that has to trade) that got the trend started and will likely be the first out, this small percentage of traders with the biggest pockets is likely to stay in the winners circle, even if that means making market average returns. The large number of small traders (a very high percentage of all traders) who jump on trends too late (or too early) and then tend to exit too late (or too early) will create the high percentage of traders who lose.

Therefore, most traders losing money is inevitable in financial markets. Only the few who understand this concept, who accept that what feels natural and good is likely the wrong choice, may manage to make money at this game. While this article provides a broad context, it applies to the small scale as well. Day traders get caught in the same crowd behavior without knowing it. That stock that won’t quit, which they watch all day before finally jumping in only to have it move the other way is the same phenomenon on a smaller scale.

Buyers and sellers can get exhausted, elated or sedate on any time frame. They experience short and/or long bursts of emotion which result in short and long-term actions/reactions, all leading to patterns which are visible on all time frames. There are are also degrees of bullishness and bearishness across time frames, meaning at times the runs and reversals will be aggressive and at other times more sedate depending on how many traders (and the public) are involved.

Also consider that if the a benchmark average is somewhere near what professionals are making on average –let’s say 15%/year–the average retail trader is attempting to make much more than this, and likely risking too much to do it. For people who want to make a living off trading it is hard to do so off making 15%/year on a $30,000 trading account. Therefore, retail investors are likely to over-trade and lose most of what they have–directly contributing to the 15%+ average return of consistently profitable hedge fund managers. For several hedge fund managers to make 15% on billions of dollars means A LOT of small traders will need to feed that kitty.

The only time the majority wins is when there is a shift in overall productive capacity of society, such as the impressive stock rally of the 80′s and 90′s--the latter part of which was more euphoria (bubble) . In my opinion there were some major advances in technology during that time which could potentially do a lot of good, and thus the rise was warranted. Unfortunately, we have mostly squandered that potential good on primarily creating products and services which decrease productivity instead of increased it; products which provide us an escape from the real world as opposed to help us harness the real world. These major fundamental shifts do no occur often, which means that in the lulls between most traders and investors will lose money.

Bottom Line

The bottom line is that traders must stick to a well defined plan and trade that plan even when it is uncomfortable (and it often will be). The vast majority of the population, and thus the vast majority of traders, buckle under this uncomfortable pressure…the same way they reach for the chocolate bar instead of the carrots. Since most of the population is more than happy to join the crowd, by having some discipline combined with a decent strategy it is possible to be one of the few successful traders who actually can leave the crowd before it implodes on itself.

There is some great reading on how our biology seems to be wired for crowd behavior. Robert Prechter has compiled some of it in his book “The Wave Principle of Human Social Behavior and the New Science of Socionomics“.

All this content is from Cory Mitchell article.

[Ruchirgupta2000]

Elliott wave has to all this inside it. If we could know that where we stand in the market (in terms of Wave count) we can avoid the corrections like the recent one which has happened in Nifyt and Banknifty for last 3 months.


Now because we know that 4th wave correction is over our winning probability gets increased.

[doji]

While most traders lose money, there are (very) few who make money consistently in the markets.

What is it that they do differently from the ordinary (losing) trader?

[mikky]

3 Ways To Exit A Profitable Trade
Traders are told to “let their profits run,” but unfortunately that’s pretty vague advice. Let a profit run long enough and it will eventually turn back into a loss.(This is the point where sometime I falters).

1) Trailing Stop
The trailing stop is probably the most well know profit extraction technique. In simplest terms, as the price moves in your favor, an exit order moves along with it, trailing the price by some set amount.

A trailing stop can be implemented in many ways. In an uptrend, a stop may be moved up to below recent lows. Thus, if the price creates a lower swing low you exit your trade. But if the price keeps making higher lows, then you keep moving the trailing stop up to lock in more and more profit.

2) Price Target
Price targets can be established for any trade using Fibonacci Extensions or support/resistance levels. Commonly, price targets are used for trading chart patterns, with the target based on the size of the pattern. Price targets can be established for any trade using Fibonacci Extensions or support/resistance levels (discussed below). Commonly, price targets are used for trading chart patterns, with the target based on the size of the pattern.

If the price has been struggling to get higher than a certain point (resistance) you may opt to place a price target just below the resistance region. If you have a short position, you may opt to place a price target just above support.

3) Entry Criteria Disappears
If you’re in a profitable trade and the reason you were in the trade disappears, you have probable cause to get out.

Assume a stock is trending higher—making higher swing highs and higher swing lows—and so you enter a long position. If the price makes a lower swing high and lower swing low the trend could be over, so you would exit the trade.

If you use indicators, you may get into a trade because the indicator gave you positive signals. When the indicator “flips” and no longer confirms your trade, you can book your profit and look for other opportunities.

[mikky]

4 Ways To Exit A Losing Trade

Traders shouldn’t arbitrarily decide to cut their losses, because that isn’t a testable strategy; instead, they should have a plan to manage their risk. Outline how much money you are willing to risk before placing a trade, and how you will bail out of a trade if it turns sour, so you know exactly when to cut your losses.

Since everyone trades differently, it’s important to come up with a plan for cutting losses based on your own trading style, account size, and position size. The goal is to allow the asset enough wiggle room to move in your favor, but if a certain size loss develops (or specific conditions), you get out and seek other opportunities

1) STOP LOSS
A stop loss is an order placed with your broker to get you out of a losing trade if the stock hits a certain price level.

The stop level should be at a price that keeps your loss manageable—based on account size and risk tolerance—but is also at a level that lets you know you were wrong about your expectations for the stock.

Stop losses are appealing not only because they manage risk, but because they also allow traders to make risk/reward assessments on their trades.

2) Trailing Stop
A trailing stop moves as the stock moves in your favor. If you set a trailing stop on a long position, and the stock price rises, the trailing stop will also rise to reduce risk or lock in a profit. During strong trends, the trailing stop allows you to capture large gains, all while controlling risk.

There are different types of trailing stops. The simplest is the manual trailing stop. This is where you progressively move your stop level based on recent price action.

3) Breach of Support Levels
Trades are often predicated on a stock’s historical price action. Whether it is a trend or a sharp move higher, price support can be used to exit a losing trade (in a downtrend, use resistance). During an uptrend, if price breaks a support it indicates the trend may be in trouble, and therefore, many traders use a breach of support to exit a long trade.

Support can be either horizontal—such as a price area that has caused the price to bounce off of it on several occasions—or it can be diagonal, such as a trend line.

If you are long and the price is holding above a support level—a price level where buyers have stepped in with regularity—it confirms your trade. If the price breaks below support, those buyers are no longer eager to buy the stock, and this warns of further price declines. Therefore, when support breaks, many traders will exit in an effort to cut their losses.

4) Indicators
Many traders use indicators to get into positions, so it follows that they can also be used to get out. When an indicator you use provides a sell signal, it may be time to get out of that losing trade, as further price declines could be developing.

The Bottom Line
All of the methods highlighted above can be used in conjunction with one another to exit losing trades. For example, place trailing stops at new support levels as they form. Indicators can also be used to compile evidence about your trade. Stop loss levels and trailing stop levels can be aligned with indicators so the stop loss is triggered when the indicator is about to provide a sell signal. It is important to control risk, not only for peace of mind and trading longevity, but also to calculate risk/reward scenarios. The same tools and methods profiled here can be used to control risk on short positions as well.

[mikky]

Trend Trading Setup

Continuation Setups:

A continuation trade setup is based on finding an entry point in an existing trend. Trends are where traders are likely to make the most money, so having a few continuation setups in your strategy arsenal is crucial.

Perhaps the most important thing to remember with this setup is that prices never move in a straight line, at least not for long. Instead, a stock uptrend moves in waves – one step higher, half a step back, and so on. Downtrends are no different. The price drops, followed by a rebound and then another drop. Continuation setups attempt to exploit this movement by entering during the pullback stage, and then riding the next wave of the trend to a profit.