M6 - Man, Mind, Money, Markets, Method & Madness
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Back today.... Lots to catch up... Here's one good read. Excerpt.
Why Do Investors Make Bad Choices? - Cass R. Sunstein
http://www.bloombergview.com/articles/2014-04-09/why-do-investors-make-bad-choices
For many years, I have studied human behavior, including the mistakes occasionally made by fallible people, including investors. But a few years ago, I made a really dumb investment decision. In a single day, I hit the trifecta, committing at least three classic behavioral mistakes. The year was 2011. The stock market was recovering well from its terrible collapse during the Great Recession, but over a short period it had a series of stumbles. I got nervous. What if it collapsed again?
At the time, I was working in the federal government, with a daughter in college, a 2-year-old boy and a new child on the way. Could I afford to lose a lot of money? Wouldn’t it make sense to sell equities and to put the money into a safe, reliable certificate of deposit? Economists know that if you invest in stocks, it makes sense to choose passively managed, highly diversified index funds. I had done exactly that. But seeing a decline in the fund’s value, I decided to sell a significant chunk. I e-mailed Richard Thaler, the great behavioral economist and my co-author on "Nudge," and before proceeding, I asked him whether I would be making a mistake.
His response: “Reread our book!”
I pretty much knew what he meant, but that was a bit vague for me (our book is long), so I proceeded as planned and sold that significant chunk. Giving Thaler the news, he exclaimed, “No! 'Nudge' explains that you shouldn’t have done that!” The fund is now up about 66 percent from the date I sold it. It looks as if Thaler was right. In fact, a little voice in my head told me, even at the time, that I was acting rashly.
Of the behavioral mistakes to which I fell victim, the first is called “availability bias.” Behavioral scientists have shown that if something has happened in the recent past, it is cognitively “available,” and people tend to exaggerate the probability that it will happen in the future. Availability bias isn’t exactly irrational, but it can produce big mistakes. The stock market did collapse in 2008, but it doesn’t collapse very often, and in 2011 I shouldn't have focused on the risk of another meltdown.
The second mistake involves "loss aversion." People tend to hate losses from the status quo – in fact, they hate them far more than they like equivalent gains. If you suddenly lose $10,000, the distress you would feel would almost certainly be greater than the joy you would feel if you suddenly gained $10,000. The irony is that if we make our decisions on the basis of loss aversion, we’ll end up as big losers. A case in point: As the stock market started to fall, I wanted to prevent losses, and as a result, I lost a lot.
The third bias is called "probability neglect." Human beings tend to focus on worst-case scenarios, especially when their emotions are running high, and not on the likelihood that such scenarios will actually come about. When I made my stupid decision, the worst-case scenario (another collapse!) loomed large. I devoted far too little attention to the question of whether it was probable. Behavioral economists now have a detailed account of the biases to which investors are subject. For example, they are also prone to the “disposition effect,” which means that they sell stocks too quickly when they have appreciated in price while holding on too long to stocks that have depreciated in price.
In addition, a lot of individual investors are overconfident. (Men are worse than women on this count.) They like to buy, and they like to sell, and they think that they can work some magic to make a lot of money. Forget about it. The stock market isn’t a Steven Spielberg movie. It cannot be said too often that the best advice, for most people, is boring and simple, so here's a nudge: Have a diversified portfolio, consisting in large part of low-cost index funds, weighted toward equities; add money as you get it, and diversify it as well; keep the cash you need; and otherwise hold steady (and spend a lot of time with the sports pages).
If your emotions start to get the better of you, and you think it’s time to make a big move in a significantly different direction, it’s good to have Thaler’s voice in your head, saying a single, beautiful word: "No."
Why Do Investors Make Bad Choices? - Cass R. Sunstein
http://www.bloombergview.com/articles/2014-04-09/why-do-investors-make-bad-choices
For many years, I have studied human behavior, including the mistakes occasionally made by fallible people, including investors. But a few years ago, I made a really dumb investment decision. In a single day, I hit the trifecta, committing at least three classic behavioral mistakes. The year was 2011. The stock market was recovering well from its terrible collapse during the Great Recession, but over a short period it had a series of stumbles. I got nervous. What if it collapsed again?
At the time, I was working in the federal government, with a daughter in college, a 2-year-old boy and a new child on the way. Could I afford to lose a lot of money? Wouldn’t it make sense to sell equities and to put the money into a safe, reliable certificate of deposit? Economists know that if you invest in stocks, it makes sense to choose passively managed, highly diversified index funds. I had done exactly that. But seeing a decline in the fund’s value, I decided to sell a significant chunk. I e-mailed Richard Thaler, the great behavioral economist and my co-author on "Nudge," and before proceeding, I asked him whether I would be making a mistake.
His response: “Reread our book!”
I pretty much knew what he meant, but that was a bit vague for me (our book is long), so I proceeded as planned and sold that significant chunk. Giving Thaler the news, he exclaimed, “No! 'Nudge' explains that you shouldn’t have done that!” The fund is now up about 66 percent from the date I sold it. It looks as if Thaler was right. In fact, a little voice in my head told me, even at the time, that I was acting rashly.
Of the behavioral mistakes to which I fell victim, the first is called “availability bias.” Behavioral scientists have shown that if something has happened in the recent past, it is cognitively “available,” and people tend to exaggerate the probability that it will happen in the future. Availability bias isn’t exactly irrational, but it can produce big mistakes. The stock market did collapse in 2008, but it doesn’t collapse very often, and in 2011 I shouldn't have focused on the risk of another meltdown.
The second mistake involves "loss aversion." People tend to hate losses from the status quo – in fact, they hate them far more than they like equivalent gains. If you suddenly lose $10,000, the distress you would feel would almost certainly be greater than the joy you would feel if you suddenly gained $10,000. The irony is that if we make our decisions on the basis of loss aversion, we’ll end up as big losers. A case in point: As the stock market started to fall, I wanted to prevent losses, and as a result, I lost a lot.
The third bias is called "probability neglect." Human beings tend to focus on worst-case scenarios, especially when their emotions are running high, and not on the likelihood that such scenarios will actually come about. When I made my stupid decision, the worst-case scenario (another collapse!) loomed large. I devoted far too little attention to the question of whether it was probable. Behavioral economists now have a detailed account of the biases to which investors are subject. For example, they are also prone to the “disposition effect,” which means that they sell stocks too quickly when they have appreciated in price while holding on too long to stocks that have depreciated in price.
In addition, a lot of individual investors are overconfident. (Men are worse than women on this count.) They like to buy, and they like to sell, and they think that they can work some magic to make a lot of money. Forget about it. The stock market isn’t a Steven Spielberg movie. It cannot be said too often that the best advice, for most people, is boring and simple, so here's a nudge: Have a diversified portfolio, consisting in large part of low-cost index funds, weighted toward equities; add money as you get it, and diversify it as well; keep the cash you need; and otherwise hold steady (and spend a lot of time with the sports pages).
If your emotions start to get the better of you, and you think it’s time to make a big move in a significantly different direction, it’s good to have Thaler’s voice in your head, saying a single, beautiful word: "No."
Thanks to Amit's thread, got a link to the 'Zurich Axiom' (Axiom = ax·i·om [ak-see-uhm] 1. A self-evident truth that requires no proof. 2. A universally accepted principle or rule. 3. Logic, Mathematics . a proposition that is assumed without proof for the sake of studying the consequences that follow from it - (taken from dictionary dot reference dot com) Posting in parts for clarity and better understanding)
Many people, probably most, want to win without betting. They know it is possible to cut one's personal risks to a minimum -- but they also know that if you do that, you abandon all hope of becoming anything but a face in the crowd.
To make any kind of gain in life -- a gain of wealth, personal stature, whatever you define as "gain" -- you must place some of your material and/or emotional capital at risk. That is the law of the universe.
To become a butterfly, a caterpillar must grow fat; and to grow fat, it must venture out where birds are. There are no appeals. It is the law.
To do this one need not be rash. Instead one could bet with care and thought. To bet in such a way that large gains are more likely than large losses.
This formula or philosophy consists of twelve profound and mysterious rules of risk-taking called "The Zurich Axioms". These are applicable to all asset classes – stocks, commodities, real estate, bullion, currencies etc.
People never get rich on salaries, and a lot of people get poor on them. You've got to have something else going for you. A couple of good speculations, that's what you need.
As far as anybody knows, they are now in their final form: twelve Major Axioms and sixteen Minor Axioms.
Their value seems incalculable. They are rich in secondary and tertiary layers of meaning, some coldly pragmatic, some verging on the mystical. They are not just a philosophy of speculation; they are guideposts for successful living. They have made a lot of people rich.
The First Major Axiom:
ON RISK - Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
Most people grasp at security as though it were the most important thing in the world. Security does seem to have a lot going for it. It gives you that cozy immersed feeling, like being in a warm bed on a winter night. It engenders a sense of tranquility.
Life ought to be an adventure, not a vegetation. An adventure may be defined as an episode in which you face some kind of jeopardy and try to overcome it. While facing the jeopardy, your natural and healthy response is going to be a state of worry. Worry is an integral part of life's grandest enjoyments.
Frank Henry's rule of thumb was that only half of one's financial energies should be devoted to job income. The other half ought to go into investment and speculation.
Every occupation has its aches and pains. If you keep bees, you get stung. If one has got a choice between worried and poor, one could take worried anytime. True, there are times when you get that shuddery feeling, but such times come rarely and don't usually last long. Most of the time you will be worried only enough to make life spicy. The degree of risk we are talking about really isn't very great.
All investment is speculation. The only difference is that some people admit it and some don't.
Minor Axiom I
Always play for meaningful stakes.
The only way to beat the system is to play for meaningful stakes. This doesn't mean you should bet amounts whose loss would bankrupt you. You've got to pay the rent and feed the kids, after all. But it does mean you must get over the fear of being hurt.
If an amount is so small that its loss won't make any significant difference, then it isn't likely to bring you any significant gain either. Bet amounts that worry you, if only a little.
Minor Axiom II
Resist the allure of diversification.
The fact is that diversification, while reducing your risks, reduces by the same degree any hope you may have of getting rich.
Diversification has some flaws:
• It forces you to violate the precept of Minor Axiom I: that you should always play for meaningful stakes.
• By diversifying, you create a situation in which gains and losses are likely to cancel each other out, leaving you exactly where you
began -- at Point Zero.
• By diversifying, you become a juggler trying to keep too many balls in the air all at once. If you have just a few speculations going and one or two turn sour, you can take defensive action. The more speculations you get into, the more time and study they will require. You can become hopelessly confused. When things go wrong -- which is inevitable, as you are surely aware -- you can be driven to near-panic as one problem after another presents itself.
A little diversity probably won't do any harm. Three good speculations, maybe four, maybe even six if you are strongly attracted to that
many all at once.
Many people, probably most, want to win without betting. They know it is possible to cut one's personal risks to a minimum -- but they also know that if you do that, you abandon all hope of becoming anything but a face in the crowd.
To make any kind of gain in life -- a gain of wealth, personal stature, whatever you define as "gain" -- you must place some of your material and/or emotional capital at risk. That is the law of the universe.
To become a butterfly, a caterpillar must grow fat; and to grow fat, it must venture out where birds are. There are no appeals. It is the law.
To do this one need not be rash. Instead one could bet with care and thought. To bet in such a way that large gains are more likely than large losses.
This formula or philosophy consists of twelve profound and mysterious rules of risk-taking called "The Zurich Axioms". These are applicable to all asset classes – stocks, commodities, real estate, bullion, currencies etc.
People never get rich on salaries, and a lot of people get poor on them. You've got to have something else going for you. A couple of good speculations, that's what you need.
As far as anybody knows, they are now in their final form: twelve Major Axioms and sixteen Minor Axioms.
Their value seems incalculable. They are rich in secondary and tertiary layers of meaning, some coldly pragmatic, some verging on the mystical. They are not just a philosophy of speculation; they are guideposts for successful living. They have made a lot of people rich.
The First Major Axiom:
ON RISK - Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
Most people grasp at security as though it were the most important thing in the world. Security does seem to have a lot going for it. It gives you that cozy immersed feeling, like being in a warm bed on a winter night. It engenders a sense of tranquility.
Life ought to be an adventure, not a vegetation. An adventure may be defined as an episode in which you face some kind of jeopardy and try to overcome it. While facing the jeopardy, your natural and healthy response is going to be a state of worry. Worry is an integral part of life's grandest enjoyments.
Frank Henry's rule of thumb was that only half of one's financial energies should be devoted to job income. The other half ought to go into investment and speculation.
Every occupation has its aches and pains. If you keep bees, you get stung. If one has got a choice between worried and poor, one could take worried anytime. True, there are times when you get that shuddery feeling, but such times come rarely and don't usually last long. Most of the time you will be worried only enough to make life spicy. The degree of risk we are talking about really isn't very great.
All investment is speculation. The only difference is that some people admit it and some don't.
Minor Axiom I
Always play for meaningful stakes.
The only way to beat the system is to play for meaningful stakes. This doesn't mean you should bet amounts whose loss would bankrupt you. You've got to pay the rent and feed the kids, after all. But it does mean you must get over the fear of being hurt.
If an amount is so small that its loss won't make any significant difference, then it isn't likely to bring you any significant gain either. Bet amounts that worry you, if only a little.
Minor Axiom II
Resist the allure of diversification.
The fact is that diversification, while reducing your risks, reduces by the same degree any hope you may have of getting rich.
Diversification has some flaws:
• It forces you to violate the precept of Minor Axiom I: that you should always play for meaningful stakes.
• By diversifying, you create a situation in which gains and losses are likely to cancel each other out, leaving you exactly where you
began -- at Point Zero.
• By diversifying, you become a juggler trying to keep too many balls in the air all at once. If you have just a few speculations going and one or two turn sour, you can take defensive action. The more speculations you get into, the more time and study they will require. You can become hopelessly confused. When things go wrong -- which is inevitable, as you are surely aware -- you can be driven to near-panic as one problem after another presents itself.
A little diversity probably won't do any harm. Three good speculations, maybe four, maybe even six if you are strongly attracted to that
many all at once.
Famous Traders : Stanley Druckenmiller
http://www.forextraders.com/forex-analysis/famous-traders/stanley-druckenmiller.html
In 1975, Stanley Druckenmiller graduated from Bowdoin College where he studied English and Economics, with the desire to eventually to become a professor of those subjects. He began to work on a Ph.D. at the University of Michigan, but left the program to work at Pittsburgh National Bank as a stock analyst in 1977. After only one year, he became head of the bank's equity research group. He was only 28 years old when he founded Duquesne Capital Management in 1981 with only one million dollars. Then, in 1985, he accepted a position as a consultant to Dreyfus, compelling him to commute to New York for two days each week. By 1986, he became the head of Dreyfus Fund, with the agreement that he would continue managing Duquesne. In 1988, he accepted George Soros' offer of a position within Quantum Funds, replacing Victor Niederhoffer. Together, the pair "broke the Bank of England" by shorting the British pound, resulting in one billion dollars of profit in a single day.
After 12 years with Quantum Funds, Stanley Druckenmiller left the company to focus on developing Duquesne Capital Management, which has become quite successful. Forbes has Stanley Druckenmiller listed as the 91st richest person in America. In addition to the single day's one billion dollar profit take in 1992, Mr. Druckenmiller has been able to sustain outstanding results over long periods of time. He typically has achieved annual rates of return exceeding twenty-five percent over a 10 year period. His sense of timing is one of the keys to his success. It has been said that he has an ability to get in and out of positions at just the right time. While Stanley Druckenmiller knew how to bet big, he also knew when it was time to back off.
While Mr. Druckenmiller has worked hard at managing multiple funds, he has clearly enjoyed some of the rewards of being among the best traders in the world. With a 2008 net worth of 3.5 billion dollars, Stanley Druckenmiller continues to provide millions of dollars each year to various philanthropic organizations. In 2009, he gave more money to charities than any other American.
It's almost impossible to deny that Stanley Druckenmiller's is probably the best trader alive. His main focus has been on capital preservation and "home runs." If you stay away from negative return years while achieving some one hundred percent years, your long-term returns will be outstanding. Druckenmiller also proves that success is not a matter of luck. His consistent returns demonstrate a sound underlying strategy along with the willingness to take occasional risks. His is a trading strategy that worked, and his success offers good insights for all traders.
Some quotes :
It is not whether you are right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.
It’s my philosophy, which has been reinforced by Mr. Soros, that when you earn the right to be aggressive, you should be aggressive.
The way to build long-term returns is through preservation of capital and home runs.
The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.
Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough of a position.
http://www.forextraders.com/forex-analysis/famous-traders/stanley-druckenmiller.html
In 1975, Stanley Druckenmiller graduated from Bowdoin College where he studied English and Economics, with the desire to eventually to become a professor of those subjects. He began to work on a Ph.D. at the University of Michigan, but left the program to work at Pittsburgh National Bank as a stock analyst in 1977. After only one year, he became head of the bank's equity research group. He was only 28 years old when he founded Duquesne Capital Management in 1981 with only one million dollars. Then, in 1985, he accepted a position as a consultant to Dreyfus, compelling him to commute to New York for two days each week. By 1986, he became the head of Dreyfus Fund, with the agreement that he would continue managing Duquesne. In 1988, he accepted George Soros' offer of a position within Quantum Funds, replacing Victor Niederhoffer. Together, the pair "broke the Bank of England" by shorting the British pound, resulting in one billion dollars of profit in a single day.
After 12 years with Quantum Funds, Stanley Druckenmiller left the company to focus on developing Duquesne Capital Management, which has become quite successful. Forbes has Stanley Druckenmiller listed as the 91st richest person in America. In addition to the single day's one billion dollar profit take in 1992, Mr. Druckenmiller has been able to sustain outstanding results over long periods of time. He typically has achieved annual rates of return exceeding twenty-five percent over a 10 year period. His sense of timing is one of the keys to his success. It has been said that he has an ability to get in and out of positions at just the right time. While Stanley Druckenmiller knew how to bet big, he also knew when it was time to back off.
While Mr. Druckenmiller has worked hard at managing multiple funds, he has clearly enjoyed some of the rewards of being among the best traders in the world. With a 2008 net worth of 3.5 billion dollars, Stanley Druckenmiller continues to provide millions of dollars each year to various philanthropic organizations. In 2009, he gave more money to charities than any other American.
It's almost impossible to deny that Stanley Druckenmiller's is probably the best trader alive. His main focus has been on capital preservation and "home runs." If you stay away from negative return years while achieving some one hundred percent years, your long-term returns will be outstanding. Druckenmiller also proves that success is not a matter of luck. His consistent returns demonstrate a sound underlying strategy along with the willingness to take occasional risks. His is a trading strategy that worked, and his success offers good insights for all traders.
Some quotes :
It is not whether you are right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.
It’s my philosophy, which has been reinforced by Mr. Soros, that when you earn the right to be aggressive, you should be aggressive.
The way to build long-term returns is through preservation of capital and home runs.
The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity.
Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough of a position.
It's always good to see some simple charts/patterns and indicators. Here's one on 50 & 100 MA. One thing that I believe in that there is no 'magical period' or MA type, be it EMA/SMA/TMA etc. but having a 1:2.5 or 1:3 ratio or such makes logical sense, and helps to avoid whipsaws, especially when price trades in a narrow range, especially in the shorter TF. While on a daily TF, in this case, the 50 and 100 seems just appropriate.
Just a short note on Gujarat visit. It's something insightful and interesting as well. The purpose of visiting Gujarat was actually to check up some properties to invest - the rational being Kutch district with Mundra and Mandvi (upcomming new port) (not to mention the old Kandla port) do have a promise and potential of some good upside, even though the prices have run up quite a lot. So this was a pre-arranged visit, and did check up on a lot of properties, and narrowed down to a few, but had the same road-block in all cases, which underpins the problem of black money in India, more so in Gujarat. In simple words, a property's 'official price' has nothing to do with what it the reality. However, transactions get recorded as per the prices of something called 'jantri' which is nothing but the minimum price at which property price has to be transferred. However the way it really works is totally inverse of the way it is intended. Say for e.g one wants to buy a property for say 30 Lakhs. The 'jantri' or the 'official price' will be about 3 Lakhs or less ie. about 10% of the market value (or less). This is across all the properties that we saw. Investing in a property in Gujarat is really good for those who have unaccounted or black money. One can take their black, unaccounted and untaxed money, and use property investment as a vehicle, and get rid of black money in a perfectly good manner. While playing black component of 90% seems excessive to us, the broker mentioned one property (farm plot) that he had recently done - which as per 'jantri' rate was transferred at 1% white rate, and 99% was paid in cash. 
Actual cash paid was 99 times more than the official rate! Something to think about.
Actual cash paid was 99 times more than the official rate! Something to think about.The Zurich Axiom
The Second Major Axiom
ON GREED - Always take your profit too soon.
Greed, in the context of the Second Axiom, means excessive acquisitiveness: wanting more, more, always more. It means wanting more than you came in for or more than you have a right to expect. It means losing control of your desire. Greed is the bloated, self destructive cousin of acquisitiveness.
As we use the term here, "acquisitiveness" is the natural wish to improve one's material wellbeing. Fear and hate it. It is a speculator's enemy. If they wanted less, they'd go home with more.
Don't push your luck" -- or, as the Swiss more often put it, "Don't stretch your luck”. You should assume that any set or series of events producing a gain for you will be of short duration, and that your profit, therefore, won't be extravagantly big. Always bet on the short and modest. Don't let greed get you. When you have a good profit, cash out and walk away.
It refers to the need to cash out before a set of winning events has reached its peak. Don't ever try to squeeze the last possible dollar from a set.
The main difficulty may be the fear of regret. Never check the price of a stock you've sold
Minor Axiom III
Decide in advance what gain you want from a venture, and when you get it, get out.
An ending is a time when you withdraw, breathe a sigh of relief, and briefly relax. Like a runner at the end of a race, you flop down on the grass at the side of the track. You think, "Okay, it's over. I've done what I set out to do. I've won my medal. I'll sit here a while and enjoy it." Or you think, "Well, all right, I lost, but it's ended. I'll rest, and think, and plan. And tomorrow I'll race again." Either way, you have come to an ending.
One excellent way to reinforce the "ending" feeling is to rig up some kind of reward for yourself.
Don't wait for booms to reach their peaks. Don't hope for winning streaks to go on and on. Don't stretch your luck. Expect winning streaks to be short. When you reach a previously decided-upon ending position, cash out and walk away. Do this even when everything looks rosy, even when you're optimistic, even when everybody around you is saying the boom will keep roaring along.
The Second Major Axiom
ON GREED - Always take your profit too soon.
Greed, in the context of the Second Axiom, means excessive acquisitiveness: wanting more, more, always more. It means wanting more than you came in for or more than you have a right to expect. It means losing control of your desire. Greed is the bloated, self destructive cousin of acquisitiveness.
As we use the term here, "acquisitiveness" is the natural wish to improve one's material wellbeing. Fear and hate it. It is a speculator's enemy. If they wanted less, they'd go home with more.
Don't push your luck" -- or, as the Swiss more often put it, "Don't stretch your luck”. You should assume that any set or series of events producing a gain for you will be of short duration, and that your profit, therefore, won't be extravagantly big. Always bet on the short and modest. Don't let greed get you. When you have a good profit, cash out and walk away.
It refers to the need to cash out before a set of winning events has reached its peak. Don't ever try to squeeze the last possible dollar from a set.
The main difficulty may be the fear of regret. Never check the price of a stock you've sold
Minor Axiom III
Decide in advance what gain you want from a venture, and when you get it, get out.
An ending is a time when you withdraw, breathe a sigh of relief, and briefly relax. Like a runner at the end of a race, you flop down on the grass at the side of the track. You think, "Okay, it's over. I've done what I set out to do. I've won my medal. I'll sit here a while and enjoy it." Or you think, "Well, all right, I lost, but it's ended. I'll rest, and think, and plan. And tomorrow I'll race again." Either way, you have come to an ending.
One excellent way to reinforce the "ending" feeling is to rig up some kind of reward for yourself.
Don't wait for booms to reach their peaks. Don't hope for winning streaks to go on and on. Don't stretch your luck. Expect winning streaks to be short. When you reach a previously decided-upon ending position, cash out and walk away. Do this even when everything looks rosy, even when you're optimistic, even when everybody around you is saying the boom will keep roaring along.
Dabba trader following 'Modified Martingale Strategy' goes broke
So we now have answer to the question below. How smart is it to add one lot to your short position, when the market moves x points against you? The answer : Not very - or it depends. If you know (or are not aware of the risk of) what you are doing. It's fine if adding to a short position when the market moves says 100 points away from you - when the market is in a downtrend or sideways. But if you have a system (or lack thereof) and are doing something basis 'what has worked' or your past experience of making money - even if over a period of time, the market will eventually catch up, and hurt badly.
I was looking fw. to meet this 'Dabba trader' again on this visit to Gujarat, who for some period of time, had made good amount of money, consistently. This time, however, his shop was closed, and he was nowhere to be seen. So I asked my friend (who was a passive investor and a partner in his scheme) as to what happened. He remarked - This is *#$## pure gambling.... The 'Dabba trader' had folded up and had to close all his short positions having incurred a 16 lakh rupee loss.
The market is unforgiving, and has the capability to take away all the winning and some more from a trader or an investor, at any point of time. Any trader intending to be long time standout, (while traders around him fold away and fade over time), has to make understanding of his strategy and understanding the market, a cornerstone for a start. Add to that, he has to understand his own mindset and psychology, to be able to implement his strategy or trade it with confidence in real time. So this becomes the third leg to the stool which gives balance. And lastly, having all these three, one has to have proper risk and money management in place. No matter how well financed a trader is, if the position sizing and risk management is not in place, a trader can place his entire capital at risk go bankrupt. In essence, a trader over time has to imbibe all good practice to succeed.
So what did this 'Dabba' trader do wrong? In my view : He failed to read the market sentiment. While shorting on every 100 point rise would have worked in a falling or a sideways market, the strategy should have been reversed to go long and 'add' position on every 100 point fall in the index in a rising market. A simple look at charts or having mind in synch with the market would have sufficed. Trading can be simple and easy - if one's mind and position is fluid and in synch with the market and the timeframe one is trading. Else one will see every up and down move in index corresponding to his/her heartbeat. Not a good way to trade in the long run. So finally, another trader bites the dust. Sobering thought, considering the size of the loss, and a lesson about having 'firm conviction' of a winning strategy - while disregarding risk management.
Originally Posted by DSM (Post 935781)
Was exchanging notes with a guy who is a 'Dabba Trader' This is what he has to say with full confidence. Only 'Dabba Traders' take money away from the market. I know these guys trade without stop loss and live dangerously. Many of these guys following modified Martingale strategy (adding the same lot size to position - but not doubling) as the market moves certain points against them) as they have a directional view of the market. How smart is that? For what it is worth, I asked this guy for his view on Bank Nifty. His call for Monday? : Sell Bank Nifty around 10,230-250 for a target of 10,150
I had previously met another Dabba Trader when I went on a visit to Gujarat. While talking to him in his office, he removed a printout of his ledger extract from his broker. He had made 70K that month, and his average take was around 50K each month.
What is surprising is that both these guys trade basis their familiarity of the numbers or levels. They know the support and resistance levels to buy and sell. But if I were to ask them to look at the chart, am sure, it would not make sense to them. This guy was a real-estate broker and a part time trader. He did not even own a laptop or computer and would not even know what a candlestick would be!! And as against the regular traders, most of these guys are perennial bears. But what matters in the end I guess is that one makes money - though it should not happen that a day comes that they blow up badly. Some food for thought.
P.S : Dabba is a word meaning 'box' or 'container' and equivalent of the 'Bucket trading shops' in the US before it was outlawed there. Dabba trading is illegal as it is off line trading and not connected to the stock or commodity exchange. It is risky as well, since counter party risk is not known.
So we now have answer to the question below. How smart is it to add one lot to your short position, when the market moves x points against you? The answer : Not very - or it depends. If you know (or are not aware of the risk of) what you are doing. It's fine if adding to a short position when the market moves says 100 points away from you - when the market is in a downtrend or sideways. But if you have a system (or lack thereof) and are doing something basis 'what has worked' or your past experience of making money - even if over a period of time, the market will eventually catch up, and hurt badly.
I was looking fw. to meet this 'Dabba trader' again on this visit to Gujarat, who for some period of time, had made good amount of money, consistently. This time, however, his shop was closed, and he was nowhere to be seen. So I asked my friend (who was a passive investor and a partner in his scheme) as to what happened. He remarked - This is *#$## pure gambling.... The 'Dabba trader' had folded up and had to close all his short positions having incurred a 16 lakh rupee loss.
The market is unforgiving, and has the capability to take away all the winning and some more from a trader or an investor, at any point of time. Any trader intending to be long time standout, (while traders around him fold away and fade over time), has to make understanding of his strategy and understanding the market, a cornerstone for a start. Add to that, he has to understand his own mindset and psychology, to be able to implement his strategy or trade it with confidence in real time. So this becomes the third leg to the stool which gives balance. And lastly, having all these three, one has to have proper risk and money management in place. No matter how well financed a trader is, if the position sizing and risk management is not in place, a trader can place his entire capital at risk go bankrupt. In essence, a trader over time has to imbibe all good practice to succeed.
So what did this 'Dabba' trader do wrong? In my view : He failed to read the market sentiment. While shorting on every 100 point rise would have worked in a falling or a sideways market, the strategy should have been reversed to go long and 'add' position on every 100 point fall in the index in a rising market. A simple look at charts or having mind in synch with the market would have sufficed. Trading can be simple and easy - if one's mind and position is fluid and in synch with the market and the timeframe one is trading. Else one will see every up and down move in index corresponding to his/her heartbeat.
Not a good way to trade in the long run. So finally, another trader bites the dust. Sobering thought, considering the size of the loss, and a lesson about having 'firm conviction' of a winning strategy - while disregarding risk management. Originally Posted by DSM (Post 935781)
Was exchanging notes with a guy who is a 'Dabba Trader' This is what he has to say with full confidence. Only 'Dabba Traders' take money away from the market. I know these guys trade without stop loss and live dangerously. Many of these guys following modified Martingale strategy (adding the same lot size to position - but not doubling) as the market moves certain points against them) as they have a directional view of the market. How smart is that? For what it is worth, I asked this guy for his view on Bank Nifty. His call for Monday? : Sell Bank Nifty around 10,230-250 for a target of 10,150
I had previously met another Dabba Trader when I went on a visit to Gujarat. While talking to him in his office, he removed a printout of his ledger extract from his broker. He had made 70K that month, and his average take was around 50K each month.
What is surprising is that both these guys trade basis their familiarity of the numbers or levels. They know the support and resistance levels to buy and sell. But if I were to ask them to look at the chart, am sure, it would not make sense to them. This guy was a real-estate broker and a part time trader. He did not even own a laptop or computer and would not even know what a candlestick would be!! And as against the regular traders, most of these guys are perennial bears. But what matters in the end I guess is that one makes money - though it should not happen that a day comes that they blow up badly. Some food for thought.
P.S : Dabba is a word meaning 'box' or 'container' and equivalent of the 'Bucket trading shops' in the US before it was outlawed there. Dabba trading is illegal as it is off line trading and not connected to the stock or commodity exchange. It is risky as well, since counter party risk is not known.
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