Random thoughts on technical analysis
- Thread starter orderflow13
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2)CONT. FROM LAST POST ...Well we take ex. of Maruti & Tata Motors.both stocks are from one single sector that is automobile.Now we have to short one stock and buy one.We then spend our time on both charts ...here i explain my trade ..on 16th jully As shown in fig.tata motors chart is comparatively weak and maruti's chart is strong
.Now its entirely different subject why this strong and that weak,in short words i will tell,in marutis chart stochastic just bottomed up,rsi nicely made two higher highs and lower lows at bottom at 16th jully,so i brought at 548 on close as it was clearly making doji ,whereas tata motors stochastic and rsi wasnt of my liking(when rsi made big base i never go on long)
.i short the stock tata motor at 16th jully at 406rs.
3)if xample seems bit difficult to understand as i am new to this posting kind of stuff then you jut consider that we are long on maruti and short on tata.
4)So nearly after one month( i will skeep how to role over ur contract with less 'cost of carry' part )you have a position in your hand like this ..
5)as shown in chart at 14 th augst. tata motor is at 450 and maruti at 705rs.u have 50 rs loss( approx.12 to 14 %)on tatas short position and profit on marutis long position150rs(apprx.24 to 26%), so you have nearly 10% profit in hand
6)Now you might ask why such a fuss just add 10 contracts long on maruti n reap off the profit,instead of adding 5 contracts long n 5 short? well as a trader we must accept a fact that we play with the probability.our aim is by any means and tools add the math of probability in our favor.If one is novice in trading his probability of loosing is nearly 100%,then we learn fundamentals,study micro and macro economical factors,learn complex credit reserve ration n so many fundamental things like P.E.,yield,beta n all then we make probability of winning bit higher,then learn technical analysis and made probability of winning bit higher,more sophisticated you become and learn your probability of winning gets higher ,still..still n still we cant make winning probability 100% no one ever done and no one ever could.PAIR STRATEGY GIVES CUSHION TO YOUR PROBABILITY .
7)suppose overnight you learned R.B.I.hiked the interest rate by 50bps then next day all interest rate sensitives tumble,including our very own automobile sector,then our short position in tata motors gives us cushion to our loss making maruti long position.as tata motor is weak in sector will fall more than strong maruti
8)And suppose in overnight rbi slash interest rates then there will be rally in auto sector n maruti long gives cushion to tata short.
9)Also many times stocks fluctuate in tendom with market we say it beta,so we minimize that fluctuation. In other way we can say grossly we holding very low beta stock so ur risk or probability of wiped out is less
other examples of pair trading -
.now u can see hedge funds operate somewhat same way,they long on s&p500 and dowjones and short on nifty since 6 month...also you can short RIL and buy crude oil future..so many examples
3)if xample seems bit difficult to understand as i am new to this posting kind of stuff then you jut consider that we are long on maruti and short on tata.
4)So nearly after one month( i will skeep how to role over ur contract with less 'cost of carry' part )you have a position in your hand like this ..
5)as shown in chart at 14 th augst. tata motor is at 450 and maruti at 705rs.u have 50 rs loss( approx.12 to 14 %)on tatas short position and profit on marutis long position150rs(apprx.24 to 26%), so you have nearly 10% profit in hand
6)Now you might ask why such a fuss just add 10 contracts long on maruti n reap off the profit,instead of adding 5 contracts long n 5 short? well as a trader we must accept a fact that we play with the probability.our aim is by any means and tools add the math of probability in our favor.If one is novice in trading his probability of loosing is nearly 100%,then we learn fundamentals,study micro and macro economical factors,learn complex credit reserve ration n so many fundamental things like P.E.,yield,beta n all then we make probability of winning bit higher,then learn technical analysis and made probability of winning bit higher,more sophisticated you become and learn your probability of winning gets higher ,still..still n still we cant make winning probability 100% no one ever done and no one ever could.PAIR STRATEGY GIVES CUSHION TO YOUR PROBABILITY .
7)suppose overnight you learned R.B.I.hiked the interest rate by 50bps then next day all interest rate sensitives tumble,including our very own automobile sector,then our short position in tata motors gives us cushion to our loss making maruti long position.as tata motor is weak in sector will fall more than strong maruti
8)And suppose in overnight rbi slash interest rates then there will be rally in auto sector n maruti long gives cushion to tata short.
9)Also many times stocks fluctuate in tendom with market we say it beta,so we minimize that fluctuation. In other way we can say grossly we holding very low beta stock so ur risk or probability of wiped out is less
other examples of pair trading -
.now u can see hedge funds operate somewhat same way,they long on s&p500 and dowjones and short on nifty since 6 month...also you can short RIL and buy crude oil future..so many examples
In your case, I found that Maruti and Tata motors are correlated as they are from the same sector.
Am I missing any point ?
Happy Trading.
hi there,first of all thanks for starting healthy discussion,lets come to the point,if one want to avoid the risk,one will take same position in negative correlated securities,see like you saying,commodity and currency are negative correlated securities,that means falling currencies are good for commodity,as u mentioned,then if i got short on currency and long on commodity and suppose currency rising,then that short position in currency will hurt me,and also i am long on commodity,then that position also will give me loses( as currency rising,commodity will fall).so it cant be market neutral,risk reducing position....so naturally ,for hedging your portfolio you gotta take same position in negative co related securities,as fund houses buy gold to hedge there long position in stock market,( as inflation rises stock market will fall, and gold is good hedge against inflation then gold will rise). so to neutralize your risk( beta value)you must take apposite positions in same correlated securities or as i said above long on negative co related securities. Hope i clear the confusion , if i am wrong leme know
does'nt matter mate, just listen to him & you may live 
joking...
by the way thanks a lot for snagit advice, really liked it...
joking...by the way thanks a lot for snagit advice, really liked it...
does'nt matter mate, just listen to him & you may live joking...
by the way thanks a lot for snagit advice, really liked it...
joking...by the way thanks a lot for snagit advice, really liked it...
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