Ok. Here is another quotable quote. Oh I already gave it. That's the title line herein -
Market is God!
But this is a different kind of god. And a fellow top trader explained it to me long time ago. He said, and listen to me carefully to appreciate the logic behind it -
If you simply ask the stock market that you want XYZ% annual returns, you will get it as long as you are able to quantify what XYZ% is. That's right you will just get it or find a way to get it. But you will blow up your account if you do not define what this XYZ% is. Because then, you will be in the never ending cycle of fear and greed.
Hence, it is so important to know your entry price, stop loss price and target price before you enter a trade. This summarises it all.
Before I start, check out this entry - Long Bitcoin made exactly 40 days before. So I do reserve some boasting rights about it, but let me tell you that I didn't make a single penny out of it. The risk and reward were badly stacked against the odds (RBI decree) but the gains have been stupendous. Guess what? Bitcoin simply doubled in almost 1.5 months.
My guess is it will not stabilize anytime soon and mark my words -this is not coming down any time soon. We are still far far away from the crest like it happened during Tulip mania. My guess it should triple after a cup and handle, so we are looking at a figure of 1 BTC = 3000 USD coming very very soon.
This is without a doubt one of the best places to learn about markets and trading in India context. I love to jump and read few chapters every now and then. But if you want to go from start to end and know things in and out, Zerodha Varsity should be your starting point. And then there is no end to it but the first step should be in the right direction.
Feel free to get back if you have any questions around the same.
I came to know about bitcoin back in 2013 when 1 BTC was equivalent to $100. Fast forward 4 years down the line it has given stupendous returns of more than 10 times. Yes! 1 BTC today is in the range of $1000.
I had discussed this with Sandeep back then and we loved the idea. I actually wanted to invest in bitcoin for I was losing confidence in gold back then. And see how things turned out, today bitcoin and gold are in the same bucket treated as safety heaven for risk averse investors.
However, I still think that another mega rally has just started which is going to dwarf the current rally in bitcoin. As per bitcoin chart, you will observe that it has made a beautiful cup and handle pattern @ $1000. This is a very strong bullish signal. But I still can't invest.
The problems with investing/doing business in bitcoin are many folds -
You are operating in a grey area especially in a country like India where the law enforcement unit simply don't understand limited liability company / partnership and catch hold of the CEO directly via an archaic rule based on loose interpretation.
There is no proper instrument to go long on bitcoin as you can do for stocks. Afterall, it is a currency. You might think that you can go long on an exchange traded index or for that matter a company with highly invested resources in bitcoin, but then it is different ball game.
An exchange can shut down overnight. A breach can close a bitcoin company in seconds. You can lose your hard disk and hence the bitcoins. There are just too many loop holes and risky things that can bring you down anytime / any minute.
Maybe a referral program can help here that pays you back in bitcoin. But the problem with the referral program is most of them want you to keep your bitcoins in safe locker with them. This is equivalent to parting with your bitcoins considering the security threats that those little bitcoins pose so seriously.
Bottomline, I missed the rally then and I am going to miss the rally again. I don't think there is a legal, secured, risk-adjusted way to go long on Bitcoin staying in India. Open for ideas ...
Lord Varys: A thousand blades, taken from the hands of Aegon's fallen enemies. Forged in the fiery breath of Balerion the Dread.
Petyr 'Littlefinger' Baelish: There aren't a thousand blades. There aren't even two hundred. I've counted.
Lord Varys: Heh. I'm sure you have. Ugly old thing.
Petyr 'Littlefinger' Baelish: It has a certain appeal.
Lord Varys: The Lysa Arryn of chairs. Shame you had to settle for your second choice.
Petyr 'Littlefinger' Baelish: Early days, my friend. It is flattering really, you feeling such dread at the prospect of me getting what I want.
Lord Varys: Thwarting you has never been my primary ambition, I promise you. Although, who doesn't like to see their friends fail now and then.
Petyr 'Littlefinger' Baelish: You're so right. For instance, when I thwarted your plan to give Sansa Stark to the Tyrells, if I'm going to be honest, I did feel an unmistakable sense of enjoyment there. But your confidant, the one who fed you information about my plans, the one you swore to protect... you didn't bring her any enjoyment, and she didn't bring me any enjoyment. She was a bad investment on my part. Luckily, I have a friend who wanted to try something new. Something daring. And he was so grateful to me for providing this fresh experience.
Lord Varys: I did what I did for the good of the realm.
Petyr 'Littlefinger' Baelish: The realm. Do you know what the realm is? It's the thousand blades of Aegon's enemies, a story we agree to tell each other over and over, until we forget that it's a lie.
Lord Varys: But what do we have left, once we abandon the lie? Chaos? A gaping pit waiting to swallow us all.
Petyr 'Littlefinger' Baelish: Chaos isn't a pit. Chaos is a ladder. Many who try to climb it fail and never get to try again. The fall breaks them. And some, are given a chance to climb. They refuse, they cling to the realm or the gods or love. Illusions. Only the ladder is real. The climb is all there is.
I think I can relate to it. You see this is typically how a stock on news behaves. There is exaggeration and passing of information and lies. It goes for wild asymmetric moves away from the mean. This is the time when the stock is so much mispriced and things around it is simply chaotic. While others see the situation as a gaping pit, I would like to see it as a ladder. Many people who try to make money out of this situation fail badly and never try again. For markets can remain irrational longer than you can stay solvent. Truly, the stock price fall breaks them. And many people are given a chance to take the stock at the right time in a platter - refuse and cling to notions like there will be another opportunity, or for that matter the chance isn't real. They are simply stuck with illusions and fears. But the heart of the situation cannot be summarized with these two sentences - Only the ladder is real. The climb is all there is.
I simply love this short video that explains the Tulip Mania - widely considered the first economic bubble in recorded history. You will observe that every economic bubble follows a similar pattern.
As you will observe from the chart below, it is the kind of money following that particular entity at different stages - that can help you figure out a bubble. This is where fundamental analysis comes into picture and return to the mean.
You have to carefully identify which stage you should participate in and you will reap the benefits/consequences accordingly.
Let me repeat the quote - Forget the risk and take the fall, if it's what you want, then it's worth it all.
So my 9 month dream run of making profits finally came to an end with Jan 2017. Not because there was something wrong with my algorithmic strategy, but I wanted to try few new things. I had spent almost 6 months preparing for this one month - collecting data, paying google compute engine cost, burning the midnight oil for iterations, etc.
Anyhow, here are the results. Out of my first set of tests against IDEA, HINDPETRO, ADANIPOWER, TATAELXSI, DIVISLAB and KSCL, I strangely got 6 of them right within two days of trade alerts. The strategy revolves around situation where the stock has run up quite a bit, has still not got anything structurally wrong or structurally extraordinary, revolves around mean reversion, money flow, historic patterns and peek levels, and some awesome machine learning to boil things down on probability. You heard it right - I managed to predict moves greater than 5% almost a day or two before. However, it is a totally different issue that I managed to make money by only one of them.
But I think I have got my hands on something awesome and I could have never figured it out if I hadn't gathered the courage to test it in 2017. It all looked pretty neat on paper but I chickened out in the very last moment. I think multiple things were at play -
Playing with highly leveraged products like Futures without understanding the risk
Wrong trade PAIRS hurt daily mark to market that further makes you doubt the trade
Not taking probability into consideration and playing against huge delta risk was definitely going away from ground rules
Hedged leg acting against you due to budget rally and increase in volatility which essentially ensured that you were playing naked with double edged sword
Giving up on your research on popular and stupid public opinion that affected subconsciously
Chickening out early because I was testing and was not having a detailed execution plan involving what if ...
So I would say, this has been a great month. I learned a lot and feel pretty confident that I have got my hands on a beautiful filter and getting the executions right will help me come out with flying colors in months to come ... Amen!
Arbitrage is probably the cleanest way of making money in the stock market. As a matter of fact, I can go to the extent of saying that whoever is making money in the stock market is probably using some form of arbitrage. However, whoever does it, has to be secretive about it. Otherwise, the arbitrage opportunity vanishes in thin air. Being secretive is part of the deal that comes with arbitrage.
Let me explain this in layman terms. Lets say you stay in city center and you are buying apples. Your local kiranawala sells 1 kg of apple for ₹100. However, you go to the city outskirts 10 kms away, their local kiranawala will be selling the same quality of apple for ₹50. Next, you figure out that travelling 20 kms (back and forth from city center to city outskirts) will only cost you ₹10. So as it turns out, if everyday you go to city outskirts, buy 1 kg of apple and come back to sell those apples to other customers at city center, you can make a handsome profit.
Profit = (Apple Cost @ City Center) - (Cost Of Travel) - (Apple Cost @ City Outskirts)
=> Profit = ₹100 - ₹10 - ₹50
=> Profit = ₹40
So you can make a neat profit for ₹40 on a daily basis with just 1 kg of apple. That's arbitrage based risk free profit. However, there are two things to consider here -
There is a limit upto which you as an individual can carry apples during transportation. After that limit is reached, you may have to go for a dedicated service or bigger transportation vehicle which will add to your cost of travel.
The dynamics of demand and supply will not always remain the same. What is reasonably profitable today might not be so profitable tomorrow. Sooner or later this balance will change in turn affecting your profits.
The above two are the key reasons why everyone who is practicing arbitrage would like to keep it a secret. You see if you are making tons of money out of it, sooner or later other people will notice it (during transportation of trucks full of apples or when you sell cheapest apples on the street). And they will start doing the same. And when the demand for apples in the outskirts increase so will the cost. And slowly but steadily the arbitrage will no longer remain.
So it all boils down to a simple thing - if you have a goose laying golden eggs, don't go around announcing it. And make no mistake, if you do, the stupidity is equivalent to killing the goose that laid the golden eggs.
If you follow technical indicators only to make your trade decisions, then you are going to make huge losses in the near future. A better approach is to use optimized parameters.
Let me explain with the help of an example. We all know - when RSI crosses 30 on the downside, the stock is oversold and you are supposed to buy. Similarly, when RSI crosses 70 on the upside, the stock is overbought and you are supposed to sell. If you go by this algorithm, there is only a 50% chance that your day will be profitable. I have back tested this for the last 10 years on NIFTY and hence claiming the same. So guess what, such a popular ideology doesn't give you any edge more than the chances of getting a heads on coin toss. And the same is true with almost every technical indicator out there. Good for nothing!!
But there is one thing that will give you the edge atleast for the day. What if the cross numbers are closer but different from 30 and 70. Finding those specific numbers is called parameter optimization and can be the differentiator between profit and loss for the day.
Let's build some premises for us to run few tests -
RSI on the downside will be plotted on the x-axis and will range from OverSold 5 to 45.
RSI on the upside will be plotted on the y-axis and will range from OverBought 55 to 95.
Profit/Loss for the day will be plotted on the z-axis considering you buy when stock is OverSold and you sell when stock is OverBought.
After back testing it for today, here are my results -
So if you have followed the age old rule of OS30 and OB70, you would have ended up with -2.9. A loss for the day. But if you had invested just a bit in parameter optimization you would have gone for the levels OS25 and OB80 giving you a handsome profit of 33.15 on NIFTY. Hope this hits home. Let me close this by giving you a neat table data, just to make things crystal clear!
By many accounts, compound interest is considered the eighth wonder of the world. So what is the big deal about it. Here is a story and I thought of validating and quantifying it. Here it goes -
The Legend of ChessBoard
Once upon a time, {come on! I had to start like that ;-)} there lived a king. He had acres and acres of land under his rule with bountiful crop year after year.
One day, a courtier gifted the king with a beautifully crafted hand-made chessboard. It was indeed one of its kind, and the king was very much impressed with the art work and detailing present in chessboard. So the king asked the courtier - what will he have in return? And the courtier requested rice grains in return to the tune of the rice that can be collected by placing one rice grain on the first square, two rice grains on the second square, four rice grains on the third square, so on and so forth until the sixty-fourth square of the chessboard.
The king laughed it out, and asked his men to immediately give the courtier his requested number of rice grains. But even after days of calculation and months assessment the king could not fulfil this simple request and finally gave up.
So what was the quantity the courtier really requested? Let's deep dive with an excel sheet -
Square #
Rice Grains
Weigh (gm)
Sum@Sq# (gm)
1
1
0.03
2
2
0.05
3
4
0.10
4
8
0.20
5
16
0.40
6
32
0.80
7
64
1.60
8
128
3.20
9
256
6.40
10
512
12.80
11
1024
25.60
12
2048
51.20
13
4096
102.40
14
8192
204.80
15
16384
409.60
16
32768
819.20
1638.38
17
65536
1638.40
18
131072
3276.80
19
262144
6553.60
20
524288
13107.20
21
1048576
26214.40
22
2097152
52428.80
23
4194304
104857.60
24
8388608
209715.20
25
16777216
419430.40
26
33554432
838860.80
27
67108864
1677721.60
28
134217728
3355443.20
29
268435456
6710886.40
30
536870912
13421772.80
31
1073741824
26843545.60
32
2147483648
53687091.20
107374182.38
33
4294967296
107374182.40
34
8589934592
214748364.80
35
17179869184
429496729.60
36
34359738368
858993459.20
37
68719476736
1717986918.40
38
137438953472
3435973836.80
39
274877906944
6871947673.60
40
549755813888
13743895347.20
41
1099511627776
27487790694.40
42
2199023255552
54975581388.80
43
4398046511104
109951162777.60
44
8796093022208
219902325555.20
45
17592186044416
439804651110.40
46
35184372088832
879609302220.80
47
70368744177664
1759218604441.60
48
140737488355328
3518437208883.20
7036874417766.38
49
281474976710656
7036874417766.40
50
562949953421312
14073748835532.80
51
1125899906842620
28147497671065.60
52
2251799813685250
56294995342131.20
53
4503599627370500
112589990684262.00
54
9007199254740990
225179981368525.00
55
18014398509482000
450359962737050.00
56
36028797018964000
900719925474099.00
57
72057594037927900
1801439850948200.00
58
144115188075856000
3602879701896400.00
59
288230376151712000
7205759403792790.00
60
576460752303424000
14411518807585600.00
61
1152921504606850000
28823037615171200.00
62
2305843009213690000
57646075230342400.00
63
4611686018427390000
115292150460685000.00
64
9223372036854780000
230584300921369000.00
461168601842739000.00
Total
18446744073709600000
461168601842739000.00
This is assuming that each rice grain's weight is 0.025 grams which is a decently accurate guesstimation. The courtier requested 461168601842739000.00 grams of rice. What's the big deal, it is a quantifiable unit after all. But here are some interesting facts when you try to get a perspective of that quantity -
If you end up stacking this many number of rice grains, it will be the size of mount everest.
If you end up weighing these many number of rice grain, it will be approximately 101 trillion pounds or 461 billion metric tons
This requested rice quantity is around 1000 times more than the global rice production in 2010.
This also brings us to another interesting idea. It is known as Second Half of the ChessBoard. If you look closely, you will realize that the first half of the chessboard requires a total quantity of rice to be around 100,000 kgs. Good enough? Well, India's annual rice output is 1,200,000 times that amount. But, by the time you reach 64th square that quantity of rice is 1000 times the global rice production. Isn't it mind boggling, the numbers added by the second half of the chess board. This is where an exponentially growing factor begins to have a significant impact.
Hence, the bottomline! Compounding in investing works on two basic premises -
The earnings have to be reinvested with the principal.
The longer you wait, the more significant wealth you generate.
That is the power of compounding! Now, you know ...
