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Commentary

Liberating Myself With A Trading System

Siddharth says in a comment to my last post:

An article on web by Ila Patnaik.

Excerpt from article “As a result we should expect to see business cycles in US and the rest of the world getting transmitted to India.”

You said ‘all of a sudden’. But to be bearish there must be some reasons or plain FEAR.

Precious metal is going up right now. The BKX index has gone below 60. and with the many things in US and EU coming out this week, market looks bearish and gold/oil bullish. Unless this induces positive confidence (short or long term)from the FED, ECB decisions, there may not be any positive outlook in Indian market immediately for upside?

My concern is how this all will be inconsequential to economy in India, not only exports.

I had said there that I expect an intermediate rally – and that the reason was the sudden bearishness in the air.

Now let me rephrase – the market’s been bearish a while now, and there is enough reason today to justify it (inflation, growth, what not). I had said in my ultra-bear post (Why Subprime Phase 3) that we are going down – the reasons I stated have worked to some extent but honestly we haven’t seen the worst of it all. Yet, when I said all of that the index was 5,000+, and we have fallen 25% from there!

All the reasons: Gold at highs, crude at highs etc. have existed for a while, and markets still moved both directions. What is impossible to work out is what data point will move the market next.

Reasons are always evident after the fact. There are no predictions that will consistently work, because all predictions are luck. Including mine, and I’ve been incredibly lucky so far.

I typically try to gauge investor sentiment and the volume of enthu on business TV. In volatile times (like these) we have to see volatility in both directions. The last three sessions have seen 10% falls, without much ado or fanfare, and pretty good volumes. Usually such deep and dark falls are followed by a quick sharp rally to keep people excited (this is not someone on the other side manipulating it, but the effect of a massive set of people communicating with their trades. To read more, research Game theory, Conway’s Game of Life and the concept of fractals – the parallelism to life and to markets is stunning)

Typically rallies make life exciting for traders, especially in a bear market. We are now so far from our moving averages it is imperative we bounce up. If we go further down, the bounce up will be stronger, and so on.

Now this is just my gut feel, so please don’t go about trading it – I have been wrong before. It’s imperative you take complete responsibility for your actions – don’t praise me for being right or scold me for being wrong, because it’s your money and therefore 100% your decision. That goes for all other “tip” providers too – please don’t rely on other people to give you information trade. You have to make your own decisions, otherwise give them your money and let them trade it.

One interesting stat: FII’s, for the first time in maybe three billion years, have bought a net 200 cr. today. It comes after literally weeks and weeks of continuous selling – I don’t even remember the last day they net bought.

There’s always money to be made in the markets. Our systems gave us THIRTEEN short positions today. We have never, ever seen all positions in the same direction. Usually you will get some long and some short positions daily – today EVERYTHING was short. And we have decided to trade like village idiots – we don’t question why, we just take the bloody trades. And we were up – literally 3 to 5% up on each system.

The takeaway for us is: don’t predict, react. The systems analyse the data and tell us where the market is going. We follow. If it changes direction, we reverse. We set up the parameters, and back-test to ensure our theory is correctly tradable and results and statistics are positive. But once we start trading we don’t ask why short this at this level or so on.

For instance today, we shorted IFCI, after it was 5% down. That is scary. But it ended up some 13% down – and we made 8% on that one trade. Whoa. Point is: don’t ask the questions when you trade. Analyse the system only AFTER it consistently fails – otherwise just trade it. And once we set up automated trading we won’t even know what positions we are in or out of, and hopefully I will be on a beach in Goa drinking beer with the winnings. But till that time, we gotta work with the trades, and we gotta stick to the system.

You can’t imagine how liberating this is – to not give a damn about where the markets are going; the system will tell us. That’s about all we care about. And given we’ve made over 10% in the systems last month, we’re doing ok – have to keep creating new systems though, as these will die.

Disclosure: Short the index.

  • Koonal says:

    >Hi,
    Just like you said in your post, if you are not doing your research on companies/market, just give the money who are doing that. I am really interested in this. Just let me know how to contact you.

    Thanks,
    Kunal.

  • kapil says:

    >can you please tell me a good place on the net where i can look at volumes at a glance? is there anything better than nse website?

  • Siddharth says:

    >Deepak,

    Thanks for the elaboration. Disclaimer well taken.

    Congrats on the systems. I believe this is what you discussed in “Creating Automated Trading Sytsems” on May26 2008?

    If thats true then its a great feat as you decided only 5 weeks back and with back testing and all that stuff the system is generating gains in REALTIME already.

    As I try to understand this system you talked in this article does that data crunching and gives you results/directions but does not trade on its own. Its still the human brains that does the trading?

  • Deepak Shenoy says:

    >koonal: You have my email – deepakshenoy at gmail dot [com]. I don’t take money to manage as I’m still building a track record with my own money first.

    Kapil: Volumes – multiple places, check out http://www.icharts.in for some charting tools which contain volume.

  • Deepak Shenoy says:

    >siddharth: Yes, this is what I’d discussed in that post. but we have been doing research on this ever since Moneyoga was created in 2007, and we have been running them with real money since 15 May 08 – each system online on a different date, but in order.

    We are only one step away from the system doing the trading. Right now it tells us what to buy, when to buy, how many shares to buy, when to sell, how much to sell, etc. All we have to do is enter the order! That’s teh easiest bit to automate but we have left it for last.

  • Siddharth says:

    >Deepak,
    Its incredible. Well does it do the same job for futures and options?
    Can this system be used in commodities, mf, forex, bonds, in short any other trade apart from equity?

    And how do you incorporate the market sentiment/psychology. Just curiousity, as in my opinion this is a human virtue in psychological terms. And other issues like geo-political shocks, unfortunate events like terrorism, or plainly somebody trying to hack into your ATS.
    Even though this may liberate, still it(ATS) will need to be constantly monitored and intervened if needed.

  • Deepak Shenoy says:

    >siddharth: It should work on any instrument – futures, commodities, forex, bonds. MF and optiosn no, because of liquidity and trading issues.

    No sentiment fundas. Just price. Of course we need to monitor it, but don’t need to have to generate the trades or think about them…

  • Anonymous says:

    >am sure someday you will give up on this ‘system’ like has always happened with all systems and theories.. will hope u do post and let us know when that happens .. all the best till then

  • Deepak Shenoy says:

    >as likely as your leaving your real name here, mate. You probably have lost way too much money in this market and have gotten too cynical about something that might work.

    If I’ve given up my career for this it’s going to be worth something for sure. And, man, is there commercial interest already!

    Now one thing may be right. I might stop writing about it.

  • Anonymous says:

    >being anonymous was a choice for different reasons. i havent lost really cause have been largely sitting out since november 07. i just read a lot and thought history has a different take on ‘history’. all the best to you. do hope it works for you. and ……. your blog is fantastic.