Prashanth Krish | Portfolio Yoga

What does one want from the markets

Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money – Ed Seykota

A very simple statement yet so deep is the philosophy behind it. Its amazing that I did not understand the depth of the statement when I went about showcasing why certain strategies / methods were not worth pursuing since the cost out weighed the benefits it supposedly came up with.

Then again, I failed to understand that not everyone is out here in the markets to make the maximum out of it. A large majority is here for the fun and if some money is made in the interim, all the better. But a very small percentage is ever going to wonder if I made a better CAGR return out here compared to the opportunities available elsewhere in markets (read Passive Investing).

Day trading is a very risky business with the probability of long term success reaching pretty close to the Zero level. But that does not stop the troops of young and old speculators who want to dabble in it. Many are not even here for the money since they have money in plenty, all they are looking for is the excitement of being able to beat the markets at its own game.

I know friends who are pretty happy with getting returns that have been achieved by many a fund and more or less achieved by passive investing as well. But, if you were to invest passively and reap the benefits, how the hell are you supposed to look like the King Kong of markets at parties where you want to be the Rock Star. After all, its only a dumb guy who would invest in Mutual Funds / ETF’s and reap the small benefits when the same is also available by trading day in and day out in the markets.

A lot of traders / investors have lost big money in markets and yet go about their life pretty happy with the sincere belief that it was Greece or Cyprus or Japan (or any other news) that was the reason for their loss this day / month / year and its just a matter of time before they not only recover their losses but thrive in the limelight of being the true master of the universe.

Markets are all about give and take. If you are here for building wealth, think deeply about what you are doing and whether some things can be done better. If you are here for the fun, Enjoy as long as your Bank Account is able to support. But whatever you do, do not mix the fun part with the wealth building part. It will only end badly and you would not even had the fun in the interim

The one minute Challenge

A systematic trader faces several dilemmas when he is trying to figure out the best time frame he should use. Should he go with a 5 / 15 minute bar where he will get a lot of signals or should he chose the 60 / 120 minute bar where signals are far less.

For those trading the hourly / 120 minute bar, a secondary question arises. Should his bar start at 9:00 in the morning (even though trading starts at 9:15) and hence have his first hourly bar reflecting 45 minutes and the last hourly bar reflecting last 30 minutes of trade or should he start his bar construction at 9:15 in which case, he will have to deal with the problem of having his last hourly bar of just 15 minute duration (3:15 to 3:30).

A optimal solution recommended for the Indian market scenario is to have 75 minutes and start bar construction at 3:30. This way, all bars are uniform in nature. But 75 minutes is not exactly something you come across in any technical literature. Its just a number that is at the current moment the best way to divide the Indian Market timings into equal number of bars.

While you may wonder as to why such small difference as important, a simple back-test shows how varied the results are for the various time frames and the difference based on the starting bar.

Lets take a simple 3 EMA by 5 EMA system (trade price being the close price) and see how much of a impact the starting time will make to the overall returns. Test period is from 0.1.01.2010 to 31.12.2014 – Nifty Rolling Futures

As you can see, its more or less evenly split. For the 30 minute bar and the hourly bar, backtesting seems to indicate that using 9:00 as the starting time frame would be best suited. On the other hand, if you were using the 75 minute or the 120 minute bar, using 9:15 would be the way to go.

Now, let me complicate things a bit. Should your bar start at 00:00 or 00:01. For example, should the bar reflecting the data between 10:00 – 11:00 start at 10:00:00 & hence end at 10:59:59 or should it start at 10:01:00 and end at 11:00:59 ??

You think I am kidding, well lets take a look at results, shall we

If you are a trader using 30 minute bar or the 120 minute bar, the difference is staggering to say the least. Its no kidding matter to see your results poorer by 32% just because you chose to move the time by 1 fricking minute.

Intraday trading (even of the positional variety outlined above) is tough and its no small matter as to how small changes in where the bar starts, where the bar ends and how long a bar should represent can dramatically vary the end results. Reminds me of the Butterfly effect.

So, what is the solution? Unfortunately, there is no easy way out. You may think that using End of the Day bar can eliminate such things, Right? Well, most systems that are tested on End of Day time frame use the adjusted close and good luck on being able to get in and out at the adjusted close prices. As to those who use Open of next day, you will need a co-located Algorithm system to even be able to come close to buying / selling at those prices.

The idea of this post was not to showcase what is right and what is wrong, but to provide you with data to show how small things can make major differences and hence the next time you think about extrapolating something, do keep this in mind.

A New Kind of Investment Outlook

A very good “Long Read”. Lot of Wisdom out here.

Capital Requirement for a trader

When one starts any business, one has a pretty clear idea as to what would be the cost of starting the business. This may go from a few thousands (if you are starting a web based company) to a few crores (say to get a start in the construction business). But when it comes to trading, there is not much of clarity on what capital is required. This post is a attempt to calculate what you will need if you want to get into the business of trading for a living.

The biggest negative of trading for a living is the fact that the number of failures are humongous in number. I have been in the Industry for nearly 17 years now and I do not know of a single trader who was active when I started off and is still active as a trader now. Of course, there will always be folks who have been active for even more a period of time, but the numbers will be pretty small in nature.

One of the key reason why many a trader cannot sustain this venture is due to lack of a viable strategy. It does not matter how big a capital you start with, if you are chasing the wrong end of the stick, you will end up suffering total capital loss.

A second reason for many a trader to be unable to sustain this business is due to them starting with insufficient capital and then hoping to make a living of it. Markets are not a cow that will provide milk every day or a tenant who shall provide the landlord with a monthly income. Even the best of traders go without having a income (or even worse, having a loss) for months together.

Stress for the trader is guaranteed regardless of the methodology he follows if he has a payment to make and markets are not providing him with the moolah. Many a advise I have heard is to keep 3 years of expenses in a separate account so that you are not troubled by the lack of ability to buy milk the next day because you are having a streak of loses and cannot afford to withdraw capital at this juncture.

I constantly keep meeting traders and the one thing that is constant among many is that they are very well capitalized. This with a decent strategy assures that one will be able to survive the thrills and spills that accompany a traders life.

So, what would be the ideal capital for a trader?

The answer actually is dependent on a lot of factors including the style of trading. For example, capital requirements of a intra-day trader is very small compared to a positional non leveraged trader.

I did a small exercise as to what is the optimal capital requirement for a trader and the results are as shown in the pic underneath.

The above expenses sheet are based on my assumptions on what would be the cost that one needs to account for.

While the costliest data feed would be having a Bloomberg Terminal, I have assumed that not many a trader would actually go for that and instead based it on eSignal. I personally use Global Data Feeds and the amount I pay comes closer to the Average.

So, considering the above expenses, what is the capital requirement if one assumes that the system will over time generate X% / year (not consistently, but on a long enough time frame).

Most simple strategies do not beat the markets and this means that while its nice to be optimistic and think of generating 4 – 5% per month (48 – 60% per annum), in reality you shall find the returns somewhere between 1 – 2% per month (12 – 24%).

Assuming that you are a Average spender, that would mean that you would need a minimum capital of 2 Million to start with. And since we cannot be pulling out money month on month, you would need to store away half a million so that you do not have to worry about your expenses for a year at least. Totaling that up, you will need around 2.5 Million Rupees for one to get started.

The biggest disadvantage for a trader who needs to dip into the capital for expenses (removal even every year) is that he literally misses out on the Eight wonder of the World – Compounding.

Without compounding of capital, there is really very little of wealth generated over time and while you may feel confident that you can continue to do this till the end of your life, it does put a pressure on one to be correct as far as possible.

The biggest advantage of a trader is the ability to lead a life without having to stick to one place. You can travel around the world and yet continue to make a living. In fact, a guy whose website I recently stumbled upon seems to do the same thing and has claimed to have traveled more than 80 countries even as he day trades for a living. (Link)

At the same time, I have first hand witnessed financial destruction and even death of traders who were not able to sustain themselves. As I wrote in my previous post, the probability of survival for a trader (if this is his only source of Income) is pretty low. Just like not everyone can make it to the IIT, so is the ability to earn a living just through trading.

But if you can succeed, there is nothing more satisfying out there. No clients to argue with, no payments overdue, no employees to worry about. Hell, one is truly one’s own boss and driver of his destiny 🙂

Travails of a Trader

Trading is not just a risky business to be in with a survivor rate of less than 5% but a expensive one as well. Most traders are engaged with the markets on a full time basis which means that they cannot earn a living elsewhere. Of course, a lot of guys do trade from their office, but most of them are there for the thrill rather than engaging in the act of earning substantial returns from the investment they make. Of course, like any other field there will always be outlier’s who are not only able to trade successfully but also hold a good paying job elsewhere.

The whole playing field is actually loaded against the trader. Take taxes for example. A investor who holds a share for more than 1 year can enjoy the gains without paying a cent in taxes, traders pay taxes at multiple levels.

Whenever a trader transacts, not only does he pay the brokerage charges but also pays Service Tax on it and Security Transaction Charges. While a investor may deal very few times, a trader by nature is active on most days (depending on the strategy he follows) and hence ends up paying a pretty packet under these accounts.

While earlier, it was essential for a trader to sit at a brokers place, with the advent of internet trading, this is no longer necessary though even today, you shall find clients sitting behind the dealer and placing their trades at may a broker’s office. But if one were to trade outside the broker’s office, it requires a place where you can sit and trade without being disturbed.

While many a trader works from home, professionals generally prefer a quieter place since unless the house is empty during the day (trading time), its tough to avoid disturbances from family members no matter how much one tries to avoid. Add to that, trading not being recognized as a activity in itself, a person at home is generally seen as unemployed rather than self employed.

Once you have a place of your own, the next in line is the investment one needs to do to ensure access to a trading terminal through the day. This means a UPS to ensure that power failure does not affect one’s trading as well as Internet connection to be able to connect to the brokers server.

While a single laptop + a broadband connection may be good enough, most traders prefer to have some redundancy build in for that rainy day when one suddenly finds that not only is his system switching on, but a damaged cable has meant that he has no access (virtual)
to the outside world.

Building redundancy is expensive but can save one’s butt when things go awry right from the world go. Just to recount a personal experience I had recently, my main system suddenly crashed and my system guy informed me that I will need to reformat and re-set up the whole thing right in the middle of a trading session.

Since I have a secondary system, I did not bother much at that time and continued working from the other system. A hour into that, the SMPS of the back-up system literally went up in smoke. Talk about coincidence.

Most traders use Technical Analysis as their trading tool and this means investment in Charting Software + Live Data Feeds. Of course, you do have internet based charting data providers as also free live data providers, but if you really want to test ideas, you would need to invest in them. And even there, one may need some redundancy. Today for example, right when the market was crashing, Global Data Feeds server crashed. If I were to have had a big long position during that time, I would have had no way to know whether to hold the position or exit and short the market.

While most traders I know trade with only one broker, bigger trading friends of mine actually trade at multiple places to ensure that in case a broker’s server goes down (for any umpteen reason), they are able to hedge themselves somewhere else. After all, if you were holding 10000 Nifty (400 contracts), you cannot wait for the brokers server to be reset even as the market starts to move against your position.

Trading as a hobby (which is what its for many) is a pretty expensive sport to be in. Above are some of the issues that needs to be thought into before you jump into a trade. And even after doing that, you may end up having the worst luck and getting killed because you could not get out of your positions fast enough.

Most traders get killed not just because they lack a strategy worth trading but also because they are highly under-capitalized while at the same time trying to earn a full time living out of it. In a future post, I shall detail what I think is the minimum capital a trader needs to start off with if he wants to survive for a period longer than the average trader.

The Truth About Investing

A good read.

Whatever works!

My twitter timeline for the last two days has been inundated with accusal and counter statements between a noted value picker and someone who claims (claim since I do not know him personally) a Financial Planner. I know neither of them but its interesting to see the reactions of others.

One reaction I keep hearing whenever such dog fights break out is that one should follow any strategy that suits him and should not demean any other just because he believes his strategy is better than the other. Man, am I amused to hear this from guys who laugh at the very concept of Technical Analysis. But first things first – I agree that what I do and use for my trading / investing is based on what I believe is best for my kind of philosophy

The problem starts though when I make tall claims about its ability and worse of all, use those claims to sell stuff to other people. The easiest money that can be made in the markets is by selling tips to gullible investors / traders who hope to cut down the amount of research they need to make on their own and yet be able to take advantage of market opportunities.

When a Ayurveda practitioner claims to be able to treat and worse cure Cancer by usage of his medicine, we laugh at his claims and at best ask for proof that is acceptable to the scientific community. Serious folks will approach courts to ensure that non sense is not peddled to save the gullible from being taken for a ride.

But when it comes to the financial world, we have not many such safeguards. SEBI has only recently started to register those who want to peddle advise, but once done, they are free to do whatever they chose to and this makes the whole effort futile.

For years, PMS returns that were generated by fund managers for their clients were not available to the general public. Thanks to Moneylife, we now have them disclosing the same (at least most of them) and this provides a equal playing field for the investor as to who is good and who is not.

In the field of Advisory, claims are tall by nature. So, we have websites that claim 90 – 95% success ratio. Anyone with any bit of market experience knows this is bunkum, but then again, the target for these sites is the general public who wish to make money without having to invest time and resources.

On one hand, we have evidences (mostly from US) that shows us that the failure rate of any trader is very high and that majority of investors are not even able to beat the market indices and on the other, we have site after site peddling systems / strategies that seem to make the whole statistic look like a pumped up number.

Personally I am sketpic about guys who claim to have understood and digested the markets and yet need to sell you stuff (SMS Tips). The big money lies not in selling tips to clients (and many of them have to be really goaded to try it out) but by helping manage money for clients (either as direct fund managers or as Certified Financial Planner). But then again, that exposes one to risks that never come up while selling what is essentially DIY stuff.

As a wonderful quote goes, “When it comes to Success, There are no short cuts”. If you are looking for a easy way to achieving profits in the market, do remember another quote that comes from the poker world

“Listen, here’s the thing. If you can’t spot the sucker in your first half hour at the table, then you are the sucker.” – Rounders, 1998

Don’t be a sucker. It really Sucks 😉

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