Wednesday, August 25, 2010

Understanding Relative strength Index and MA and VXX and other stocks

It is an index that show relative strength of the individual stock with the overall market index like the S&P. I found some very interesting observation in case of VXX. When ever the index was below 10, the market reversed and was allways a profit. So that is the only spot at which one can think of investing in VXX. Not looking at RS and not adjusting to time frame of the Moving agerage to 10 days can confuse about the buying and selling decisions.

Basically when the swings are faster, the time frame needs to be changed to a suitable range. Like 10 days is good for VXX. For individual stocks 30 day MA works very well.

I learnt this now. And will not make a mistake again on future index purchase and sell decisions. Both RS and MA are important, basing decisions on just one is not advisable.

I case of other stocks whose RS is moving higher and the stock is treading higher and it has an initial
high volume to begin with, that can be a good stock to purchase and hold. RS should always be moving higher above the base line.
And the opposite for shorting the stocks. It is interesting to see the decline in RS as a sign of shorting, ofcourse also below 30 day average. In case of BONT that slided from 16 dollars to 8 dollars the RS moved from 80 to 35.

Tuesday, August 24, 2010

BONT and shorting at 30 day MA. Need to refine buying points. Patience.

Shorted BONT below 30 day average at around 9 dollars. It moved  to 10 then came  back to 9 ..then I covered it. Right now it is at 7 dollars.

I am losing and not making on this trades because of my buying point is not good. I was correct about the happened as I expected. I should not have covered the stock so early.

Or to be in profit right from the beginning on has to short the stock early on the top of the mountain or when it is sliding and makes some visits to the 30 day MA points or above it.

Same with is on its top now. My buying point is not near the 30 day MA ..I am talking about buying on the uptrend. Got into it at the top. Should have waited for bad day like today when it came back to 24.5. Its not good to get a loss in the beginning since it lowers the confidence.
In this case there is enough volume to support the buy. When the market recovers or moving side ways...this stock may soar to 30. Lets see.

Buying points need to be refined for better profits.

Making it up

Making It Up

According to Bloomberg, Raghuram Rajan is now getting specific: he wants Bernanke to raise the Fed funds rate by 200 basis points in the face of 9.5 percent unemployment and inflation under 1 percent.
Let me try to explain what bothers me about this sort of thing, aside from the fact that it would be an utter disaster for the economy: it’s the way Rajan — and many other economists — seem to be making up new doctrines on the fly to justify their policy prejudices.
I’m all in favor of innovative thinking. But my view is that what you say about policy at any given time should be based on some kind of model — and furthermore, you should be willing to apply the same model to other situations, not make it a one-off used to justify what you happen to favor right now.

My writing on policy in this crisis has been based on the same model of macroeconomic policy I use in normal times; it’s just that the situation is different. The quick-and-dirty version looks like this:
That is, other things equal, demand is higher, the lower the real interest rate. Do you really want to quarrel with that? But right now, thanks to the aftermath of the financial crisis, even a zero nominal rate, which is a slightly negative real rate, isn’t low enough to produce full employment.
In normal times, when the zero lower bound isn’t binding, this basic framework suggests that conventional monetary policy can play the key role in stabilization. So in normal times I’m all in favor of having the Fed take on the job of managing the business cycle, and basing fiscal policy on long-term concerns.
But now we’re up against the zero lower bound; and that changes everything.
The idea that it would be good if we could raise expected inflation comes straight out of this minimalist framework: the economy “wants” a negative real interest rate, and the only way to get that given the zero lower bound is to have positive expected inflation.
The case for fiscal expansion also comes out of this fairly straightforwardly: if you can’t raise employment by cutting interest rates, deficit spending — which doesn’t crowd out private spending when the interest rate doesn’t change — becomes a way to put unemployed resources to work.
The point is that I’m not making it up as I go along; I have a consistent view here, which yields unorthodox conclusions right now only because we’re in an unusual situation.
So what is Rajan’s model? What’s the justification for raising real rates in the face of high unemployment? How would that model work in normal times?
My sense, obviously, is that a lot of the people who want monetary tightening start from a prejudice — they just dislike the idea of easy money — and then look for some arguments to back up that prejudice. And that’s no way to do economics.

Sunday, August 22, 2010

Using 10 day MA and RS for VXX and other future trading

An important tip i foun'd from the book " Profitting in bull and bear markets" is that one can use shorter moving averages that last on a weeks instead of months like in individual stocks. So I used 10 day MA and found that it is appropriate for the future indexes and even for VXX which is future reversal index.

So my buying point at 25 was during a declining market and hence had to wait now for the market to fall again. I prospects of market moving down are high and hence waiting on the position is fine.

I observed RSI indicator. It is important tool too for buying or selling short etc. 

Friday, August 20, 2010

Man who broke the pound quits hedge fund

The billionaire investor who beat the Bank of England on Black Wednesday in 1992 and drove the U.K. out of the European Exchange Rate Mechanism (ERM) has given a rare glimpse of the emotional cost of the hedge fund industry as he announced plans to wind up his business.
Stanley Druckenmiller, the inspiration behind George Soros’s famous bet against the pound in 1992, surprised investors by promising to close Duquesne Capital. In a letter to clients, he blamed the impact of three decades in the world of high-stakes finance, and the pain of losing money.
“While the joy of winning for clients is immense, for me the disappointment of each interim drawdown over the years has taken a cumulative toll that I cannot continue to sustain,” wrote Druckenmiller, who has an estimated fortune of $3.5bn.
“I continue to care deeply about performing for our clients, and the stress of performing in a way that I consider to be disappointing — even if you do not share that view — persists in exacting a high emotional toll, with the result that I have concluded that this change is necessary,” he added.
Kenneth Heinz, president of Hedge Fund Research, believes that Druckenmiller’s decision shows the personal capital that he and his fellow traders invest in their businesses.
“There’s no question that fund managers and people who have been in this industry a long time are under great pressure to be successful, not only financially but also personally,” Heinz said.
This has been a tough year for macro hedge funds such as Duquesne Capital, whose trades are based on changes in the global economy. Duquesne is thought to have lost about 5% so far this year, but many rivals appear to be performing worse. Data collected this week by the Financial Times showed several big names are sitting on significant losses for the year so far, some losing up to 10% of their assets.
An invitation to play in a golf tournament this October helped to persuade Druckenmiller to step down. He rejected the opportunity, fearing it would coincide with another bout of market turmoil.
Several other hedge funds have closed this year, and Druckenmiller’s departure suggests the industry is experiencing a major shake-out. Heinz, though, is confident that hedge funds will not suffer a talent shortage. “Even the most successful hedge fund executive reaches a point in their lives when they want to step back from managing capital and do something else, but for every one there are many more people who want to come in and be as successful as Druckenmiller,” he said.
Druckenmiller founded Duquesne Capital in 1981, and it holds about $12bn in assets. He is married with three daughters, and was ranked as the 91st richest American by Forbes this year. Last year he gave $705m to a foundation that supports education, medical research and anti-poverty charities, thought to be the biggest single charitable donation by an American in 2009.
Druckenmiller was chief investment officer for Soros Fund Management on 16 September 1992 when it took a huge position against the pound, winning more than $1bn. This dragged Soros into the limelight, but Druckenmiller should have got the credit according to another Soros employee, Scott Bessent.
“What is so interesting to me was the combination of Stan Druckenmiller’s gamesmanship — Stan really understands risk/reward — and George’s ability to size trades,” Bessent recalled in a book titled Inside the House of Money.
“Make no mistake about it, shorting the pound was Stan Druckenmiller’s idea. Soros’s contribution was pushing him to take a gigantic position.”

Wednesday, August 11, 2010

trading futures market is different from individuals stocks

Trading Vxx is different because it has a guessable above and below bound depending on the bear or bull conditions of the market. Certainly in a bear market like this the stock indexes vacillate between these bounds. When under a high leverage postion one should never take a loss on the future market although the same principle applies to individual stocks, in future market on has to be extra careful because unlike a individual market ( a micro asset) that is easier to understand the behavior and wait and hold till the stock move up(even if there is a loss of 5 percent on the treading 30 day MA).

In case of the future market like a VXX it is impossible to guess where the market is going in the short run. If one take a loss from the buy price one does not know when the stock will come back to the same price to get out of the situation. One needs a lot of patience and one has to leave the future for some time even if one is confident of the macro economic situation will go the way one is thinking.

VXX moved to 22.75 today. that is good news for me. But it has to move to 25.5 for get out off the train without a loss.

It could probably happen but I am in a wrong situation, instead of making  a profit I am waiting to recover losses. Hmmmmmm

Never never take a loss on the futures market. It is just unpredictable movement with the limited bounds.
One has to learn to buy or sell at the upper and lower bounds. On the peaks of the market or atleast near the peaks. Needs some expertise.

Have to take small losses in this game. That is for sure. Have to take losses for commmission costs but have to hold stocks and cover all the losses when the future moves in the macro economic reality
check situation from the market irrationality. Make money off the market irrationality. Sometime the irrationality can go far against ones situation. One should get out of such a situation. Not take a loss from the current buy situation. One should not be intimitated about the market irrationality.
One has to get out of the train and catch it at the right station. Thats what the game is all about.

More lessons

There are some fundamental mistakes I have been making and not putting much waitage

1. Preservation of capital
2. Dealing with leverage
3. Buy and sell options with regard to situations 1 and 2

It is of unlimited importance that when a portfolio of say 5k and a 5k leverage is available, then when investing in a stock with 8k say a certain price x, it is important that when one is highly leveraged,
one should never hold even a cent lower than price X, although one is confident of future rise in price.

One should be in a high leveraged stake one should be very confident of the situation and should get profit right away. If one is not certain about the trades upside one should not be in a high leverage situation. One should be in 1 to 2k investment risk situation.

When under high leverage even a 5 % loss on the original capital is a huge loss and one tends to hold the asset to recover the loss and there could be even greater changes of losses incurring.

Thats what happened with VXX which i bought at high leverage then it slided from buy price 25.5 to 21.5. If I sold the stock at 25.5 and then got into it at a lower price I could have made more money.
Hold on a price below buy price is not a good trading practice on high leverage situation. This is mistake NO 1.

2. Mistake NO 2 was dealing with IDT. The concept of RS, relative strength compared to the market indicators should be taken into consideration which determining buy or sell decisions. IDT had a good volume pushing the price upward even when the market was sliding down, then it was rocketing above 30 day MA. The problem was it was far apart from the 30 day MA base line. One tends to get confused in case there is a sudden sell off. But the high volume was a good indicator that there were people holding the stock, unlike pure gambling.
If not a high leverage atleast some money could have been invested in this stock. Another mistake was that if the stock is moving far apart from the 30 day MA one has to draw another base line touching all the down points of the IDT curve. This new base line needs to be used as the new base line for sell considerations. 

I completely forgot about this concept from the book Profiting in bull and bear markets. Now I understand better in experience.

Companies like VRX that have shown good RS have actually stood study in the turmoil. Even IDT has done will in the market down situation.

If one is buying one has to buy stock that are showing good RS and above 30 day MA. 
If one is shorting one has to short stock that are showing worst RS and below the 30 day MA. 

Preservation of capital should be the number one priority in trading. Otherwise any kind of knowledge is of no use, when one does not have money when one needs most. Never take a loss on high leverage. 

If one buys above the 30 day average and the stock is gliding on the 30 day average, one can buy on the dip in the curve on the 30 day average. Thats a good buy situation but even then not on high leverage. With  a small quantity one can take a  loss of may be 5-8 percent and see the stock move up on the 30 day average. But not when on high leverage. What ever the situation.