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Some Trading Secrets

  
  Education
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  • Stop placement
    • Don’t place stops at round numbers (which are common support / resistance zones).
    • Place stops below support zones (above resistance zones) to give price every opportunity to move in desired direction.
  • Trade with the trend
    • Select stocks that are moving with the general market and industry trends.
  • Enter on breakouts near the yearly high
    • Breakouts from chart patterns within a third of the yearly high perform best (statistically). If price doesn’t rise within a few days, consider selling immediately.
  • Exit only on expected significant price turns
    • Don’t be so quick to sell. Learn to predict significant price turns.
  • Use trendlines as sell signals
    • If prices are trending up and then drop below a trendline, the trend isn’t up any longer. However it doesn’t mean that the trend is down.
    • Victor Sperandeo’s criteria to determine if a trend has changed from up to down: (i) price drops below an up-sloping trendline, (ii) lower high (or failed breakout), (iii) lower low.
  • Ignore news
    • Don’t believe scenarios spun by news outlets.

Trading Wisdom From Jesse Livermore

  
  Education
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Don’t Avoid Exit Strategies

“It was the same with all. They would not take a small loss at first but had held on, in the hope of a recovery that would let them out even. And prices had sunk and sunk until the loss was so great that it seemed only proper to hold on, if need be a year, for sooner or later prices must come back. But the break shook them out, and prices just went so much lower because so many people had to sell, whether they would or not.”
Jesse Livermore

Hope, Fear and Greed

“The spectator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day and you lose more than you should had you not listened to hope. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.”
Jesse Livermore

Ten Reasons – Trading Long Option Strangles

  
  Education
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A long strangle is long one call at a higher strike and long one put at a lower strike in the same expiration and on the same stock. Such a position makes money if the stock price moves up or down well past the strike prices of the strangle. There are higher costs and risks with these strategies, as I discuss below. 

 Strangles are low risk plays, one side of the options will go up in value when the other side goes down in value the majority of the time.

  1. If one side becomes worthless it generally means the other side is worth a lot.
  2. You can make money on strangles even when you do not know which way the market will move.
  3. It is much less stressful to hold a position with a hedge in place.
  4. The big risks are transferred from the option buyer to the option seller in this play.
  5. Strangles lose small  with small movements but win big when there is a big move. The are asymmetrical in their construction.
  6. When one side of the option sellers blow up their account due to an outsized move you will be on the other side of them and be the trader their capital flows to.
  7. Strangles can be played on any time frame.
  8. With the strangles the winning side has a growing delta and the losing side has a shrinking delta.
  9. Strangles can be used to capture trends, volatility, and reversals.

Where is the risk? (more…)

Morgan Stanley probed by Federal authorities

  
Analysis, Economy, Education
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May 12 (Reuters) – U.S. federal investigators are probing whether Morgan Stanley (MS.N) misled investors about mortgage derivative products it helped create and sometimes bet against, the Wall Street Journal said, citing people familiar with the matter.

Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized debt obligations (CDOs), and its trading desk at times placed bets that their value would fall, the Journal said, citing traders.

Federal investigators are examining whether Morgan Stanley made proper representations about its roles in the mortgage derivative deals, the newspaper said.

Two particular deals — named after U.S. Presidents James Buchanan and Andrew Jackson — were scanned by the investigators, the paper said, citing a person familiar with the matter.

Morgan Stanley helped design the deals and bet against them, but did not market them to clients, according to the paper.

Traders called them the “Dead Presidents” deals, the Journal said. The firm made money on those deals, but any profit was far overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, the paper said

citing a person familiar with the matter.

Morgan Stanley helped design the deals and bet against them, but did not market them to clients, according to the paper.

Traders called them the “Dead Presidents” deals, the Journal said. The firm made money on those deals, but any profit was far overshadowed by the $9 billion the firm lost on bullish mortgage bets in 2007, the paper said.

“We have not been contacted by the Justice Department about the transactions being raised by The Wall Street Journal and we have no knowledge of a Justice Department investigation into these transactions,” Morgan Stanley spokesman Mark Lake told Reuters by telephone.

Spokespeople for the Manhattan Attorney’s office and the U.S. Securities and Exchange Commission (SEC) declined to comment to the Journal.

Updated at 11:17/12th May/Baroda/India

Teaching Math

  
Education, Humour
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Teaching Math in 1950: A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price. What is his profit?
Teaching Math in 1960: A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price, or $80. What is his profit?
Teaching Math in 1970: A logger exchanges a set “L” of lumber for a set “M” of money. The cardinality of set “M” is 100. Each element is worth one dollar. Make 100 dots representing the elements of the set “M.” The set “C,” the cost of production contains 20 fewer points than set “M.” Represent the set “C” as subset of set “M” and answer the following question: What is the cardinality of the set “P” of profits?
Teaching Math in 1980: A logger sells a truckload of lumber for $100. His cost of production is $80 and his profit is $20. Your assignment: Underline the number 20.
Teaching Math in 1990:  By cutting down beautiful forest trees, an unenlightened logger makes $20. What do you think of this way of making a living? Topic for class participation after answering the question: How did the forest birds and squirrels “feel” as the logger cut down the trees? There are no wrong answers.
Teaching Math in 2002: A logger sells a truckload of lumber for $100. His cost of production is $120. How does Arthur Andersen determine that his profit margin is $60?
Teaching Math in 2010: A logger sells a truckload of lumber for $100. His cost of production is $120. The federal government bails out his firm. How much is his bonus?

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