Thoughts on Scaling into Positions

I was reading an article "Advanced Scale-In Strategies For Short-Term Traders. by David Penn"

The closing remarks caught my attention. 

Part 1

Part 2

This runs absolutely against the one of the golden rules of trading "Never add to a loosing position". But the more professionals I met, the more I got convinced that, like all things in life, reality and edge has its nuances. So scaling-in in a given context is perhaps a good trade management strategy.

The key is - one has to know the context in a quantified sense, which is what is highlighted in the second snapshot above. 

My back testing on NIFTY tells me, Pullbacks in the trend and Mean reversion setups are the ideal candidates for this approach. If you are new to this, remember this can be a double edged sword, but then almost everything in trading is. 

More on it that I have written previously.

Book Excerpt - Layered Position Sizing

Note to Self - Learning from Losses

What I learnt from Victor Neiderhoffer | Article Review

I have been a fan of Victor Niederhoffer for a long time. What a talented multifaceted man. If you are into trading or any kind of speculative business you've got to read his books.

I read this (https://www.newyorker.com/magazine/2007/10/15/the-blow-up-artist) article about him and thought of sharing some interesting snippets.

1. Experience in some sort of Performance Sport - I do think it helps to have had played a sport or done any performance related thing like Music etc. The reason I think its relevant is from a skill development perspective. All forms of sports or crafts require a progression of skill levels. It also requires us to observe, reflect, deconstruct, attempt and practice tasks. 

2. Discipline, avoiding noise and focusing on Short term moves - Being on time I guess is the first aspect of discipline, alludes to the idea of routines and their importance in success. The second aspect is avoiding noise, as a trader you need to have confidence in your system and approach and you need to avoid noise i.e informational noise. Thankfully I quit TV a decade back, and have never gone back. Lastly, look at that focus on "Short term moves". I have always been against the Random Walk/Fama school, and have been more of a Mandelbrot follower. Good to see the same beliefs at play here. 

3. Market Statistics as an Anchor - It always helps to know how things worked in a similar context in the past. The reason it helps is because prices in the short term are nothing but a reflection of the emotions of people, and that does not change.

4. I told you so! If someone tells you that day trading does not work, its because most traders do not have the skills to make it work, but by itself patterns in shorter periods are far easy to predict than in longer periods.

5. RIP - Efficient Market Hypothesis and Random Walk Theory - The moment you shorten your trading time frame, you will start to see the inefficiencies. If you are a trader reading this, think about Open Close as a separate event and High Low range formation as a different event, and you will see the inefficiencies clearly.

Lastly, understand where risk comes from, I mean risk of ruin. While there is always a defined risk with which we take trades, risk of ruin typically comes from the possibility of an unforeseen event happening and you having no control over it. Read that statement again, the second part especially.

Now think about how to avoid being in that situation, that should be good enough to keep you going in this business.

Happy Trading!

Article Excerpt & NiftyScalper Data Analysis - Fundamentals of Short-Term Trading : Part Two | Dr. Brett N. Steenbarger

Ever since I began my journey in the world of trading, articles and books by Dr. Steenbarger has been of great value to me.

Coincidentally I came across this excerpt where he is alluding to the idea of looking at markets horizontally, something that one of my team members' tried analyzing sometime back. First things first, here is what Dr. Steenbarger has to say.  

Article link - http://www.brettsteenbarger.com/Short-Term%20Trading2.doc

All the seasoned day traders that I have interacted with, either intuitively or through analysis, have said the same the thing, ie Not all time slots are the same.

Lets look at the volatility spikes on an Intraday basis for NIFTY. This was 2 years data, and we tried to do the same horizontal analysis by normalizing each day's move. You would clearly see two peaks and a trough. Of course this does not give a nuanced picture as a Monte Carlo analysis would, but still tells us quite clearly where the "meat" is. 

On a closing note, I was once told by a developing trader that he take trades only after 10:15 am IST in NIFTY, as he "believes" that's when you get an opening range breakout. Needless to say, he would get stopped out more often than not, and perhaps would see his trade move in the intended direction, couple of hours later. 

A simple horizontal analysis can help you time and size your trades optimally. Try it out.

Learning to see data - NYT Article Summary & More

Article Link - https://www.nytimes.com/2015/03/29/sunday-review/learning-to-see-data.html?_r=1

I came across this article sometime back when I was researching on "Perceptual Learning". Perceptual learning basically is about how we learn and create patterns in our brain using all of our senses.

Here's an excerpt from the article which explains it further 

In the context of markets, it is closely linked to the idea of "Fractals" and concept of "Thin Slicing" from psychology.

When we are looking at charts and trading, esp. seasoned traders get an intuitive feeling of what may happen next. I have seen this with several traders. They see a pattern emerging and they know how its going to develop further. Obviously its not fool proof, but even if it's better than a coin toss probability, its good enough, in reality I have seen people who have a probability of getting it right more often. But then, it may not just be their refined visual perceptual abilities, there could be other variables that they may be tacitly processing, perhaps some moving averages or some other data. Its only when their brains kind of processes all these elements together that they get their predictions right.   

Also, since price movements are fractal in nature, traders are further able to apply the same sense to different time frames, and perhaps benefit from larger swings as well.  

But then how do we develop this intuition, unfortunately there are no shortcuts. Sufficient "Screen Time", "Focus" and "Reflection" seem to be the only ways get there.

BTW, if you are more interested in the subject of forecasting there is this awesome book by Philip E. Tetlock and Dan Gardner called "Superforecasting: The Art and Science of Prediction", here is a nice summary.