What trading really is about

“Everybody knows, that nobody really knows” – John Legend

The above quote (from part of a song) probably could be bastardized to trading as well. Everyone has a mental image of what trading is, but they don’t really know what it is.

A short introduction about myself, i started trading on a real account about a year ago. Made many mistakes and achieved some realizations. You can check out my trade explorer for the results. I'll let them speak for myself.

Anyway the main purpose here about this thread is not to teach you how to trade per say. Nobody can. Except yourself.

What i can do though is to illustrate the pitfalls and beginning mistakes. Hopefully you will find it useful

TRADING 101 - Basic principles

To give a short example, people often confuse trading with investing. They are not the same.
Or they confuse it with gambling. Ok, i can see some similarities there but not quite.
So what is trading really? To me, i prefer to keep it simple. Trading at its core is an exchange of value.
A trade happens because of a divergence in perception. For example, When a trade is made in a contract of the S&P500, the buyer thinks that the price will appreciate, the seller thinks the reverse.
This brings to me my first realization : Nobody in the markets came in to lose money.
Yet for the larger part of us without inside information, most of us saw the same information, the same charts and we arrived at 2 diametrically opposite decisions.
Though the markets are a zero sum game, both of us could make money depending on our exit points. Or lose money.
Perhaps, by reading to this point, you have realized that i have been constantly harping on losing money. For good reason. Most beginning traders have heard the statistic that 95% of traders lose money. I would completely agree. If the financial markets are not your passion, do not trade. You will regret it. Invest, do ball room dancing, whatever. But don’t trade.
For those who are still determined however, then let me illustrate to you 3 concepts.
1) Methodology. Aka How do i make money. What is my edge over others
2) Money management. Aka how much do i put on this trade such that losing it is not extremely consequential and yet i make enough?
3)Mind. Aka, IF I had a winning system, great risk control, how do i not screw up.
To be successful in trading, one has to have all 3.
If you only have methodology, but not money management, then you will eventually blow up.
If you only have money management but not methodology, you will just be bleeding cash.
However, even if you have the first 2 but not the last, you will doubt your system and that will be your downfall eventually.
The markets are rife with stories of wealth. That’s great. However what goes often unpublished are those who met their downfall.
I believe while we have much to learn from the greats like Soros, it is even more important as beginners to learn from the mistakes of amateurs and to avoid them.

I shall be updating this thread with a few other posts about trading.

Meanwhile, you can check out my own trade setups on www.theuniversitytrader.com

For such a big name the design looks like shit.

I agree with you .i started trading in 1991 and still trying to come to terms with trading methods. ever since I have been trying to reverse that 95% loose.
perhaps I will never achieve that goal. my passion at 65 is to continue working to improve last years performace. I trade only spx futures and opns. as and
when there will be a trade I will post it and would seek your critical review. tks

So of all the effort this guy put up to do this, you are only border about the design. I pity people like you in this forum. No positive impact on others but just to criticize

mmmn. Noted. So how can i improve the design?

The design is fine, it's clear and easy to read. It's the content your visitors should be interested in anyway.

good luck

http://charts.mql5.com/4/250/usa500-...arkets-ltd.png
Trade Setup
Short S&P500 @ 1853, SL @ 1867, TP 1820
Since the failure to breach past 1875 as well as fall past 1849.4 (previous low), the S&P500 looks set to go down towards 1830. However, it is likely with a stronger negative sentiment this time that it will fall past that level to about 1820.
Could this be the start of something interesting? Let's wait and see

http://www.theuniversitytrader.com/2...setup-2532014/

Why gold prices are almost at all time lows despite huge physical demand

This question was first posed to me by my mother when she wanted to buy gold. My only and rather puzzled answer was that physical gold and the paper gold markets are 2 entirely different markets.
In one day, more gold is traded on the paper markets than one entire year of physical gold. In theory, paper gold is supposed to track physical gold. However when the supply of paper gold is so much more than physical gold, there is no way all this structure can hold when a squeeze occurs- For every bit of gold, there could be more than 6 claims on it.
I believe that in our daily lives, we have heard to some extent of China's huge demand for gold. Yet why are gold prices falling despite such demand?
Goldman Sachs Research as well as Zerohedge have published a speculative article on how the mechanism works. You can read the full article here http://www.zerohedge.com/news/2014-0...ce-gold-soarin
A summary
The divergence in prices occur as a result of China's Commodity Funding Deals
CCFDs are one of the ways in which hot money is brought into China while bypassing official channels.

1. 1) B Imports gold into China through USD Letters of Credit from A
2. 2) B Sells warrant documentation on gold to offshore parties C at USD or offshore CNY
3. 3)Convert USD to CNY
4. 4) C holding warrant resells it to A at a discount
5. 5) Rinse and repeat

Usually, commodities are negative carry ie. you are charged a cost for holding them. However through the above financing deal to exploit the CNYUSD interest rate differential (where the carry is now interest rate differential - cost of storage - cost of financing) the demand for the physical commodity results in strong demand for the physical asset while selling in the paper markets to hedge.
What's next?
An unwind of such carry trade would mean physical selling and paper buying. Could the sheer volume of the unwind result in strong back wind for gold?

http://www.theuniversitytrader.com/2...ysical-demand/

Nice start IMO. I like the economic calender and the markets timer on your site.

Good luck

Amateurs only make two errors.

1. They over trade.

2. They over leverage.

Presently, a 500 dollar cd will give about 1% per year. If you are going to be an active trader, target 1% per week. That means that if you have a 500 dollar account, you should have position sizing that will get you 1% a week. You will still crush the return any bank will give you. You are not likely to turn 500 dollars into a million dollars in a single year. If that is your goal, you need to study poker, or better yet, blackjack, and head to Vegas.

Thank you

To be honest, i don't really have a target return. Some days there will be set ups, some there wont be any.

As they say, its time to ride the buckling bronco

There will be setups every day if they make sense and you trade enough pairs.

On the S&P500
http://charts.mql5.com/4/371/usa500-...arkets-ltd.png
Possible Set ups
Sell Stop Short @ 1828, TP @1770, SL 1845,
Sell at 1880 ( if it ever comes here), SL 1901, TP 1770
With the lack of data this week, things could get ugly as investors finally wake up to the idea of a extremely overvalued market and stop buying every single dip.
However, with that in mind, we should not rule out cautious longs. In fact, should there be a signal, a long can be taken with a 5:1 risk reward ratio. (to compensate for the weakness in the overall market structure)
GOLD
http://charts.mql5.com/4/371/xauusd-...kets-ltd-2.png

With the recent price action in gold, i am tempted to go long and strong.
A few ways to trade gold.
Aggressive approach : Long@ current prices , SL @ 1276, TP 1420
Cautious : Limit buy @ 1294, SL@1276, TP 1380
Sell stop at 1275, TP 1211, SL 1295

When you hit, hit hard.
I am of the opinion that trades should come to you. Trading is probably one of the few endeavors where effort can be a double edged sword instead. The market is a being none of us can control, trying to forecast prices with certainty is a fools game.
What is a worthwhile pursuit on the other hand is to assess the odds and take calculated risk.
While i have been busy for the past week and traded quite infrequently, one set up stood out to me so obviously that i entered into a position while chasing a bus.
http://charts.mql5.com/4/371/usa500-...arkets-ltd.png
When i saw the 2 exhaustion pin bars, with price at 1895, it was a trade to take.
A few reasons,

 

1. On the S&P500, there are rarely exhaustion pin bars, especially of late. Moreover over the previous few days, the market seem overextended without any corrections.
2. Despite the "good news", it failed to breach 1900
3. On a risk adjusted basis, this trade made sense. My risk was constrained at 1901, whereas i could take profit quickly at 1840, R/R of 55/5 = 11

The last reason is the most important one. We can never be certain of anything. Yet the game is played by entering into trades with a positive expectancy.
So what happened next?
http://charts.mql5.com/4/371/usa500-...kets-ltd-2.png

S&P500 Retracement play
http://charts.mql5.com/4/393/usa500-...kets-ltd-2.png
Aggressive Buy@ 1853, SL 1836, TP 1885
Conservative buy @ 1841.5, SL 1836, TP 1885

Could we be looking at a long overdue correction?
Last week for the first close ever, we had a particularly vicious close with tech and biotech getting dumped.
This is a warning signal.
Today we had sell-off without any signal. Personally, its still too early for me to make any calls. But this is a very very exciting market to trade.
http://charts.mql5.com/4/419/usa500-...arkets-ltd.png
As of late, exhaustion pinbars have been extremely good predictors for price action.
Personally got in on this little short with a stop at 1874, riding it down to 1842.
I would not touch the region from 1830 to 1840 (too congested)
A further sell stop at 1829, TP @ 1777, SL 1845
Cheerio,

Calling tops and bottoms is usually a fool’s game. However, there has been some happenings that might justify a bottom on the VIX.

A brief primer on what the VIX is. It is basically a number based on the implied volatility of the options on the S&P500 for the next 30 days. In this case, the proxy i am using for the VIX is the VIX August contract.

Futures contracts on the VIX have been in contango for the past few months/years. Contango is a structure where later dated futures are priced higher than the spot. In essence, taking a future trade with contango is like taking a long options trade. Without volatility, as expiration nears your futures price will converge to spot. In order to profit, you need your spot price to spike.

Now, let me lay out my case for why i feel that the VIX has essentially bottomed.

First of all, since VIX futures have been in contango for the past months, they have been steadily mowing down. However, for the first time since this year, they have essentially traced out a bottom at 12.65 with it refusing to go lower.

Second, during this month when the S&P dropped a few measly points, VIX spiked over 30% to 14.4. Underlying this would probably be a dramatic squeeze on short VIX trades as traders unwind.

Those who track the markets would then argue, but it did drop back down towards 12.85! (for the august contract). I do admit this. However in light of such a dramatic drop in VIX, there was no follow through. The lowest the market touched was 12.85 before shooting back up.

Finally, the 80/85 numbers have been a tough nut to crack. The previous correction(if you could even call it a correction) was triggered when the market went for 1885 and failed. Might this be a replica?

Therefore from a technical perspective as well as the long/short positioning of players, i would argue that the VIX Aug future has bottomed.

Moving towards the fundamental perspective, I would like us to look at Crude Oil.
Traditionally, WTI has had an inverse relationship with the S&P500. High energy prices are essentially another form of tax. With the recent price action of crude oil as well as the ukrainian/israel crisis, i would say that the market might have been too complacent in under pricing volatility.

No examination could go without a look at the quantitative numbers coming out of the US. First of all i must establish that i do not trust the numbers at all. It is understandable that market data might have to be readjusted as preliminary numbers might not be accurate. However historically the number of revision upwards and downwards have been about equal. This year most numbers have all been revised downwards. If this doesnt seem fishy. I don’t know what is.

Secondly, the first quarter data has been nothing but bad. However the weather was blamed and analyst became extremely optimistic about Q2 with pent up demand. Yet the data that we are seeing for Q2 has seen almost none of this pent up demand. There been multiple CEOs coming up front declaring that there has been no recovery at all.

However, one could always take stock in the unemployment claims data. Yes. Unemployment is going down. However, much of the improvement in data can be drawn from people voluntarily leaving the work force ie. giving up hope of finding a job and relying on benefits. Second, much of the jobs created were part time low value jobs. If one wanted a picture of the US recovery, it would be like i got fired by mckinsey and i took a job at mcdonalds. But it’s ok since both firms starts with D. Same same.

To conclude, this week is going to be big on the fundamental side. We are going to see data such as Q2 GDP, ISM as well as NFP and these can move the market in a big way.

The consensus now is for a Q2 print at about 3%, however Gary Shiling views a print at 1% possible. If that happens, watch out below for the vix tiger.

More at

http://www.theuniversitytrader.com/2...atility-tiger/