Monday, November 29, 2010

BSAR Trading System - Exit Rules

  1. Once I have bought futures, how long would I hold them, before I sell them?
    • You would hold onto your open positions (open positions mean positions that have not been closed by a corresponding opposite transaction) until (1) you get an exit signal from BSAR OR (2) the Futures Contract Expires.
  2. What are the Exit Rules or Exit Signals
    1. Calculate BSAR after markets have closed
    2. If today's closing price is lower than today's BSAR then;
    3. We inquire about the Quotes of the underlying asset after 10 am tomorrow
    4. IF tomorrow at 10 am, the underlying asset (spot prices) is still quoting below BSAR for today then we close our positions immediately
  3. Is there an astrological significance of 10 am?
    • NO. The first one hour and last one hour of trading are characterized by higher volatility, as a rule of thumb. And because our BSAR Trading System is not based on volatility, so we avoid these two time periods in our trading. Which means we could take positions between 10:00 am to 2:30 pm (preferably between 10:05 to 12:30)

Sunday, November 28, 2010

BSAR Trading System - Entry Rules

  1. How to trade for the very first time using BSAR?

    The entry rules for the very FIRST TRADE are as follows: (first trade would always be a long trade)


    1. The Underlying Asset must have been closing below it's BSAR level for at least 3 consecutive trading sessions
    2. Today, for the very first time in last four trading sessions, it should close above BSAR level
    3. Tomorrow even after 10 am, it should be quoting above today's BSAR level
    4. So tomorrow, after 10 am we would place a 'market buy order' to buy Futures Contract of our preferred underlying asset
  2. What are the entry rules for subsequent long trades?

    The entry rules for subsequent Long Trades (Long Trade means first you buy something then sell it) are as follows

    1. The Underlying Asset must have closed above it's BSAR level for today
    2. Tomorrow , even after 10 am, the asset must continue to quote above today's BSAR level.
    3. Place a 'market buy order' for Futures Contract after 10 am

Thursday, November 25, 2010

BSAR Trading System - Simple Implementation

  1. This is the Simple Implementation for most of the people willing to earn extra money using BSAR Trading System
  2. It is good for everyone - Employed, Unemployed, Self- Employed, Shopkeepers, Merchants, Retired, House Wives, Students, Handicapped or Disabled, Farmers, Craftsmen,etc.,
  3. Although one could profit from the BSAR Trading System with a capital as small as Rs 10,000, however for regular Income, one needs to start with Rs 25,000, or start with Rs 10,000 and wait till your capital and profits total Rs. 25,000 for getting a regular income from the system.
  4. There is no need to sit in front of a computer or a terminal or at broker's office
  5. No need for an online trading account - which usually tricks investors into over-trading
  6. There is absolutely no need to purchase any software, data feed etc., you could use a pen (cost=Rs 10) and a pocket diary (cost=Rs 10) and phone your broker for days high, low and close prices (average time = 1 minute everyday, 5 days a week and 22 days a month, a total expenditure of Rs 14 per month). On the other hand some newspapers also publish this data
  7. No need to watch the Support and Resistance Levels, or any Pivot Points, or any other Exponential Moving Averages or Simple Moving Averages (One could do very well even without 50 SMA).
  8. No need to anticipate or fear reversals, volatility, premiums and discounts on derivatives

Wednesday, November 24, 2010

BSAR Trading System - Requirements

  1. What do we need to Profit from BSAR Trading System?
    • A Pen and a Notebook/Old Diary
    • A PAN Card & Election ID Card
    • A Bank Account
    • A Demat and Derivatives Account with any Stock Broker
    • A Basic Mobile Phone with Incoming Call Facility
    • Capital Requirements
      • Minimum: Rs 10,000
      • Recommended: Rs 1,50,000

Wednesday, November 17, 2010

BSAR Trading System - 50 Periods Simple Moving Average

  1. What is the significance of 50 SMA?
    • 50 SMA is the average of the closing prices of last 50 periods. It is used to filter the signals generated by BSAR value. This is the implementation of the style of Bert Dohmen of Dohmen Capital Group. So if,

      UP TREND

      Closing Price is greater than BSAR AND BSAR is greater than 50 SMA.

      DOWN TREND

      Closing Price is less than BSAR AND BSAR is less than 50 SMA

      SIDEWAYS

      When above two conditions are not satisfied.
  2. Advanced Technique:
    • If Delivered Quantity is different than Traded Quantity,then:
    • Instead of Using 50 SMA we could use 50 Periods Adjusted Volume Weighted Moving Average(AVWMA)
    • Adjusted Volume = Traded Quantity * Percent Delivered Quantity to Traded Quantity /100
    • Adjusted Volume Weighted Price = Multiply Low of the Period (day/week) by the Adjusted Volume
    • Calculate 50 periods Moving average of the Adjusted Volume Weighted Price
    • Use it instead of the 50 SMA in the above technique

Tuesday, November 16, 2010

BSAR Trading System - Slow Stochastic Oscillator

  1. What is a Stochastic Oscillator?
    • It is a graphical depiction of a Mathematical formula, which compares a security's closing price relative to it's price range over a given (predetermined) time period.
  2. What is the difference between Fast and Slow Stochastic Oscillator
    • Stochastic Oscillator is termed as %K and it's 3 period moving average is termed as %D. It's the %D's divergences that it's inventor Dr George Lane emphasized upon. So in order to reduce noise and focus on %D, another 3 period average of %D is taken and it is termed as %D Slow. Now if you take a moving average of a moving average of the same period, it is nothing but Triangular Moving Average. And Triangular Moving averages assign maximum weight to the middle of the data series, thereby developing smoothly as we watch them, so that acting upon the signals is relatively easy.
  3. What are the Optimum values for %K, %D, %D Slow?
    • 7,4,4
  4. What are the various ways in which Stochastic Oscillator could be interpreted?
    • Buy when the Oscillator (either %K or %D) falls below a specific level (e.g., 20) and then rises above that level. Sell when the Oscillator rises above a specific level (e.g., 80) and then falls below that level.
    • Buy When the %K line rises above the %D line and sell when %K line falls below the %D line.
    • Look for divergences
  5. What is Jake Bernstein's Stochastic Pop?
    • Use the Slow Stochastic (14,5,5)
    • When Slow Stochasticgoes above 75% level then BUY
    • Exit when %K and %D cross
    • When Slow Stochastic goes below the 25% level, then SELL
    • Exit when %K and %D cross
  6. How is Slow Stochastic (7,4,4) implemented in BSAR Trading System?
    • Buy when the asset or a security closes above BSAR and Slow Stochastic (7,4,4) %D rises above 20 after falling below it.
    • Buy More when the asset or a security closes above High EMA and Slow Stochastic (7,4,4) %D is above 75% level. (Full Implementation later)

Monday, November 15, 2010

BSAR Trading System - The EMA of Highs

  1. How is EMA of Highs calculated
    • Exponential Moving Average (EMA) of Highs are calculated in a similar manner as EMA of Lows.
  2. Is EMA of Highs used in a similar fashion as EMA of Lows, perhaps to initiate Short trades?
    • NO. Exhaustive studies conducted by Researchers have found that Going Short hasn't been fruitful using any kind of system, unless the trader uses ad-hoc judgment which is contrary to the basic premise of developing and using a system.
  3. So what is the significance of EMA of Highs
    • We use it for setting breakout point, a deeper understanding would develop as we move along

Sunday, November 14, 2010

BSAR Trading System - The EMA of Lows

  1. How is BSAR value calculated?
    • Biased Stop And Reverse is a value derived by calculating the Exponential Moving Average (EMA) of Lows of the period.
    • First take up the Simple Average of the Lows of the period, e.g., if you want to calculate the Exponential Moving Average of Lows for 9 periods, first calculate the Simple Average of the first 9 periods Low
    • Then Calculate the Smoothing Percentage by the following formula:
      α = 2 / (N + 1);
      Since N in our case is 9;
      => N = 9;
      => N + 1 = 9 + 1 = 10;
      => α = 2 / (10);
      => α = 0.2;
    • Then to calculate the EMA of Lows, the formula is:;

      EMA (today) = EMA (Yesterday) + α * {Low (today)- EMA (Yesterday)}

      Where EMA (yesterday) is the yesterday's value of Exponential Moving Average, but the very first day we had calculated the Simple Average of Lows, hence just for the second day, the EMA (yesterday) would be Simple Average of Lows calculated Yesterday;

      So,
      1st Value of BSAR is Simple Average of Lows for the Period;

      2nd Value is the EMA of the Lows for the Period;
      where the EMA(Yesterday) = Simple Average of Lows calculated Yesterday or 1st Value ;

      3rd Value of BSAR is the EMA of Lows for the Period;
      where the EMA(Yesterday) = EMA of Lows calculated on 2nd Day.
  2. What is the α in above equation
    • α is the Greek alphabet "Alpha".
    • It is the smoothing factor in EMA formula which defines the weight that is assigned to the current value
    • It's value range is between 0 and 1
    • For Example a 18% weight-age for the current value means α = (18/100) = 0.18 and a 47% weightage for the current value means α = (47/100) = 0.47
    • For calculating α for time periods the formula is:
      α = 2 / (N + 1)
    • For Example, for calculating 5 day EMA the α would be 2 / (5 + 1) = 2/6 = 0.33 which is equivalent to 33% weight-age to the Current Value. Similarly, for calculating 21 days EMA, the α would be 2 / (21 + 1) = 2 / (22) = 0.09 Which is equivalent to 9% Weightage to the current value

    • The EMA formula could be expressed in two ways:
      EMA (today) = EMA (Yesterday) + α * {Raw Value for Today - EMA (Yesterday)}
      EMA (today) = (α * Raw Value for today) + {(1 - α) * EMA (Yesterday)}
      both would give the same value.

  3. What is the Optimum Value for α?
    • α for different assets would be different, and it should be chosen on the basis of the mean price volatility of the asset
    • For most of the assets a 20% to 25% weightage or α = 0.20 to α = 0.25 would work; but personally I prefer α = 0.236 or 23.6% which is {Phi * ( 1 - Phi)}
    • To put it even more simply, EMA of 7, 8 or 9 period Lows should work fine.

Thursday, November 11, 2010

BSAR - The Conceptual Framework - Moving Averages

  1. What is meant by Moving Average?
    • A Moving Average is an indicator that shows the average value of an assets price over a period of time
    • When calculating a moving average, a mathematical analysis of the asset's average value over a predetermined time period is made.
    • As the asset's price changes, it's average price moves up or down
    • For example, a picture of a stock's moving average along with its price is below (SBI's 50-day moving average):
  2. What are some different types of moving averages?
    • Simple Moving Average
      • A simple, or arithmetic, moving average is calculated by adding the closing price of the security for a number of time periods, say 20 days, and then dividing this total by the number of time periods, like 20 in our case.
      • The result is the average price of the security over a time period
      • Simple Moving Averages give equal weightage to each price element
    • Exponential Moving Average
      • An Exponential (or exponentially weighted) moving average is calculated by applying a percentage of today's closing price to yesterday's Moving Average Value
      • Exponential Moving Averages place more weight on recent prices
      • Because most investors feel more comfortable working with time periods rather than with percentages, the Exponential Percentage can be converted into an approximate number of periods.
      • For example a 10% Moving Average corresponds with 9 periods Exponential Moving Average { Exponential Percentage = 2 / ( Time Periods + 1) }
    • Triangular Moving Average
      • Unlike Simple Moving Average, which gives equal weight to each price element and Exponential Moving Average which gives more weight to the recent price elements, Triangular Moving Averages give more weight on the middle portion of the price or data series.
      • They are actually Double Smoothed Simple Moving Averages
      • They are chiefly used in Oscillator Signal Lines, e.g., Slow Stochastics (5,3,3) uses 3 period Simple Moving Average of the 3 period Simple Moving Average of the 5 period Stochastic.
    • Weighted Moving Average
      • A Weighted Moving Average is designed to put more weight on recent data and less weight on past data
      • A Weighted Moving Average is calculated by multiplying each of the previous day's data by a weight.
      • The weight is based on the number of days (periods) in the Moving Average
      • For Example to calculate a 5 day Weighted Moving Average, the first day's close is multiplied by one and the second day's close is multiplied by two and so on, so that the 5th day's close is multiplied by 5
    • Variable Moving Average
      • A Variable Moving Average is an Exponential Moving Average that automatically adjusts the smoothing percentage based on the volatility of the data series.
      • Rise in Volatility increases the sensitivity of the smoothing constant
      • Sensitivity is increased by giving more weight to the current data
      • Variable Moving Averages perform better than both Simple Moving Averages and Exponential Moving Averages, in rangebound as well as trending markets

Sunday, November 7, 2010

BSAR - The Conceptual Framework - Trading Systems

  1. So what is BSAR, and how could it help a trader?
    • BSAR, (Biased Stop and Reverse) is a simple Mathematical Trading System designed to help traders make better profits, consistently.
    • It could be used by anyone - beginners, experts etc., (individuals could use it for free)
    • It could be used to trade anything, that is traded for money
  2. What is a trading system, and why does anyone ever need it?
    • A trading system is simply a group of specific rules, or parameters, that determine entry and exit points for a given asset.
    • These rules are defined logically, using Mathematical Equations
    • These rules are tested on historical data and the results are statistically validated for consistency and effectiveness
    • So trading systems take archaic emotions out of trading
    • They help a trader stay calm and composed, as he sees order in the chaos
    • Trading Systems save time and money as trading decisions are automated.
  3. What are the disadvantages of trading systems?
    • Masochism is defined as, "gratification gained from pain, deprivation, degradation, etc., inflicted or imposed on oneself, either as a result of one's own actions or the actions of others, esp. the tendency to seek this form of gratification." Masochism which is a manifestation of mortido, is present in all human beings, but the degree of need varies. Losing in gambling is a masochistic behavior, and most losers unconsciously enjoy it. Trading Systems take these kinds of masochistic pleasures out of trading, as trading ceases to be gambling anymore.
    • Trading Systems, in general, are complex and difficult to develop
    • Most trading systems defined in the textbooks and manuals ignore the transaction costs like brokerage taxation and opportunity costs
    • The development of a trading system is usually a time consuming and a daunting task, and entails lot of expenditure in terms of payment to trading systems developers, programmers, software and data subscription fees etc
  4. What are different types of trading systems, and what type is BSAR?
    • Trading Systems could be broadly classified into three categories
      • Advisory Trading Systems - Where a financial adviser or a stock broker or someone who could be responsible for executing the trades for large Financial Institutions advises Buy/Sell of particular assets.
      • Technical Trading Systems - The systems based on Mathematical or Statistical tools, and they could be further subdivided into following categories:
        • TREND FOLLOWING SYSTEMS:
        • Moving average based trading systems
        • Trigonometric/Geometric/Quadratic Equations based trading systems
        • Breakout Systems
        • Indicators Based Trading Systems
        • COUNTER-TREND TRADING SYSTEMS
        • Volatility Based Systems
        • Market Breadth Based Systems
        • Oscillators Based Trading Systems
        • Price Overlays Based Systems, including Bands
      • Fundamental Trading Systems - These systems chiefly rely on Financial reports and Ratios, Economic Data, Industry Statistics etc to find the intrinsic value of the asset and the projected value of the asset in the long term which is derived from the topline/bottomline growth statistics and future demand outlook
    • So BSAR is Moving Average Based Trend Following Technical Trading System
  5. What is the differnce between an indicator and oscillator?
    • Simply stated (in terms of technical analysis), an indicator is a mathematical formula that is applied to the price or volume of a security with the intention of predicting future trend. Common examples of technical indicators are the MACD, OBV etc.,
    • Oscillator is a mathematical formula that is constrained between minimum and maximum values. Oscillators are designed to help you identify overbought or oversold conditions. When the oscillator approches the upper (maximum) value, the security is said to be overbought, and conversely, when the oscillator approaches the lower (minimum) value, the secuirty is said to be oversold. Common examples of Oscillators are RSI, Stochastics & W%R
  6. Which trading systems are better the trend-following or the counter-trend?
    • Both trading systems have their advantages and disadvantages. However the trend following systems are best suited for aiding the decision for holding onto the open positions, while the counter-trend systems are best suited for market timing. A Complete Trading System which makes use of counter trading system for Entry/Exit signals and trend following system for holding the open positions would be very robust.
  7. Now the Problem with BSAR that it doesn't give us precise and clear Entry Exit signals, is due to the fact that it is a trend following system, and it needs to be used in conjuction with some Counter-Trend System.

Saturday, November 6, 2010

BSAR - The Problems

  1. The Biased Stop and Reverse (BSAR) and The Parabolic Stop and Reverse (PSAR) have one problem common amongst them
  2. They do not tell us when to enter the trade (and when not)
  3. This is the chief reason, why so many know about it but are unable to profit from it
  4. The Problems are not insurmountable - but it requires deeper analysis of the situations where buy and sell signals are generated; some pertinent questions that have been asked time and again are:
    • the volatility factor - could volatility help us determine the entry and exit points?
    • the signal confirmation - is there a way we could confirm our buy and sell signals and still avoid collinearity?
    • The problem of correct time frame - what time period is optimum to calculate BSAR or PSAR ?
    • The problem of position sizing and targets - how many contracts should be traded at different stages of the holding period?
    • The Determination of Minimum Capital Requirements - Is there an optimum amount of Capital?
    • The problem of plenty - What underlying asset should be selected to trade, for trading both the asset itself and it's derivatives?
    • The problem of hedging the open positions- how could the trading capital be protected from sudden large unfavorable moves?
    • How much could I lose if market goes against me - what could be the Maximum Adverse Excursion? And what could be the Maximum Favorable Excursion? How much should be provided for drawdown
    • The Problem of Consistency - could one make a living out of trading BSAR, or could I receive a regular income in all types of market conditions, trading with BSAR system?

Friday, November 5, 2010

Muhurat Trading

  1. Nifty is likely to gap up to above 6300 odd levels.
  2. The high could be around 6369.30.
  3. The low could be around 6312.70
  4. Short Nifty above 6360 for a minimum target of 6335, intraday
  5. FIIs have bought for Rs 5475.45 Crore in Cash Segment yesterday alone.
  6. We might have an upper circuit this month
  7. Wish you all a Happy and Prosperous Diwali

Monday, November 1, 2010

New System

The new system, that I had discussed some time back on my forum, is out for Implementation Testing. It's being tested in Real Time. You could follow the links given on the right, and leave your suggestions, which I might even try to incorporate, if feasible.