Top 50 Day Trading Myths – Get the Facts

By Alton Hill

In this article, we are going to cover the top 50 day trading myths that are floating around in the trading community. This list will cover what I have learned during my 15+ years of trading experience. Feel free to share with others, as I would have loved to come across a list like this back in 2000.


Top 50

1. Day Trading is like gambling – If I hear another person say this, I may literally punch a hole in my dry wall. Day trading is the furthest thing from gambling! Like anything in life, if you take on something and you are unprepared, then you will get your you know what handed to you. Day trading requires enormous practice, focus and dedication to a set of rules. If you keep your eyes on the ball, day trading can be just as predictive as you getting a paycheck every two weeks from your job.
2. Day Trading is a Man’s Game – anything a man can do a woman can do better. Don’t believe me, ask my wife. Trading is not somehow geared to men because we are perceived hunters and the ultimate competitive creatures. Some of the best traders in the world are women. Still not a believer, check out this article from Investopedia, which highlights 7 top female traders.
3. Stops aren’t Necessary – I have toyed around with the idea of trading without stops. My premise was that using stops was a glorified way of saying you were too afraid to take on the risk of your position. Wrong! You need to use stops in order to make sure you don’t lose all of your capital on one bad trade. It’s better to live to fight another day, then to be slaughtered on the battlefield.
4. You can Make Money Trading All Day – this is a bit of fact and fiction; however, I will say that the vast majority of day traders make money trading in the morning. Since this article is not about playing both sides of the fence, then I have to say it’s a myth to think that you can trade all day long and consistently turn a profit.
5. There is Volatility from 11 – 2pm – believe it or not, day traders need to eat like every other human being on the planet. If you are out there whacking at the weeds during lunch, you are literally going to drive yourself crazy as you watch stops violated and low share trades push a stock one way or another. At the end of all the back and forth, you will notice that your stock hasn’t really moved much in either direction, but you have lined your broker’s pockets with trade commissions.
6. Using 4 times margin is a good idea – Margin is purely psychological for most traders and has little to do with risk management or hedging a position. Traders just see that they can use 4 times their margin, so they wildly throw their funds into the market. As a trader, you will quickly realize that the more margin you use will ultimately prove to be disastrous as you go through an expected downturn. Margin must be used wisely and maxing out your margin is never a good idea. In life, you always need to keep a trap door open, just in case you need to make a last minute getaway.
7. Pre-Market Trading is lucrative – trading is meant to take place between the hours of 9:30am and 4:00pm. Trying to somehow master the pre-market trading realm to get ahead of the market is a farce. Volumes are thin and the bid/ask spreads are terrible. Focus your efforts on trading during core market hours. Playing in the pre-market arena really comes down to you thinking you know what’s best, when in reality the pre-market is often the worst case of irrational exuberance you will find in the market.
8. After Hours Trading is lucrative – please see number 7; same rules apply for traders trying to jump in the pond before the market opens the next day.
9. Day Trading Futures is Easy Money – futures trading in my opinion is actually harder than equities. Reason being, futures are traded by more professional traders with a hyper focus in one or two instruments (E-mini, etc.). You are better off competing against the retail traders in equities until you get your feet wet.
10. You Need a ton of day trading monitors – save your money. Don’t go out here buying some custom day trading setup because you need to watch 6 different time frames for the same stock. If you can’t make sense of the action with 3 monitors, you sure won’t be able to figure things out with 10.
11. You can Day Trade from Work – day trading from work is a horrible idea. Unless you are working in a server farm and things never go down, the day-to-day distractions at work will hurt your trading performance. Not to mention your employer is paying you to work, so shame on you. Let me not judge, but you get the point.
12. There is Money in the first 30 minutes – there is a ton of money in day trading the first 30 minutes. Sad thing for you, it’s really tough to consistently turn a profit. You will need years and I mean years of experience trading this early in the am before you will be able to identify trends in order to make split second decisions. The market is unforgiving in the morning, so if you don’t know what you are doing, the volatility will kill you.
13. Let Your Winners Run – this is one of the most ridiculous statements I have ever heard. To newbie traders, they will interpret this to mean hold onto my stocks forever, because they are going to run to the moon. The last time I checked, the only time you make money in the market is when you close your position and put cash in your pocket. So, let your winners run to a point, but have a plan for when you need to exit your position.
14. You must sell half of your position once you’re up a bit – some traders sell half; I however sell all of my position. I’ve noticed that when I would sell half of a position, I would relax my rules and get a little sloppy on the second half. Bottom-line for me, I simply make more money when the pressure is on me and I am on the ball. So, focus on trading your entire position and leave the multiple entry/exit strategies to the folks looking to over complicate the market.
15. The more indicators the better – show me a trader with 10 or more indicators on his/her chart and I’ll show you a broke trader. Adding a million indicators to a chart will not correct the fact you have no idea what you are doing. Don’t handicap yourself with both confirming and contradicting points of view. Have enough courage and belief in yourself that you have what it takes to succeed at day trading.
16. Day Trading Taxes are Way Too High – day trading gains are taxed at whatever income tax bracket you fall into. Stop thinking that the man is out to take 50+% of your trading profits. Remember, paying taxes is a good thing, it means you are a profitable trader.
17. Day Trading Tips are Helpful – day trading tips are one of the most hurtful things you can expose yourself to in the market. If you find yourself cruising stock picking sites and social sharing sites, then stop. You will never get the fills of the folks on the board and you have no way of knowing what is going on behind the avatars. For all you know, the forum member could be saying to sell, when in reality they are hoping to get the stock at a lower price. Remember, you are dealing with traders; these are not always nice people.
18. You can’t trade from a Laptop – there are tons of traders now that are traveling the world and still conducting their trading activity on the road. They simply pull out their laptop, load up a few charts and conduct their business. Sometimes less is more and the additional hardware of a fully customized trading office is no guarantee you will turn a profit.
19. You can make a living with little equity – day trading costs money. Anyone that tells you that you don’t need money to make money has no idea what they are talking about. After commissions, living expenses and a rough streak or two, you will be hard pressed to make a living. Take my word for it, I tried this route and boy did I fall on my face.
20. You should only Short Sell – the market goes up and the market goes down. Why be obsessed with one or the other. You need to be flexible in your trading styles, so you can follow the primary trend, whichever way she takes you.
21. Reading Books is a waste of time – while you may not use the strategies provided in a day trading book, the thought process provided by the author could trigger creative thoughts, which can affect your bottom-line. The first time I read ‘Reminiscences of a Stock Operator’; I couldn’t fall asleep because I felt like I went back in a time machine. Funny though, the emotions expressed in the market are just as relevant in the 21st century as they were in the 20th century.
22. Moving Averages are worthless – Moving averages are one of the best ways to gauge the strength of the primary trend and whether you should enter or exit a trade. You’ll be surprised how much punch is in the moving averages.
23. You have to understand Elliott Wave to make money – I’m not going to bash Elliott Wave, because it’s just too easy. Nevertheless, I will caution you of trying to outsmart and predict where the market is going. I can’t tell you how many Elliott Wave analysts I have encountered over the years that have provided 5 different counts or more on the same chart. Don’t worry if you can’t exactly map a wave-3 extension in a primary wave 1….did you get all that?
24. Day Trading Penny Stocks is easy- you had better know what you are doing. By shear definition, penny stocks are volatile and if you are trying to day trade these stocks, things can get even more complicated. You are better focusing on volatile stocks and not just that the stock is cheap. Oftentimes things are cheap for a reason.
25. Day Trading Options is the way to go – I get it, you want to create this or that straddle to eliminate your risk. Well let me help you out here, you can’t avoid the risk. Just trade the stocks straight up, don’t try to become some M.I.T whiz kid overnight. Leave the complicated Black Scholes grids to the experts.
26. Who Needs Day Trading Rules – You do! If you go out there without rules, the market will take your money. Imagine watching a football or soccer game with no rules. All you would see is total chaos that will ultimately lead into two teams brawling on the field. Day trading is very much the same way. With no boundaries, it’s only a matter of time before you blow up your account.
27. Day Trading Algorithms – please stop wasting your time writing the next wonder program that will print money from the market. The market is a living and breathing entity. If you think it’s as simple as writing some buy, sell and stop loss orders, then you my friend are sadly mistaken. Let the super smart think tanks with direct lines to the exchanges do their thing. Don’t try to play in this pond, you don’t have the resources, expertise or time to constantly stress test your model. Start taking accountability for your trading and stop relying on code. You can’t code the logic behind why birds flock together and you can’t code the market, the variables are too endless.
28. You need an Advanced Degree to Day Trade – trading is one of the last meritocracy’s left in the world. It doesn’t matter your race, religion, education level, or financial background. If you work hard and learn what makes you tick, skies the limit. Often times the traders with a ton of formal schooling have it the worst, because they are used to always being right and are unable to let go of the need to win every trade.
29. Day Trading Business Plans are Boring – don’t want to make money, then don’t write down your business plan. How much do you plan on making per month? What will you do with your trading profits? These are questions most day traders don’t ask themselves, because they never have any intention of taking money out of the market. A good number of traders look at day trading as a hobby. They are really looking for action and could care less about making money.
30. Tracking Trading Performance is Complicated – yes it is if you are looking at one of these data dump reports provided on the web. Tracking your trading performance comes down to a few key performance indicators (KPIs) that help you identify how to become a more consistent and profitable trader. One of my favorites is tracking your profit in terms of R. The bottom-line, did I make more money from my winners than my losers. Who cares if Monday is your best winning day between the hours of 10am and 11:30am? Keep trading long enough and Wednesday will become your best trading day. Do not get lost in Sharpe ratios; leave the million plus performance ratios to the statisticians and just focus on the few KPIs that make you money.
31. The more expensive the more valuable the day trading course – Wrong! I do agree with the idea of buying books and taking courses, because this will spark your creative juices as you are defining your trading methodology. Nevertheless, to think just because you pay someone thousands of dollars, their course will work exponentially better than a $500 dollar course is just the wrong way to think about it. Your trading style could be in alignment more with the person selling the $500 dollar course, which would result in you making more money. Don’t fork over tons of money, especially when you start out. You will want to take the perceived easy way out if you start struggling up front and pay big money for a course, which is exactly what some of these so-called gurus want you to do.
32. Day Trading Chat Rooms are helpful – stay away, they are a complete waste of time. You have no way of validating the performance of the other traders, nor should you look to others to tell you what to buy or sell. You have to make your own trading decisions.
33. You Can’t Make Money Day Trading a Cash Account – give me a break. What’s the rush? Why do you need to use more money than you have in the bank? Relax, have a beer and take a deep breath. You can make a ton of money trading with the cash you have in your account. No one is putting a gun to your head and pushing you to use all of your margin. Just make sure you have a margin-enabled account, so you will not be tagged with a pattern day trading account and you are placed on a 3-month hold.
34. Day Trading Charts are Voodoo – I only trade technicals and the numbers do not lie. So, please feel free to think charts are nonsense, I hope you never pick up on the fact they are the breadcrumbs of the smart money.
35. Day Trading is for Dummies – day trading is not some basic course in HTML or how to write your resume. Please do not make the mistake of assuming you can pick up a book colored black and yellow and expect to master the markets. While you may gain some foundational insight into the markets, you have a long way to go before you should ever consider placing in cold hard cash in the market. Do you ever see a book titled Plastic Surgery for Dummies? Of course not, and I will argue that trading is just as hard if not harder to master.
36. Day Trading Morning Gaps is Easy – morning gaps can be your best friend one minute and quickly turn against you the next. You have to first decide if you are going to fade the gap or go along for the ride. You can really complicate matters and decide that you will either fade or ride depending on the way the market is trending. While I agree the morning gap has the action, you need a few rodeos under your belt before you decide to swing for the fences.
37. Sometimes it’s ok to hold a position overnight – I’ve been there before where it’s the end of the day and you are waiting on a position to pop. You see a nice bullish candle formation and the volume is trending accordingly; however, time is not on your side and 4:00pm is quickly approaching. You may get the bright idea to just hold the position overnight to let things play out. Wrong! Once you start to hold positions over night, you are no longer a day trader and have entered into the realm of hope. Not to mention that morning gaps will not provide you the opportunity to safely exit a position if things drastically go against you.
38. Day Trading Horror Stories are all over the web – try typing in a search for day traders that have taken a bath in the market, good luck finding one. People are private about their finances and when it comes to day trading people are extra hush-hush. Who wants to shout from the rooftops that they have lost their retirement fund or kid’s college savings in the market? Just know that you may not find many stories on the web, but the stories are real. Whatever you can think of in terms of financial ruin, imagine worst. Remember to respect the market and she will respect you.
39. A Day Trading Journal is worthless – a trading journal is your way of capturing the mental state you were in the day you placed your trades. Trader’s that know their stuff will tell you that trading is primarily a game of mental toughness, clouded with technicals, tips and social media. A journal will keep you honest in terms of why you placed a trade, but more importantly, the emotions you were experiencing at the time of the trade. You can use the journal to identify when you are riding too high or low, in order to keep your emotions in check.
40. You Don’t Have to Do your Homework – If you think you are just going to sit down at your computer at 9:30am and make money, you are sadly mistaken. At a minimum, you need to start observing the momentum stocks of the day at 8:30am, in order to create your watch list. This way you can have all of your monitors ready to go with the charts of interests and key trendlines you need to keep an eye on for breaks. You can also use this time to review your previous day’s trades to make sure you correct any poor behaviors.
41. It’s ok to go all-in every once and awhile – do I really need to respond to this one? Never and I mean under any circumstances put all of your money in one trade. If you are wrong and things blow up on you, it’s game over.
42. If the NASDAQ is up you should go long – just because the broad market is going in one direction or another, does not mean you need to follow suit. Trading is about just that – trading. Since you are trading volatile stocks, all you need to do is focus on your position, while keeping an eye on the market. Nevertheless, don’t turn the market into a green light, red light experiment where you follow the broad market like a game of Simon Says.
43. You don’t need to take breaks – unlike a normal job, if you don’t day trade, you don’t get paid. Just like a consulting gig, while you may not make money while on vacation, you should make enough money that you factor in vacation as a cost of doing business. When you don’t take breaks for the need to make more, you will end up losing the money anyways due to fatigue and poor decisions. Therefore, it’s better to just take the time off and recharge your battery.
44. I too can day trade from my mobile phone – please stop. Your cell phone could experience a slow connection and furthermore, can you really see the chart on your phone? It may look cool when people swipe their phone at the store to pay for groceries, but everything isn’t made to be done on your cell phone.
45. It’s a good idea to put on 100 trades a day – the only person or entity you will be helping by placing 100 trades a day is your brokerage firm. When it’s all said and done, you will be paying in excess of $1,800 a day for that many trades. If you figure the average round trip trade will run you $18 dollars, just take that times 100. I can think of a million things I would rather do each day with $1,800 dollars other than give it to my broker.
46. I will practice trading – the majority of brokerage firms will allow you to practice trading, but only during market hours. This would force me every day to make the tough decision of either making a living for my family or practicing. Unless you use a market replay tool like Tradingsim, which lets you practice trading 24×7, you will never find the time you need to practice your craft. Airline pilots, cops, doctors and any other professional career requires you to practice your craft for hundreds if not thousands of hours. Why should day trading be any different?
47. Your Friends and Family will understand why you want to day trade – this one is tough, but you need to realize that day trading could be something that people in your inner circle just don’t get. It’s not that they don’t love you or support what you are doing, but they will likely think it’s gambling or just nonsense and not as prestigious as being a doctor or a lawyer. Unless someone sits with you at your desk every day and sees the hard work you put into your craft, they just won’t get it. Remember though, this is ok.
48. Trading is about your personal journey of mastering your emotions to control your own destiny. This my friend is a walk you must be prepared to take alone. The bright side is that the more success you have, generally the more interested your friends in family will become with what you are doing in the markets. This will likely lead to further frustration on your end as they try to dummy down your thousands of hours to some get rich quick scheme or just luck. Again, you have to realize that without living and breathing day trading, people are just unlikely to get it.
49. You will pay yourself at the end of the year – you won’t. You will simply continue to reinvest the money in hopes of making more profits. You need to consistently take profits out of the market, so the money is real to you. I am not saying you need to take 100% of your profit, but you do need to reward yourself. For starters, it will push you to make more money and secondly, the little pixels on the screen that make up your account value actually begin to mean something. Lastly, you can do nice things for those in your life. If you are able to treat your wife to a nice dinner or dress every once in a while, it makes the conversation at 9pm when you say you need to review a few more charts before coming to bed a little easier.
50. Making Gains is like Pulling Teeth – if you find yourself saying this aloud, you are doing something wrong. When you are trading in the zone, the money will literally fall into your pocket with little to no effort. That’s because you have learned to accept the risk and adhere to your day trading rules.
51. It’s impossible to trade without a complicated system – once you have been trading for years and have been able to consistently make profits, you will notice you will enter and exit a trade without knowing why. However, you will be able to look back and see that you exited a trade right before the trend took a turn. This level of trading intuition comes from learning to feel the market and to place trades without even thinking. This level of trading skill is reserved for the very few, so tread lightly.

Good luck trading and remember that you make your own truth regardless of what you read in this or any other article.

Al

- See more at: http://tradingsim.com/blog/top-50-day-trading-myths-get-the-facts/#sthash.87JUvPRB.dpuf

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Five immediate concerns that can take the wind out of Sensex's sails

By Kshitij Anand, ECONOMICTIMES.COM | 17 Jul, 2015, 03.10PM IST

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NEW DELHI: Indian stocks might have remained resilient in the wake of global turmoil, but analysts believe that there are at least five immediate concerns that have the potential to take the wind out of the sails of market barometers.

Markets are likely to face headwinds in the form of sub-par monsoon rains, parliamentary disruptions, muted June quarter earnings, US Fed rate hike and debt crisis in Greece. However, analysts expect indices to hit fresh record highs in the next 12 months.

In the interim, they are likely to trade in a range.

"We have always been a structural bull for the Indian market. I do feel that the risk-on sentiment is gradually creeping back to the markets after a very difficult several months on the back of Greece and Chinese market volatility," says Tai Hui, Chief Market Strategist - Asia, JPMorgan Asset Management in an interview with ET Now.

"The only two worries I have in mind is - one, how the Fed rate hike will impact emerging markets including India. Second is earnings, because so far, the key missing ingredient to a much more forceful rally in Indian market is earnings," he added.

The S&P BSE Sensex has risen over 2,000 points in a matter of a month. However, further upside remains capped and markets are likely to consolidate before they resume an uptrend.

"After the first year of the new government, expectations were a bit ahead of what the reality was. It has taken time for things to change on the ground. I believe what has happened now is that expectations have come down," says Hiren Ved, Director & CIO, Alchemy Capital Management in an interview with ET Now on Thursday.

"It is not reality versus what happens, but it is expectations versus where you are in the markets. The expectations are now more muted, especially after the fourth quarter numbers. It is not a V-shape recovery, it is a long U-shape recovery in India. My sense is that we are base building before the next phase of leg up in the Indian markets," he added.

After this phase of consolidation, which might last for another quarter or two, markets should head higher.

Apart from local factors, analysts are of the view that valuation of Indian markets remains stretched. Most of the rally in the calendar year 2014 was based on optimism, where P/E expanded, while earnings remained muted.

Experts are of the view that growth in earnings is more likely to drive markets higher, and growth is expected to happen only after a couple of quarters.

"Indian valuations remain stretched at an 18.0x 12-month PE. In addition, consensus seems over-optimistic on 2015 EPS growth, forecasting 15-16% versus our estimate of 10-11%, based on our coverage universe," said an HSBC report.

"In our view, if earnings start to be in line with consensus forecasts over the course of the year, it could facilitate a change in sentiment towards India. A low base for FY15 should be supportive of growth," added the report.

We have collated a list of five factors which are likely to weigh on Indian market in the near term: 

Monsoon in July remains muted, RBI may not cut rates: 

After recording above-normal rains in June, July has remained more or less muted and that might become a concern for markets.

"It is pretty clear that the central bank will not go ahead and lower rates at the August meeting because the monsoon progress is pretty much questionable as July had a weak start," says Radhika Rao, Economist, DBS Bank, in an interview with ET Now.

Private weather forecaster Skymet may revise its monsoon forecast by the end of this month as it expects July rains to be less than its earlier forecast.

The India Meteorological Department (IMD) said on Thursday that monsoon rainfall so far has been 6% below the long-period average (LPA).

Below-normal monsoon rains will also impact earnings, which would also cap upside for markets.

Vibhav Kapoor, Group CIO, IL&FS, is of the view that if the monsoons do not turn out to be good, then even the September earnings will come into question.

"So, all in all, there is a balance between some positives and some negatives and therefore the market is going to stay in this range for some more time. Also, the valuations, if you look at least at the Nifty overall, they are not that cheap, they are about 17 times FY16 earnings," he added.

Parliamentary disruptions: 

The opposition parties have enough reasons to disrupt the proceedings and stall any meaningful legislative work, said a Sharekhan report.

In the recent past, the emergence of controversies like the Lalitgate scandal and the Vyapam scam have provided enough fodder to the opposition parties.

The brokerage firm feels that any more delay in passing of the key bills like the Goods & Services Tax would be viewed quite negatively by investors.

"We have the monsoon session starting next week. That may create some sort of uncertainty in the market because the going for the government may be slightly difficult at this point of time because of the issues which were raised over last couple of months," says Vivek Mahajan, Head of Research, Aditya Birla Money.

"It may suggest that the rally is getting halted, but I will be a buyer in any correction in the market place," he added.

Muted corporate earnings: 

Q4FY15 was a dismal quarter for India Inc, with topline, EBITDA and bottom line declining 4%, 10% and 11% YoY, respectively. In fact, these growth numbers were even below the Lehman crises lows, say experts. June and September quarters are unlikely to be any better.

"Currently, the PEs cannot expand beyond a point. We believe that June quarter as well as September quarter earnings momentum is likely to be quite muted and may be December onwards, because of the lower base of last year as well as some amount of supportive government policies that have happened in the recent past, you will start seeing some uptick in earnings momentum and that is when probably there will be a case for PE re-rating," says Harsha Upadhyaya, CIO - Equities, Kotak AMC.

US Federal Reserve rate hike:

Reiterating her earlier view, the US Federal Reserve Chairperson Janet Yellen on Wednesday said that the US Federal Bank may kickstart raising interest rates this year itself, which might fuel volatility across emerging markets including India.

For the last three or four months, the market has been gradually pricing in the first hike coming as early as December 2015.

"Yellen's commentary validates what our house view has been - that the rates will go up with the first rate hike pencilled in for December," says Radhika Rao, Economist, DBS Bank.

"It has been made clear that although Fed's policy trajectory will still be data dependent, the current economic indicators are sufficient to justify the starting of a rate hike cycle," she added.

The Fed is liklely raise rates in December, and will take interest rates higher by another percentage point over the course of the next year. Rates are likely to go up, but as not aggressively as in the previous rate hike cycles, she added.

Greece overhang continues: 

German Finance Minister Wolfgang Schaeuble said in a letter to the president of Germany's lower house of parliament that the International Monetary Fund would not be involved in the payment of a first tranche of a planned third Greek bailout, said a Reuters report.

That tranche is due to be paid in mid-August, according to the letter, seen by Reuters, in which Schaeuble requested that the parliament agree to open talks on a third Greek bailout.

http://economictimes.indiatimes.com/markets/stocks/news/five-immediate-concerns-that-can-take-the-wind-out-of-sensexs-sails/articleshow/48111725.cms

In Shadow of Chinese Rout, India Fights Illegal 'Dabba' Market

• 

  
  The logo of the Securities and Exchange Board of India (SEBI), India's market regulator, is seen on the facade of its head office building in Mumbai, India, July 13, 2015. | REUTERS

MUMBAI: A crack team of regulators and specially trained police are spearheading India's efforts to stamp out the country's "shadow" market in shares and commodities, turning up the heat on backstreet traders who threaten the broader financial system.So-called "dabba" trading has been a headache for regulators for years, but a government push to crack down on the black economy and clean up the Indian market for retail investors has given a fresh boost to efforts to stamp out the multi-billion-dollar parallel system, which bypasses market rules and taxes.

Though brushing off comparisons, regulators and brokers acknowledge China's dramatic stock market rout of recent weeks has also served as a stark reminder of the risks -- even if troubles across the border were exacerbated by China's far higher proportion of retail investment and margin lending.

"Dabba trading and any other unlawful trading practices do present a risk in the market and need to be curbed," said Nirmal Jain, chairman of domestic brokerage and financial services firm IIFL. "It's not good for anybody."

There is no reliable estimate of the size of India's dabba markets, but the practice is widespread and brokers estimate share volumes are likely to add up to at least several hundred million dollars daily, compared to an average of 175.25 billion rupees ($2.76 billion) on formal exchanges.

In commodity markets, estimates put trade at multiples of legitimate business. A senior official at leading commodity bourse MCX said earlier this year that the dabba market could be eight to 10 times the regulated derivatives market.

Commodity derivatives worth $265.54 billion were traded on India's exchanges in the first six months of the year, less than a third of the volumes two years ago before a new transaction tax was introduced. Market participants and traders estimate a bulk of the those trades has moved to the dabba markets.

Officials at the Securities and Exchange Board of India (SEBI) say they are worried about contagion if markets turn volatile, particularly if dabba traders are using both on-market and off-market trades to hedge their exposures.

Though there is rarely proof, brokers say they sometimes see instances of dabba causing unusual market moves. In early 2013, brokers attributed a sell-off in mid and small-cap stocks over several days in part to a major Calcutta investor liquidating actual shareholdings after losing heavily in the dabba market.

"There is a significant risk of spillover in the financial system," said a senior regulator at SEBI.

SEBI, which will be overseeing commodities after a planned merger with the Forward Markets Commission, has set up a three-member team to revise its dabba policy, SEBI officials said.

The regulator said in a statement to Reuters that it was also working with state police and had set up 16 regional offices, given the proportion of trades happening outside India's main financial hubs, in regions like Gujarat.

LOSING BUSINES

Modelled after the "bucket shops" prevalent in the United States a century ago, dabba trading -- after the Hindi word for "box" -- sprung up after India opened its markets in the 1990s, mainly as a way to avoid high taxes.

Although India has been steadily cutting the securities transaction tax for equities, other taxes have made trading more expensive for ordinary investors. These include taxes on short-term capital gains and a business tax.

Dabba trades also allow investors to avoid SEBI registration requirements or the margin requirements set by exchanges.

In a typical dabba trade, an investor places an order with a broker, who logs the trade but does not usually buy the actual security. As a result, it is a straight bet on a capital gain, without any hope of dividend income.

When the investor cashes out, the broker would need to pay back the profit should that security have appreciated, or receive money should it be a losing bet.

The ease of dabba trade has made it particularly difficult to root out, even though Indian laws stipulate stringent penalties of up to 10 years imprisonment as well as fines of up to 250 million rupees ($3.94 million).

Indian households own only about $400 billion in equities, compared with $1.1 trillion in bank fixed deposits and $1 trillion in gold, according to Morgan Stanley. But brokers say squeezed clients mean they are losing out regardless.

"Most of my clients are shifting to dabba," said Nishant Jain, a broker in the state of Rajasthan.

"They don't want to trade officially because of the disadvantages."

http://www.newindianexpress.com/business/In-Shadow-of-Chinese-Rout-India-Fights-Illegal-Dabba-Market/2015/07/16/article2923330.ece

6 Reasons Not to Trade During the First 30 Minutes

6 Reasons Not to Trade During the First 30 Minutes

The first 30 minutes is the most volatile time in the equities market. As a new or even seasoned trader, you will gravitate to the first 30 minute slot like a moth to a flame. It really comes down to the level of action present in the market early in the day, which keeps us all mesmerized.

In this article, we will cover 6 reasons you should avoid trading during the first 30-minutes in order to increase your odds of long-term success.

#1 – Violent Morning Gaps

Whenever you see a violent morning gap in the market, it’s really anyone’s call if the stock will go up or down during the first few 5-minute bars. The stock is likely reacting to some overnight news which, is fueling activity from retail investors and institutions.

To this point, your risk exposure in the morning is high as a stock has already risen or dropped 15% or 20%. To illustrate this point, let’s take a look at a few charts.

Morning Gap Example 1

Do you honestly have any idea which direction the stock will take? Without scrolling lower, make a call of higher or lower. Remember at this point, the stock is already down 16% on the day.

Morning Gap 2

How many of you guessed correctly?

Let’s take a look at another example from the same trading day.

Morning Gap Example 3

Resist the urge to scroll lower on the page; take your best guess.

Morning Gap Example 4

Who guessed the stock would go into a consolidation phase?

Imagine playing this high stakes game every single day in the market. You are going to drive yourself crazy trying to anticipate which stock will continue in the direction of the primary trend or reverse sharply. To put it bluntly, it’s not worth trying to figure this out and the risk is too great as your stops will likely be tripped.

Attempting to jump in front of or on the same train as a violent morning gap is like taking a cake out of the oven before it’s fully baked.

The point of allowing the first 30 minutes to play out, is for a formation to take shape in order to determine if the bulls or bears will come out on top. Jumping into a morning gap before this process is able to fully develop, is no better than flipping a coin.

#2 – Emotions

Emotions

I love passionate people, who really get worked up about what they are doing. To see an athlete let out a tremendous roar as they score the game-winning goal, gets everyone in the stands and fans watching from home pumped up.

But, similar to candidates running for President, traders need to be a little flat when it comes to their emotions. In the first 30 minutes, the market will present some pretty wild scenarios and more than any other time of day, you can easily get pulled into the action.

Once you are pulled into a trade and your emotions begin to take over, the money will leave you faster than you can blink.

Brett Steenbarger, Ph.D., has done some extensive research into trading psychology and emotions. Check out this cool article titled “Trading Emotionally with Intelligence.”

Just to be clear, if you are an emotional person and more importantly and emotional trader – avoid the first 30 minutes.

#3 – 10am Reversal

The 10am reversal is one of the most vicious times in the trading day. For those that have been day trading the markets for a number of years, you will notice that at 10am things start to get interesting.

So, why does the market often course correct at 10am? It really comes down to the number of participants. For starters, it’s the first time that the 1-minute, 5-minute, 15-minute and 30-minute traders all have a candle print on the chart. The reason I have not accounted for the 60-minute time frame, is because these traders are often focused on swing trading and are not what I would consider day traders.

The other reason for the 10am reversal is that most of the traders that were either up or down significantly from an overnight move have been able to close out of their position. This accounts for all of the traders that are exiting trades due to sizable gains on a morning gap, to those that were liquidated due to margin calls.

Still not a believer that the market shifts right at 10am? Well have a look at the QQQ over a two-week period.

10am reversal

Now, this will not always play out to an exact science; however, 10am is a time slot where your antenna needs to perk up. In the above example of the QQQs, each blue line is at 10am and you can see how quickly the market reverses course from the primary trend. As a day trader, the last thing you want is to establish a position, only to have the market turn against you.

Once the position goes against you, the volatility in the market dries up after the first hour, so the odds of the market again reversing and going in your desired direction are slim to none.

During ’08 – ’09 I was actively trading the gold market. Some of my favorites were Royal Gold (RGLD) and Barrick Gold (ABX). Like clockwork, I would take a position only to have the entire gold market shift at 10am. I remember fighting the gold market for 3 to 4 weeks, where I would establish a position prior to 10am and then end up giving back all or the majority of my gains on the trade.

It was the most frustrating experience, because during the ’08 – ’09 period, the gold market was extremely volatile as the equities markets were getting slammed due to the mortgage crisis.

I ended up focusing on other sectors because the gold market kept taking me out to the wood shed. Have you experienced similar trading challenges with a given sector?

#4 – No Clear Trading Formation

I am not some chart purist running around with a thick binder of formations; however, I do need to have some idea of the struggle between the bulls and bears. For example, I would like to see if the stock is making higher highs and lower lows.

One could argue that you can find patterns within the first half an hour if you look at shorter time frames (i.e. 1-minute or tick charts). While this is true, I give more credence to formations when there is a critical mass of market participants. For me, tick charts and 1-minute charts don’t pack enough punch to make entry decisions on a trade.

Let’s take a look at a few stocks on a 5-minute chart and try to speculate the next move of the stock.

No Formation 1

No Formation 2

Unlike the previous section where we covered violent gaps, I’m not going to show you how these stocks ended up on the day. You can see visually that on a 5-minute chart, you have no way of knowing which way a stock will break with any degree of certainty based on one or two bars.

Think of it this way, you need to have just enough data to make a decision, but not so much data that you miss the trade.

To combat the need to jump in front of the trade, I started to institute rules, which required a stock to make a new high or low prior to me entering the trade. This naturally resulted in patterns that I could trade versus trading the first one or two candlesticks.

#5 – Not Enough Experience

It took me years of day trading before I was able to effectively trade within the first 30 minutes.

Just to be clear, I still do not open a new position until 9:50am.

Whenever I placed trades early in the am, let’s say 9:35 or 9:40, things would go against me for all of the reasons aforementioned in this article.

If you are a trader, odds are you believe in writing your own ticket and I fully understand that mindset. You also think in terms of probabilities, because we make our living based on controlling our risk and reward on each and every trade.

If 90% of traders fail at day trading within the first year, then I think we can agree on the fact day trading is difficult. Now compound this number with the fact you are trading during the most volatile time of the day, and the odds of success become even fainter.

Like anything else in life, you have to first learn to crawl before you can walk.

#6 – Economic Reporting

Economic Reports

Another reason to avoid trading prior to 10am is the reporting of key economic data. Examples of key economic data released at 10am include the University of Michigan Consumer Sentiment Report, Pending Home Sales, Consumer Confidence and the ISM to name a few.

As the reports are released at 10am, each one has the ability to move the market. To illustrate an example of this, in June 2013, the ISM (Institute for Supply Management) report was released twice within a 3-hour time frame, which resulted in a volatile day in the stock market as traders reacted to different numbers quantifying the health of the American manufacturing sector.

As a new trader, you will want to avoid being trapped in large market moves related to global or national news events which could impact your trade. It’s tough enough just trying to evaluate the setup, let alone understanding external factors outside of your control.

Summary

If you start to think about the market in terms of difficulty, the first 30 minutes is the black diamond of skiing. If the end game for you is profits, then why take the hardest path to get to the bottom of the slope? All that matters is you get there without running into a tree.- See more at: http://tradingsim.com/blog/6-reasons-not-to-trade-during-the-first-30-minutes/#sthash.MeuUOoWo.dpuf

Chinese stock markets

Explainer: what's the turmoil in the Chinese stock market all about?

Why the Shanghai stock exchange should be thought of more as a casino than as a proper stock market.

Michele Geraci, The Conversation  · Today · 03:30 pm

Photo Credit: Greg Baker/AFP

The Chinese stock markets have experienced significant turmoil in recent weeks, with the Shanghai Composite Index – the country’s major reference – falling by 32% since June 12. But this fall was preceded by an equally sharp rise of 150% over the previous nine months. In the 20 years since I have been working in finance, I’ve never seen anything like this. So what is going on with the Chinese stock market?

There are several reasons for this unusual behaviour: firstly, when I teach stock market investment to my Chinese students, I always remind them that the Shanghai stock exchange should be thought of more as a casino, rather than as a proper stock market. In normal stock markets, share prices are – or, at least, should be – linked to the economic performance of the underlying companies. Not so in China, where the popularity of the stock market directly correlated with the fall in casino popularity.

Stocks and casinos

In China, given the low credibility of the financial statements published by listed companies, investors need to rely on other tools to predict share price performance. These tools include a heavy reliance on technical analysis and charts – a method that tends to predict future share price based purely on the company’s past performance, with no regards to its fundamentals. Even the name of the company is often neglected; all that matters is the historic price performance.

While this technique is also used in Western markets, my experience in China is that it is the predominant method for investment. Hence the disconnect between a share’s price movements and economic fundamentals.

There has been, however, a strong correlation between the stock market’s performance and the revenues of the casinos in Macau. While gambling revenues were growing at a fast pace in Macau, people largely ignored the stock market – whose performance was, largely, uninteresting for a number of years. But since China’s president, Xi Jinping, launched a campaign against corruption, gambling activity has started to decline. This was when the stock market started to move up. Coincidence?

Real estate

The other reason why the stock market experienced a sharp increase between September 2014 and June 2015 relates to the Chinese real estate market. In recent years, investment in real estate has been the only way for ordinary citizens to get returns higher than the paltry 3% offered by bank deposits (yes, 3% is paltry in an economy that grows at more than 10% a year in nominal terms). But high capital requirements and growing regulations on the purchase of real estate has meant that benefiting from this growing market has been increasingly difficult for ordinary citizens.

Commercial banks therefore – in an effort to mimic real-estate returns – started to offer so-called “wealth management products”, which are basically funds that invest in the real estate market. These funds were then repackaged and resold in the retail market. Chinese individuals would take their savings out of current accounts and placed them into these wealth management products and achieve returns similar to those available to buyers of real estate.

This was the modus operandi until the beginning of 2014, at which point the economy and the real estate markets started to show signs of weakness. The once-easy money coming from the property market started to disappear and people with wealth management products started to get into financial trouble and some of them even defaulted on their payments (the government bailed them out, so no individual was at a loss).

Monetary policy

From November 2014 the Chinese central bank, worried about the slowing economy, decided to institute an aggressive monetary policy to rapidly lower interest rates with the aim of stimulating the economy, which also caused current account rates to decline. This created a perverse scenario where individuals who were already seeking returns higher than those offered by current accounts were then denied the opportunity to get them through real estate because of the falling market. As a result, deposit rates were cut further and the return on current accounts became even more dissatisfying. Commercial banks found themselves in a quandary.

With the casino route closed and real estate off the table, what was left? The Shanghai and Shenzhen stock markets: the two main stock markets that had remained dormant for years.

Banks then turned the old real estate wealth management products into investment vehicles to purchase shares directly on the stock markets. A large portion of customer deposits were then directly invested in the stock market, which then surged on the back of that demand.

An empty bubble?

Meanwhile, however, nothing happened to the earnings forecasts of the underlying companies. In fact, if anything, they should have been revised down because of the deteriorating macroeconomic condition of the Chinese domestic economy. But of course, as we said before, no one really looks at earnings and price ratios.

Due to the desire to maximise returns, many individuals then used leverage so that the inflow of money in the stock market was even higher. For example, if someone wishes to purchase shares for a total value of 100RMB, but only has available cash in his deposit account of, say, 60RMB, he could borrow the remaining 40RMB from the brokerage house. By doing this, the original source of 60RMB was turned into an upward push of the stock price equivalent to the full 100RMB. This drove strong share price growth between September 2014 and June 12, 2015.

What happened on June 12? Nothing. Just some smarter investors (generally large institutional investors, which represent 20% of all market volumes) started to sell and the rest of the market followed suit. Fear got hold of small investors (who represent 80% of the market) and selling accelerated, with margin calls making those selling do so even faster, and here we are today – a 32% drop and counting since the peak of mid-June.

In the past few days, the Chinese government has adopted a number of measures to try to mitigate this crash. The market finally reacted positively to a relaxation of restrictions on margin requirements. But this measure simply transfers the risks from investors to brokerage houses – it does not change the fact that the market has increased by 70% over the last year. The bubble, if it is a bubble, still has a long way to go.