FROM AN EXPERIENCE
“Trading, like poker, can be described as a zero-sum game. If you are winning then someone else must be losing. This battlefield aspect to the markets is something that the novice trader disregards at his/her own peril, since humans sit behind those trading screens and you can bet that they will do everything in their power to take your money, even if that means bending the rules in their favor.”
“Stopping out of a position may give the appearance of defeat, but it is not meant to necessarily signal total defeat. While others may see it that way, you must never be fooled. Stopping out of losing positions is the only sure way to maintain survival in difficult conflicts and to achieve the complete victory that is your aim. To learn how to live to fight another day is the best advice that all traders can be given. Not only is it the smart thing to do, but in the long run, the prevention of injury.
What is trading discipline?
What is trading discipline?
There is a direct correlation between your ability to let the market
tell you what it is likely to do next and the degree to which you have
released yourself from the negative effects of any beliefs about
losing, being wrong, and revenge on the markets. Not being aware
of this relationship, most traders will continue to observe the market
from a contaminated perspective.—-The Disciplined Trader,
Mark Douglas
Learning to accept losses as part of the game and cutting them short is the single most important step towards becoming consistently profitable. It sounds simple, but in reality is extremely difficult for everybody. Why? Because we’ve been taught that giving up is for losers and we should fight till last breath. I certainly agree that you should not give up quickly, but only if you can influence the end result. Let me be clear, the stock doesn’t know that you own it and it doesn’t care that you cannot afford to lose the money. The market will strip your last cloth if you don’t know how to manage risk. You have to understand and accept your power. You cannot move the market. You cannot tell him where to go and how fast. This is why so many people, who are successful as entrepreneurs and engineers, have troubles breaking even in the capital markets. It takes a special kind of person. Someone, who can forget his ego and concentrate on what actually works. Very few people are able to reach that level and to distinguish their trading life from their personal life.
Trading or investing is a skill that can be learned. There are two ways to learn a new skill in general. Through the school of hard knocks and through the mentorship of others that have the gift of teaching. To become a successful trader, you need to somehow implement both approaches. Nothing can replace personal experience. You can hire the best mentors in the world to teach you and purchase the most expensive equipment and trading software, but this is not going to help you to build a new skill. Skill building is subdued to eternal physical laws. There are a hundred billion neurons in your brain. For every skill that you possess (speaking a language or driving a car), there is a certain combination of connections between some of your neurons. To build a new skill, you need to build a new net of connections. This is why every beginning is hard, this is why big changes do not happen overnight. You have to establish new connections, which takes hard work via repetition and visualization.
People trade their beliefs. This is why is so hard to trade someone else’s market approach. You just don’t trust it enough. I have found out that the best way to build a solid market understanding is to devote efforts to studying past winners. I meticulously study the best performing stocks at different time frames (weekly, monthly, quarterly, and annually) and try to figure out what most of them had in common before they made their big moves. Such an approach helps me to filter out the factors that are truly driving prices.
(to be contd)
Intraday Break Outs and Targets
of Nifty FUTURES (DEC 12)
of Nifty FUTURES (DEC 12)
Resistance today @ 4944 & 4960
Supports today @ 4819
If opens above 4883 & sustains above 4891 for 5 minutes NF will touch 4923 for sure & if sustains above 4923 for 5-10 minutes, a trek upto 4943 is possible
Suppose if cuts 4882 & trades below 4878 for 5-10 minutes,
See a non-stop intraday slide upto 4860
Below 4860 for 5 minutes,
means watch more slide upto 4835-20
SHARE TIPS TODAY (DEC 12)
Sell CESC @ 233
T1 – 231.25 T2 – 229.25 T3 - 227.25
Also Sell BGRENERGY, CROMPGREAVES on rise
of faulty thinking adapted from
Dr. David Burns, author of the
classic Feeling Goodand pioneer
of Cognitive Behavioral Therapy:
All-or-Nothing Thinking: Failing to
recognize that there may be
some middle ground. Characterized
by absolute terms like always,
never, and forever.
Overgeneralization: Taking an
isolated case and assuming that all
others are the same.
Mental Filter: Mentally singling out the bad events in one’s life and
overlooking the positive.
Disqualifying the Positive: Treating positive events like they don’t
really count.
Jumping to Conclusions: Assuming the worst about a situation even
though there is no evidence to back their conclusion.
Magnification and Minimization: Downplaying positive events while
paying an inordinate amount of attention to negative ones.
Emotional Reasoning: Allowing your emotions to govern what you
think about a situation rather than objectively looking at the facts.
Should Statements: Rigidly focusing on how you think things should
be rather than finding strategies for dealing with how things are.”
Labeling and Mislabeling: Applying false and harsh labels to oneself
and others.
Personalization: Blaming yourself for things that are out of your
control.
THE WORLD OF DEBT
Every human being on earth currently carries a debt burden of nearly $22,733 on average, if the latest reports are to be believed.
Every child is sharing the same debt burden at birth, as debt growth rates beat the global population growth rate. In fact, debt liabilities are growing faster than GDP expansion rates.
Overall outstanding debt worldwide has more than doubled in the past ten years to $158 trillion (Dh580 trillion) in 2010, up from $78 trillion in 2000, according to a recent report by global consultancy McKinsey.
The global population is currently estimated at 6.95 billion, whereas worldwide gross domestic product (GDP) reached $74.54 trillion last year.
This translates to a per capita GDP of $10,500, which is less than half of the per capita debt burden of $22,733.
In theory, this makes the human population a ‘bankrupt’ race and financially the most dangerously exposed and vulnerable in its history.
If you think this is bad, then wait for the worst news: The debt toll is rising and it will be higher next year.
The global debt trap
The global debt of $158 trillion includes $41.1 trillion incurred by governments worldwide up to last year, accounting for 69 per cent of global GDP. This is expected to rise to $46.12 trillion in 2012, according to the Economist Intelligence Unit (EIU).
“Debt also grew faster than GDP over this period, with the ratio of global debt to world GDP increasing from 218 per cent in 2000 to 266 per cent in 2010,” McKinsey said.
Around $48 trillion of the total debt outstanding was that of governments and financial institutions. In both the US and Western Europe in 2010, the ratio of public debt stood at more than 70 per cent of the GDP, McKinsey said.
“Developed countries may need to undergo years of spending cuts and higher taxes in order to get their fiscal houses in order,” it added.
Many governments in the developed world have resorted to massive stimulus measures to bolster their economies since the 2008 global financial meltdown.
“Public debt outstanding [measured as marketable government debt securities] stood at $41.1 trillion at the end of 2010, an increase of nearly $25 trillion since 2000. This was equivalent to 69 per cent of global GDP, or 23 percentage points higher than in 2000. In just the past two years, public debt has grown by $9.4 trillion — or 13 percentage points of GDP,” McKinsey said.
The government debt worldwide was $31.7 trillion in 2008. Last year alone, government debt accounted for about 80 per cent of the overall growth in total outstanding debt.
World governments owe the money to their own citizens and lenders. The rising total debt is important for two reasons.
First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future, EIU explains in its global debt clock — which is ticking every second.
“Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week,” it says.
“Fail that vote, as the Greek government did in early 2010, and the country can be plunged into imminent crisis. So the higher the global government debt total, the greater the risk of fiscal crisis, and the bigger the economic impact such crises will have.”
Greece, Ireland, Portugal, Spain, the UK and the US are caught in a debt trap. For some governments, the only escape is to do the same things that an average household must do when it can’t make ends meet — sell off assets, slash spending, scrape for extra earnings, downsize, and make sacrifices.
They are cutting healthcare and pensions for millions of citizens, laying off hundreds of thousands of government employees, or worse. For others, like the US, the primary response so far has been to run the money printing presses — all with untold consequences.
The national debt of the United States — the world’s biggest economy — reached $14.62 trillion in recent months — close to its GDP.
According to the IMF, US public debt will reach 99 per cent of its $14.65 trillion GDP in 2011 and 103 per cent in 2012.
In the United States, debt per citizen is more than double the global average, standing at $46,884, while its burden per taxpayer has reached a whopping $130,662 — according to US Debt Clock.
Born into debt
“Every American born today owes $46,884 to the federal government the day she or he is born. And we are transferring a tremendous amount of debt to the new generation, much of it owed to overseas creditors who expect to be repaid by our children with interest,” US Senator Mark Kirk said recently.
The latest push to raise America’s debt limit of $14.29 trillion by $2.4 trillion earlier this month that placed the country’s policymakers in direct confrontation with opposition politicians — is another example of how difficult things could become. By August 2, a possible US default was creating a worldwide panic.
But how did all this happen?
The US Treasury has borrowed trillions of dollars over the past decade, much of it from foreign investors, to help finance two long wars, rescue its financial system, and promote economic growth through fiscal stimulus.
“The government must be able to issue new debt as long as it continues to run a budget deficit — the current shortfall is about $125 billion per month,” Jonathan Masters, Associate Staff Writer, of Council on Foreign Relations, says. The debt limit was instituted with the Second Liberty Bond Act of 1917, and Congress has raised the cap 74 times since 1962.
“It took the first 204 years of our nation’s history to accumulate $1 trillion in debt. And now we are doing that every two or three years,” Jim Cooper, US Congressman, said.
The Budget Control Act of 2011 of the US now allows up to a $2.4 trillion rise in the debt ceiling (in three tranches), and immediately institutes ten-year discretionary spending caps totaling nearly $1 trillion.
Euro-zone — the trouble zone
“In recent months the major areas of uncertainty for the global economy have revolved around the crisis in the Eur-ozone, the future path of monetary and fiscal policy in the United States, and the fight against inflation in emerging markets,” says Ira Kalish, Director of Global Economics, Deloitte Research. “Failure to resolve these issues will have a negative impact on global growth and stability.”
In its report, Deloitte Research says, despite the problems in the housing market and sovereign debt in Europe, the case for growth in the United States seems to be more compelling at the moment.
“As for Europe, recovery will depend on implementing a permanent solution to the debt crisis. Lowering inflation and steadily increasing average earnings will be key to recovery in the United Kingdom,” it says.
The authorities in Europe and the US must focus on radical structural reform that brings hope to the markets that the debt situation is being seriously tackled, feels Gary Dugan, chief investment officer for Private Banking at Emirates NBD.
“Investors now recognize the Euro-zone is at the epicenter of the world’s fears. As the dust settles on problems in the United States [at least for the moment] investors have come to recognize the Euro zone as the weakest link in the global economy,” Dugan says.
“Whilst the United States faces its own problems as an integrated economy it has the ability to address its problems far quicker than the Eurozone. In Europe it is incumbent upon each government to address its problems separately with only mild pressure from the European Central Bank [ECB] or the European parliament.
“Rules that were in place about how much debt a country can have and how much of a budget deficit any country can run in any one particular year have largely been ignored and now lack credibility.”
None of the rules are working anymore, it seems. In fact, the rules of managing economies have changed drastically. Where this will land the human race — no one knows, including bankers and economists.
Market volatility
The last two weeks have been a roller-coaster ride in the markets. Already concerned about signs of economic weakness, investors have reacted dramatically to the dysfunction in Brussels, Frankfurt and Washington.
European policymakers have responded to their crisis with a series of indecisive measures, including a counter-intuitive tightening of monetary policy by the European Central Bank, said a Bank of America Merill Lynch report.
“Apparently, we are told, raising interest rates can control inflation without hurting growth or financial markets.
“Closer to home, fiscal authorities have bombarded the markets with a quadraphonic message of hopelessness: 1. The US has a huge fiscal problem, 2. They are too dysfunctional to deal with it, 3. Threatening to default on the debt is an acceptable form of negotiation, and 4. We will continue to tighten policy regardless of how the economy is doing,” it said.
“Unfortunately, this leaves the Fed in a familiar spot, cleaning up everyone else’s mess. Back in 2008, the Fed was left to deal with the emerging financial crisis, while the ECB hiked rates and Congress refused to take any action, until the stock market was in full collapse.”
Ben Bernanke, Chairman of the US Federal Reserve, has pointed out that monetary policy cannot solve all of the world’s problems.
Moreover, each new round of unconventional policy is likely to have a smaller effect than the last.
“This is particularly the case when the Fed faces a bevy of dissent from both inside and outside the Committee,” Ethan S. Harris, Economist at BofA Merill Lynch, said.
Nonetheless, the Fed is not impotent.
However, there are two reasons for concern. First, a number of sectors have yet to recover from the previous crisis. Banks have rebuilt their capital and are in better shape. However, both the housing sector and state and local governments are quite vulnerable. If the economy does go back into recession, it could reignite the negative feedback loop between employment, home prices and mortgage delinquencies, BofA economists argue.
Hope against hope
The best case for a recovery is that the market panic stops and some of the recent shocks fade. Oil prices have already come off their highs and Japanese supply chains are recovering from the impact of the recent earthquake and tsunami. Moreover, while the Fed has no room to cut interest rates, the ECB and most emerging market central banks have room to ease, it says.
“Europe could take the big step of fiscal integration and centralized debt financing—this is the natural end game for the union. Over the longer term, we could see a pickup in foreign investment, a re-opening of immigration to skilled workers and a productivity boom triggered by technological innovation,” it says.
While risks are skewed to the downside, the economy will continue to recover slowly.
“The recovery will likely come in fits and starts, and we should not be surprised if there are more dead spots that may feel like a recession.
“We learned from historical episodes that the healing process from a balance sheet recession is slow and often bumpy,” Harris says.
How and why did the world get into this huge ‘trap’?
To begin with, it is the advanced or developed industrialized countries that have a huge and unsustainable debt problem, says Dr Nasser Saidi, chief economist of Dubai International Financial Center (DIFC).
By contrast, emerging market economies (with few exceptions) have healthy national balance sheets, strong macro-economic conditions and sound fiscal policies.
The OECD forecasts that advanced economies — without major corrective changes in fiscal policies — will have debt to GDP ratios in excess of 115 per cent by 2015.
What led to this growing debt problem?
“We need to distinguish between secular, trend factors that underlie government budget deficits and debt accumulation from cyclical factors and the results of interventionist government policies,” says Dr Saidi.
The trend factors are related to the demographics of aging populations in advanced economies (Japan, Europe and to a lesser extent the US) and the role of entitlement and health policies: social security, national health programs (Medicare, Medicaid).
The aging population that characterizes Japan, Europe and the US has contributed to the current situation in two ways.
First of all, an uneven growth of working-age and retirement-age population means that a decreasing number of tax-payers have to provide the financial resources for an increasing number of people that become eligible for old-age pensions, he explains.
“There is large transfer of resources from the young to the elderly causing the generation that is entering the job market now to finance not only their own future retirement, but also of their parents. Rather than increase the taxation burden [considered high already in Europe] politicians have taken the easy way out: increased borrowing,” he says.
“The political cycle in advanced economies is heavily biased towards running deficits and increasing debt. The related issue is that people are living longer: life expectancy in the advanced economies has increased from an average 71 years in 1970 to 78 years in 2009. This results in higher public [and private] spending on health and medical as well as other entitlements and growing budget deficits.”
The cyclical factors relate to the impact of the Great Contraction and the Great Financial Crisis. Recessions typically lead to increased government spending through the operation of automatic fiscal stabilizers (e.g. unemployment benefits) while tax revenues decline as a result of lower income; the result is higher deficit spending and debt accumulation.
This expected deficit increasing cyclical effect was exacerbated by unprecedented fiscal stimulus, bail-outs of banks and financial institutions and the ‘socialization’ of private debt, when governments and central banks took over liabilities from insolvent banks and financial institutions and other sectors (e.g. car industry).
“In the US the situation was aggravated by loose monetary and fiscal policies after 2001, leading to both public and private sector dis-saving and reversing a string of government budget surpluses from 1998 to 2001 [with a peak in 2000 when the surplus amounted to $236 billion (Dh866.8 billion],” Dr Saidi argues.
“A policy of low interest rates encouraged private sector dis-saving and greater household indebtedness [mortgages in particular], while military spending surged in association with wars in Iraq and Afghanistan.
“The US moved from being a net capital exporter to a capital importer, absorbing some two thirds of global saving over the period 2004-2006, resulting in the ‘global imbalance’.”
What is the way out?
There is no easy way out.
Advanced economies will require deep and sweeping reforms to their taxation systems and to their entitlement programs. Fiscal sustainability requires higher tax rates and the countering of demographic pressures, Dr Saidi says.
“The choices are stark and limited: retirement ages need to be gradually extended to 70 or higher, given increased life expectancy; this should be accompanied by a reduction in the size and coverage of entitlement programs,” he says.
For the US, the long term fiscal sustainability menu will need to include a major reduction in military expenditures and agricultural subsidies. For Europe, dealing with the demographics will also entail loosening of the strict emigration policies in place now: Europe has to draw on the relatively young populations of the Southern Mediterranean in order to pay for its pensions.
None of the above choices are politically palatable and we should not expect governments to willingly take hard choices.
“The lessons from history are clear: faced with large debt burdens, governments are unlikely to substantially increase taxation or effect permanent reductions in spending; they are more likely to default or reduce the real value of their obligations through inflation,” he says.
To convince their creditors and financial markets, governments will need to invest in credible institutions. Increasingly, governments are turning towards setting up of independent fiscal advisory councils and the adoption of fiscal rules.
“Such fiscal councils should also be adopting new and different ways of looking at governments fiscal accounts. We should move toward ‘generational accounting’ systems: a method for estimating the economic impact of fiscal policy on different generations — including future ones.
“The idea is to evaluate the inter-generational effects of alternative government fiscal policies,” he says.
But Saidi says to keep the economic growth momentum, governments are forced to spend, rather than repay debts.
Modern political systems — in advanced economies predominantly — have a built-in bias to deficit spending. Most spending once instituted is difficult to roll back and raising taxes is not a vote getter, he explained.
“This is exacerbated by the political cycle and short-time horizon of governments and elected politicians: if you are elected for three to four years or you are a government with a short expected lifetime, you will tend to spend, not tax in order to get re-elected or to pass the consequences of your fiscal follies to subsequent governments,” he says.
Income disparity
Of the global population, nearly half or 3.25 billion earn less than $2 (Dh7.3) a day, whereas the number of millionaires has obly crossed ten million — reflecting a widening wealth gap that could threaten social stability.
According to the latest World Wealth Report by Merill Lynch and Capgemini, the population of global high networth individuals (HNWI) increased 8.3 per cent last year to 10.9 million and HNWI financial wealth grew 9.7 per cent to reach $42.7 trillion. The global population of Ultra-HNWIs grew by 10.2 per cent in 2010 and its wealth by 11.5 per cent.
“In its beginnings, the credit system sneaks in as a modest helper of accumulation and draws by invisible threads the money resources scattered all over the surface of society into the hands of individual or associated capitalists.
“But soon it becomes a new and formidable weapon in the competitive struggle, and finally it transforms itself into an immense social mechanism for the centralisation of capital.”
However, the rising debt toll is becoming the single biggest headache for governments and economists worldwide and is gradually reaching a point where no one can protect humans from ‘insolvency’. The Arab spring is a reminder of how things can flare up if not dealt with properly.
RELAX A BIT BUDDIES
Three engineers and three accountants were traveling by train to a conference. At the station, the three accountants each bought tickets and watched as the three engineers bought only one ticket.
How are three people going to travel on only one ticket? asked an accountant. Watch and you'll see , answered an engineer.They all boarded the train.
The accountants took their respective seats, but the three engineers all crammed into a rest room and closed the door behind them. Shortly after the train departed, the conductor came around collecting tickets.
He knocked on the restroom door and said, Ticket, please .The door opened just a crack and a single arm emerged with a ticket in hand.The conductor took it and moved on.
The accountants saw this and agreed it was a quite clever idea. So, after the conference, the accountants decide to copy the engineers on the return trip and save some money (being clever with money, and all that).
When they got to the station, they bought a single ticket for the return trip. To their astonishment, the engineers didn't buy a ticket at all. How are you going to ride without a ticket ? said one perplexed accountant.
Watch and you'll see , answered an engineer.When they boarded the train, the three accountants crammed into a restroom and the three engineers crammed into another one nearby.
The train departed. Shortly afterward, one of the engineers left his restroom and walked over to the restroom where the accountants were hiding. He knocked on the door and said, Ticket, please.
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