Sunday, May 26, 2013

Tuesday, May 21, 2013

Sebi tightens algorithmic trading norms


Sebi tightened the norms of algorithmic trading. Sebi said it had decided to review the algo guidelines following representations made by its Technical Advisory Committee and the new norms will come into effect from May 27

Tightening the norms for algorithmic trading, market regulator Sebi on Tuesday made it mandatory for the users to have their systems audited every six months and increased penalties on errant stock brokers.
Algorithmic trading or 'algo' in market parlance refers to orders generated at a super-fast speed by use of advanced mathematical models that involve automated execution of trade.
    
It is mostly used by large institutional investors and has raised concerns that algo exposes small investors, and the market itself, to possible systemic risks. Sebi first issued guidelines on algo trades in March 2012, after it witnessed a growing trend of usage of advanced technology for trading in financial instruments.
    
In a circular issued , Sebi said it had decided to review the algo guidelines following representations made by its Technical Advisory Committee and the new norms will come into effect from May 27.
    
As per the amended guidelines, stock brokers and traders offering algo facility would need to subject their algorithmic trading system to audit every six months so as to ensure compliance with the requirements prescribed by Sebi and the stock exchanges. Such audits would need to be undertaken by a system auditor with relevant certifications.    


Sebi has also allowed the stock exchanges to impose "suitable penalties" in case of failure of the stock broker or trading member to take satisfactory corrective action within a time-period specified by the bourses.
    
"In order to further strengthen surveillance mechanism related to algo trading and prevent market manipulation, stock exchanges are directed to take necessary steps to ensure effective monitoring and surveillance of orders and trades resulting from trading algorithms," Sebi said.
    
The regulator has also asked the bourses to periodically review their surveillance arrangements to better detect and investigate market manipulation and market disruptions.
    
In March last year, Sebi had asked the exchanges to implement a framework of economic disincentives for high daily order-to-trade ratio for orders placed from trading algorithms by prescribing penalties in form of 'charges to be levied per algo orders' at various levels.
    
"The penalty rates specified by the stock exchanges have been reviewed and in order to provide sufficient deterrence, stock exchanges are directed to double the existing rates of 'charges to be levied per algo orders' specified in their circulars/notices," Sebi said. 
    
The stock exchanges have also been asked to impose an additional penalty 'in form of suspension of proprietary trading right of the stock broker/trading member for the first trading hour on the next trading day in case a stock broker/trading member is penalised for maintaining high daily order-to-trade ratio', if such an entity has been penalised on more than 10 occasions in the previous thirty trading days.
    
Sebi said this step would discourage repetitive instances of high daily order-to-trade ratio. Sebi also said that the deficiencies or issues identified during the audit of trading algorithm or software of brokers would need to be reported to the stock exchanges immediately after the completion of such audits.
    
Further, the stock broker and trading members would need to take immediate corrective actions to rectify such issues or deficiencies. In case of serious deficiencies or issues or failure to take satisfactory corrective action, the broker or trading member would be barred from using the trading software till the time these issues are rectified and a satisfactory system audit report is submitted to the stock exchange.
    
The regulator has also directed the bourses to take necessary steps and put in place necessary systems for implementation of the new guidelines.
    
The bourses have also been asked to make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the algo guidelines, while they have also been directed to inform the brokers and trading members about the changes in the norms.

Wednesday, May 01, 2013

How To Think Like A Winning Day Trader


What makes the best traders successful?  
Are they "lucky"?  Have they discovered some "secret" indicator?  
No.  
They've learned the truth about trading.  Trading success is a simple as 1-2-3.  
Step 1 - Understand what trading is really about;
Step 2- Learn what a winning day trader does;
Step 3 - Then do it.  Continually.

1. The Essence Of Successful Trading


Trading is all about percentages.  
You enter a trade because you believe that it's more likely to succeed than fail.  
The job of finding favourable trades goes to your trading system.  There are numerous books and courses about trading systems.   The actual trading system you use is beyond the scope of this article, but please, please, understand this:
If you're searching for the perfect trading system - you know, the one that delivers profits on demand - you'll be searching until the end of time.
Successful trading is simply a game of probabilities.  Does that disappoint you?  Were you hoping for something a little more intellectual?  Do you know how many academics - doctors and lawyers particularly - lose fortunes in the market each year?
The positive bias comes from your trading system.  Our advice is keep it simple.  Find a system you're comfortable with.  Know the setups.  Understand why and when you enter and exit.  Then stick to it.
Sure, some trading systems offer a higher profitability than others.  But don't get hung up on it.  Just don't get too caught up on it.  The real determining factor is your ability to follow it.

2.  What Makes A Successful Day Trader


A successful day trader is someone who follows a trading plan.
Your trading plan tells you when to enter a trade, and when to exit.  An entry point.  An exit point - either a target or just to get stopped out.  Parabolic SAR, lower bollinger, natural support and resistance, volatility stop.  Whatever.
Any trader must understand the timeless law of probability.  That with a positive bias and a sensible approach to money-management (cutting your losses and letting your profits run), eventually you'll come out ahead.  
What makes day trading so challenging is the speed.  You simply execute trades faster, and compound your profits faster - which is why we do it.
That's why a day trader is NOT a stressed-out, valium-swallowing, adrenaline junkie who lives from one minute to the next.  
A good (i.e. profitable) day trader knows that it's just another trade.  It's all just statistics in action.
The important point here is consistency.  Like the heads / tails example, the one time you don't take a trade is when the market takes off and never looks back.  
Day trading is boring.  Keep it that way.  

3.  How To Develop The Day Trading Mind


Every time you sit down at your trading screen, remind yourself that "trading is statistics in action".  
Nobody knows what the market is going to do next.  It's a law unto itself.  You follow what works "most of the time".  
When you understand that trading is about probabilities, that any trading system is designed to provide a positive bias over the long term, then all you have to do is execute the plan.  So what is it that prevents you from being successful?  
You.  
Or rather, the emotional you.  
You need to work on developing the mindset of a professional trader.  Try this routine for 30 days and see how you go:
BEFORE: (At the start of trading day)
Step 1 - close your eyes, and remind yourself of the truths of trading:  "Trading is all about probabilities".  Write this on a yellow Post-It note and stick it to your monitor.  Permanently.
Step 2 - Mentally see yourself following your trading plan.  Entering a trade on signal.  Exiting at the right time.  Trading the right size for your account.
Step 3 - Visualize each trade as a tiny part of a big picture. You might want to visualize it as a matrix, with 100 boxes.  Each trade is unimportant compared to the overall scheme.  Create your own image for this.  (Your own is best.)  Trading is a visual process.  The point is you need a visual metaphor to distance yourself from the immediacy of real-time trading.  Anything.  
DURING: (When in a trade)
Step 1 - Physically relax.  Remember the definition of emotion?  "A physical disturbance."  You need to reduce emotional power as much as possible.  Prevent it from creeping up on you, and doing something silly.  So you don't feed it.  Relax.
Be aware of your whole body.  Remember the last time you got stressed.  What did it feel like?  Tense shoulders?  Stomach muscles tightening?  Relax those areas now. Know thyself.
Note - none of this suggests that you should be slow about entering or executing trades. Quite the opposite!   In real-time trading you must be fast.  But you are operating from your rational, thinking mind... and not the panic-induced animal mind fighting for survival!
Step 2 - Breathe!  Some traders stop breathing completely in a trade!  Breathe in slowly for a count of four, hold it for four, and breathe out for four.  
Step 3 - Focus on yourself.  Following a trading plan is a "no brainer".  You enter.  You trail a stop.  You exit.  Self-talk helps stay in the state.  Remember that when you're watching the price in real-time, there's a tremendous danger of adding emotional fuel to a simple situation.  Watch how you're feeling.  Observe any tension and let it go.  
Step 4 - Watch your language!  Words affect us profoundly.  Ever had someone scream at you?  Stirred up lots of emotion, didn't it?  So don't scream at the market.  Speak calmly.
Commentate on what the market's doing.  Speak out loud.  "The current trade began at hh:mm, the system gave a buy signal at price level, the target is with a stop at.. Stop loss was moved to break even at as per the plan...  The market is currently in trading range between x and y..."
All this helps you to stay objective.  
Also, avoid "what if" thinking.  Creativity has no place in trading!  Be mechanical .  Be objective.  
Step 5 - Continually remind yourself of what successful trading is.  See the current trade as just another trade. on just another day.  Your job is to follow the system - professionally and without emotion.  With practice, you truly won't care whether the current trade turns a profit or a loss.  
AFTER:
Review.  How did you do?  Were you trading rationally, or emotionally?  How much?  This isn't black and white.  It's about balance.  Think of it as 2 bar charts.  The higher the rational level, and the lower the emotional level, the more successful you'll become.  
Master yourself.  And the money will follow.

BY : MARK MCRAE