The above is known as the Mandelbrot set, named after the mathematician Benoit Mandelbrot who discovered the fractal phenomenon in nature. Now he is dedicating his research in the financial market. He wrote a book called, “The Misbehaviour of Markets”, which I strongly encourage you to read. I reckon it a prequel to “The Black Swan” and this man has great influence on Nassim Taleb. Mandelbrot reasoned that the financial markets behave in multi-fractal characteristics. Clueless? I am none better. His book covered many issues in finance and to make it easier to digest, I will break it down and focus on one concept at a time. Let’s begin with this:

Some people say that short term trading is risky. Intraday trading is risky. Long term investment is safer. Mendelbrot disagrees with it. He suggested that no matter what time frame, the risk is the same. Hence, a trader looking at an hourly chart is no difference in his exposure to risk as compared to a buy-and-hold investor who look long term. Take a look at the above pictures. The picture at the top left corner is the entire size of the object. The one to it’s right is a 6 times magnification of the part on the object. Notice the second picture also have a small box? The third picture (left bottom) is the 100 times magnification of it. And the fourth picture shows the 2000 magnification of the box in third picture.

So what is the purpose or significance of this? Mandelbrot has explained in the book why the market behaves more like fractals than the normal bell curve that the academics currently adopted. But I am not explaining it in this post. So I am jumping into things a little, hope you do not mind. At this moment you should just take it to be true, i.e. the market is fractal in nature. What Mandelbrot is trying to show in the pictures is that no matter how much you zoom in, the object does not get simpler. It is as complex as before. In his own words, “Proper fractals remain equally complicated at every level of magnification.” In fact, it always retain a certain similarity or resemblance of the bigger entity. This means that the financial markets are equally complicated in a 10 year time frame as well as a 1 min or 1 hour time frame. They look the same too. Hence, the risk does not change with a different time frame.

The following picture shows the animation of zooming:

{ 0 comments }

Characteristic of a bull run

by Alvin on March 10, 2010

We all know that even in a bull run, the stock market does not run up in one straight line. It always move in a zig zag way. So what is the characteristic of the move upwards?

There is a classical technical explanation to the movement and I have learnt this from “Technical Analysis Explained” by Martin Pring. Generally, a bull run has 3 intermediate cycles. Looking at the figure, each intermediate cycle consists of a primary intermediate price movement (indicated by blue lines) and a secondary movement (indicated by red lines). For example, one intermediate cycle consists of line 1 and 2. An intermediate cycle can last from 6 weeks to 9 months. The secondary movement can lasts 4 weeks to 3 months.

The primary intermediate movement is lasts longer than the secondary movement. The former gets it’s name as it is in the same direction as the primary trend. The first secondary movement (numbered 2) usually retraces 1/3 of the first primary intermediate price (numbered 1). Number 4 usually retraces 2/3 of number 3. And lastly, number 5 will rise very steeply as many retail investors are pouring funds after the market has proven to be bullish. This euphoria will not get them far and this would be the last stage of the bull run.

Although this theory characterises the bull run well, it must only be used as a guide. The duration stated above is only a rough gauge and there maybe more than 2.5 intermediate cycles (or 5 phases) in a bull run. The more accurate warning is when the market shows sign of euphoria, that is when the stock price is rising very steeply.

So now let’s take a look at the current situation. I would say phase 2 just ended and now we should be in the beginning of phase 3. Phase 1 was the recovery after the market bottom and the STI recovered 99%. Phase 2 started when Dubai debts were declared and was sustained with Greece’s demise. Hopefully we are really in phase 3 now and get ready for more profits!

{ 3 comments }

Your investment capital looks like this

7 March 2010

Everyone has seen how stock charts look like. But have you seen the chart for your investment capital – how your capital rise and fall with time? The way your investment capital moves depend on the type of investor. I have heavily generalised 3 kinds of charts for the Buy-and-Hold investor, Trader and the Clueless [...]

Read the full article →

Lessons Learnt as a Trader (so far)

3 March 2010

It’s only been almost 2 years since I began trading and I must say I am still learning how to trade. I have summarized the lessons learnt so far in my trading journey:
Be patient and wait for the best opportunity to place a trade
Trading is really a patient game. It is not as quick as I imagined in the first [...]

Read the full article →

Catch me on ChannelNewsAsia

2 March 2010

 
I was interviewed by Timothy Nga in a programme with regard to trading. The programme is called, “What’s Your Position?”, and will be aired on ChannelNewsAsia at the following time slots:
Part 1:
3 Mar 10 (Wed) – 9:30pm
4 Mar 10 (Thu) – 12:30pm repeat telecast
5 Mar 10 (Fri) - 4:30pm repeat telecast
8 Mar 10 (Mon) – 6:00pm [...]

Read the full article →

EURUSD (Short) – closed on 2 Mar 10

2 March 2010

 
This trade looks a bit risky even though the entry criteria were fulfilled.
Firstly, USD strengthened tremendously from 10am (GMT) onwards. It has gone up so much that I opin it may just take a break or retrace. I was also thinking whether I should wait for a small pullback for a better entry but decided [...]

Read the full article →

Trading Report Card – Feb 10

1 March 2010

Stocks

Counter

Date In

Date Out

Action

No. of Shares

Price In

Price Out

Profit/Loss

Dong Feng Motors
2/2/10
9/2/10
Long
2,000
HK$10.60
HK$9.86
-S$335.14

IndoAgri
24/2/10
 
Long
2,000
S$2.14
 
 

HL Asia
24/2/10
 
Long
1,000
S$3.68
 
 

Epure
25/2/10
 
Long
5,000
S$0.825
 
 

Total

-S$335.14

The market is flat with no strong trend. Only closed a trade this month and 3 open trades carried over to March. Hope I can close them with profits. The loss of S$335.14 this month pushed me further from my trading goal for this year to S$23,735.80
FOREX

Counter

Date [...]

Read the full article →

Launch of MOOLAH – First Online Flipping Financial Magazine (Free!)

28 February 2010

MOOLAH has launched their bimonthly financial magazine on 28 Feb 10, 12am, and poised to be the first flipping financial magazine online. The articles are contributed by local investors and most importantly, in our context. It is free to subscribe to the magazine and hence, you should do so!
Visit MOOLAH.asia for a sneek peek and to sign up.
They [...]

Read the full article →

Nassim Taleb explains Black Swan Theory

26 February 2010

Here it is, Nassim Taleb himself explaining his theory of Black Swan:

The presentation is rather long and it is advisable to visit the site so that you can select the chapters you are interested to view.
Some interesting topics covered in the talk:
Problem with Predicting
Ignore Experts
Fallacy of Prediction of Markets
Nassim Taleb explains the success of Warren [...]

Read the full article →

USDCHF (Long) – closed on 24 Feb 10

25 February 2010

I have been waiting for this opportunity since the day before and finally get the chance to long this pair.
Entry signal for using the PIPS Swing method – on the 4 hourly chart, enter after a full candlestick formed above the Pips Weekly Pivot. Hull Moving Average aqua in color. The only concern was that [...]

Read the full article →