An Elliot Wave trader who trades global markets across various asset class talks about his trading journey.
The are many common traits needed to master a musical instrument, play a sport, and trade on the markets. Not only do they require dedication, skill and talent, but they all happen in real-time. It requires the talent for instant course correction and the mental ability to go through the good and bad times. Very rarely do we come across someone good in all three.
Singapore based Jai Bala, who tweets on the handle @cashthechaos, is a trader, technical analyst, an amateur tennis player and an amateur singer. Coming from a family with a background in classical music, Jai Bala says he would have pursued music had not technical analysis crossed his path.
A well-known market expert seen regularly on business TV channels, Jai Bala converted traditional technical analysis to an Elliott Wave technician after a chance meeting with Robert Prechter -- the poster boy of modern-day Elliotticians.
Like any Elliott Wave followers, Jai Bala searches for turning points in the market and has built a strong reputation for calling the tops and bottom. He trades global markets and all asset classes including equities, bonds, currencies and commodities.
On the sidelines of Traders Carnival (@traderscarnival) at Coimbatore, Jai Bala spoke to Moneycontrol talking about his journey as a technical analyst and a trader.
Q: As an IT professional based out of England, how did you get involved with the market?
A: I have been involved with the market since I was 18. My father invested in the markets on a long term basis and I was handling the logistics needed for the physical share certificates. He was a long term investor and held on to shares were picked in 1974 and were giving him dividends. But my serious entry in the market was after the Enron crisis.
I am a Computer Science Engineer with post graduation on the same subject. I worked with HCL Tech as a SAP consultant and later moved to the UK.
When the Enron scandal broke, we were unsure if our jobs would be there by the next fortnight. We decided that this was not the way to live and I plunged into an area which I was passionate about – markets. I was lucky as my wife had a stable job that helped us in taking the plunge.
The first couple of years were tough as I was not sure of the way to approach the market. A research firm I followed gave fundamental calls. They identified three stocks that they said were good buyback candidates. Since buybacks followed a SEBI pricing formula at which one could announce one, and these stocks were trading below it, I invested.
However, the event never unfolded and these stocks fell like a pack of cards, and I lost 90 percent of the amount invested. The event shook my confidence in fundamental analysis, and I decided to try technical analysis.
The advantage technical analysis had was that if one would be disciplined enough to have stop losses and cut their losses fast without letting their egos interfere, one could make it through.
I started exploring the markets through technical analysis and traded based on it. During this period I came across a company called Wow-India and got to know the owner of the company.
We collaborated to give technical analysis based on an intraday basis as well as positional calls. There was also a division in the company that gave calls on a fundamental basis.
This was also the time when I decided to pursue some certifications in technical analysis. If you are a trader you do not need these certifications, but if you are looking for a career in the industry, which I was then, you needed certifications. I completed the STA (Society of Technical Analysis) and CFT (Certified Financial Technician) diplomas.
While in Wow-India we were also working with various fund houses and got noticed. The fundamental side got picked up and became the India Fund. The technical analysis team was approached by Reliance Capital, who were starting a new institutional broking business. I was asked to head the technical analysis desk.
This opportunity gave me an exposure to big fund houses and fund managers like Soros, Helios Capital, hedge funds, Treasuries among others. That gave me more visibility. Unfortunately, Reliance Capital’s broking arm closed down soon and I went back to my freelance setup.
My moment under the sun was when I called the top of 2008 on Bloomberg, UK as an independent technical analyst. CNBC noticed that and approached me. Later, other Indian firms also began to do the same.
During this period I was approached by the private fund of Richard Chandler, the richest individual in Singapore who had a personal fund of $3.5 billion. He used to use a lot of technical strategies and do deep value investing.
He was very serious about technical analysis and asked his employees, including those in the HR department, to attend technical analysis sessions. I was advised him on multiple asset classes – equities, bonds, fixed income, currencies and commodities. He is a big believer in time cycles.
After this assignment in Singapore, I moved back to London where for four years I took ad hoc consulting assignments for UK and Singapore-based funds.
We then decided to move to Singapore and settle down. I sold my house in London and used that money as my capital in trading.
Q: Can you walk us through your journey as a technical analyst
A: For the first eight years as a technical analyst, I used the traditional approach to trading by looking at candlestick patterns, chart patterns, moving averages, among a host of others. Everything changed in 2010 when I had a chance encounter with Robert (Bob) Prechter, known for his financial forecasts using the Elliott Wave Principle.
We were at a social gathering and were talking about life in Singapore. Then suddenly someone, I don’t recall who, came and showed Bob a chart right in front of me. I noticed Bob run his fingers around the price line and showed the wave pattern. I was flabbergasted with this revelation. That event changed my outlook and the way I looked at markets.
I knew the Elliot Wave. I had studied it, but never used it. While I had called the 2008 top using traditional patterns, the November 2010 top was called by me with the help of Elliott Wave principles. But I have to admit, I was not too confident back then in using Elliott.
Between the high of 2010 and the low of 2011, I learnt a lot on Elliott waves. From then on, I have been only using Elliott Waves. I do not even know where the 200-day moving averages are unless I have to go on TV.
There was, however, one thing common in my calling the tops of 2008 and 2010. I also looked at the market from a sentiment point of view.
To me, market sentiment is important. Like in 2008, just two days before the 6,357 high, a renowned fund manager said that Nifty would touch 10,000 by 2010. Such exaggerated optimism collaborated with the topping technical patterns.
Having said that, it is difficult to measure these sentiments in India. In the US, there are various paid surveys of futures traders, fund managers that indicate the underlying sentiment. In India, we have to rely on other indicators. One indicator I check out for is when a non-finance magazine starts portraying bull market pictures on their front page. These are blunt tools and one needs to sharpen it by combining other studies.
Before 2010, I was a trend-following trader, which resulted in some lag in my entries and exits. Elliott Wave offers an earlier indication of a trend reversal. While you have to just wait for confirmation signals in traditional technical analysis, Elliott waves tell you ahead of time where the pressure points are and to look for reversals around these places. Elliott Wave and Gann cycles are the only tools that have predictive power and forewarn you about a change in trend.
Elliott wave is not a trading tool alone. It tells a lot about the sentiment of society, and the psychology of the market. Behavioural Economics and socioeconomics are closely related. An Economist would give a recession call when they see two-quarters of negative growth. But socionomics tells you that recessions aren’t caused by two negative quarters, but it is caused when businessmen, investor and traders become cautious. It's the change in the sentiment in society leads to a recession.
The Elliott Wave also helped me in calling the Indian general elections and the Brexit vote. I told a proprietary trading firm that Prime Minister Narendra Modi is coming back to power based on inferences from Elliot Wave.
Q: Why do two Elliott Wave technician disagree on the wave count.
A: There is no technique in the world that is perfect. When it comes to Elliott Wave at any point, there is more than one legitimate wave count. If there would have been one count, it would have been automated and people would have made money on it.
Markets are subjective. Any Elliott Wave analyst maintains one main count and one alternate count.
When in September 2019 the finance minister announced a corporate tax cut, I was bearish till that point with a Nifty target of below 10,000. But with a sudden 7 percent move, I changed my view and said that the market would be opening up a possibility of 12,400. Alternate count gives you the flexibility and at the very least it prevents you from taking on big losses.
Even when you are bullish, as per the Elliott Wave principle, you have a view of medium bullishness, ultra bullishness or extended bullishness.
Q: How do you trade?
A: There is a process and a plan behind every trade I take. Before taking any trade I ask the following three questions – what is the setup, what is the risk in the trade and how am I going to make the entry.
Suppose if I am trading Coffee futures, then I would look at the chart to see what has Coffee done in the past to get an idea of where it could turn as per the Elliott Wave pattern.
If the price is about to complete a correction, then I would measure the Fibonacci projections to get an idea of where the correction would end. Once it comes near that zone I would be alert for a reversal. And when a reversal does happen, I would buy above the reversals high. If it’s a short trade I would sell below the low of the reversal.
I look for a point of entry with a good risk-reward ratio. An advantage of this is that if the price moves as per my anticipation, I would be in the trade at the start of the trend.
While my entries are well-defined, so are my risks. The losses during my earlier days of trading, when I blew up my account twice, have made me incorporate very strict risk management measures. I do not risk more than two percent of the total portfolio in any one trade. This trading plan has prevented me from severe losses more often than not. If there is one takeaway a newbie trader can take from my interview, let it be risk management.
Apart from risk management, I also focus on position sizing. If I am exposing, say Rs 25,000, on a trade, then the next one will also have the same size.
Coming back to my trade, I like to add to a winning trade. Because I am an Elliott Wave follower, I look out for Wave 3, which is the sharpest and fastest. I look out for areas to add to my position by pyramiding on to my winning position. However, the initial position will be the largest and subsequent ones will be smaller. Depending on the degree of the wave my position is a matter of a few days to 8-12 weeks.
Even though I may have a long term view on the underlying I like to be in and out of the trade as often as possible.
In the case of Indian Rupee against the dollar, I had called that it would depreciate to 65 when it was trading at around 43.85-44. I knew it would take several months for my level to reach as it was a primary degree trade – multiple time zone triggered on the weekly timeframe.
In this case, I traded the pullbacks and correction in the shorter timeframe, and was in and out of the trade. Doing this gives me more bang for the buck, and I end up making more than what I would have by just holding on to the initial trade.
I do not trade intra-day now. I used to take those trades earlier. Most of my losses have been on account of intra-day trades. It’s not that Elliott Wave principles cannot be applied to the smaller timeframe, it’s just that it needs a higher level of concentration and precision.
My favourite instrument for trading is options. I am an option buyer as it gives me bigger exposure. One of my best trades was a result of a long option position during Brexit referendum vote.
My view of the pound against the dollar at the time of the vote was that it would come below 1.35. I came to 1.5, a point where I was ready for a reversal. I positioned a sizeable position keeping in mind the risk control parameter of risking 2 percent of my capital. I bought the put option for December expiry in June. Since I traded these options in the US market, which are 6-9 months away from expiry, they are liquid and offer me a chance to take a sizeable position.
Just before the referendum, the polls were pointing to a ‘Remain’ in the European Union. But I knew this would not happen since the pound would have shot up much higher if this was true. The wave structure was pointing to a new low, probably it could go to as low as 2009 low. The Elliott Wave was pointing out that the Brexit team would win. I knew this was once in a Blue Moon event, so if a big event is happening, you have to size up your position accordingly. Such events provide big movement in the direction of the trend.
As luck would have it, the trade manifested in the next three days, and I was out with a good profit. This trade accounted for 70 percent of my profit for that year –2016, and in the last three years, I have not had such a trade. I had not anticipated the trade to work out so fast, else it would have bought a near month Put option that would have multiplied my profit many times. But then, that’s the nature of the market, you win some and you lose some.
As for Indian markets, I trade only in futures, that too the SGX futures which has good liquidity and better margins. It also allows me to take an overnight position that is not available to traders in India. Further, the contract size of only $2 helps keep risk under control. For a foreigner trading with dollars, SGX Nifty gives you the chance of taking a bigger position.
Q: What are your plans going forward and a word of advice for the retail trader
A: I am planning to become a professional Fund Manager going forward. I have been approached by someone, and they are in the process of setting up the fund. It will be among the handful of international funds that will be completely based on technical analysis.
As for the retail trader, I would like to say that you should make all possible mistakes at the start of your trading career. If you are going to go broke it should happen at the initial stages of your career when the capital is small. You should be able to pick yourself up as you do from a fall when riding a bicycle.
Every aspiring technical analyst trader should start with the classical trendlines, knowing how to locate a trend. It is only later that they can try their hand at Elliott Wave.Managing risk is extremely important. One can have any method – technical analysis based or Elliott Wave base, but risk control is a must. Playing defence is very important in trading. One should be like Rahul Dravid, you play for the singles and now and then a loose ball will come by itself. If you leave your wicket open and aim for the fences at every ball, then you are asking for it.
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