2010-2011 Summary

Its been a year since I started actively trading. And roughly two years since I started actively investing regularly with a long term perspective. What I learnt in the last year has been a lot more significant than what I learnt in the year before that. But paradoxically, the profits that I earnt in the first year or so, was much higher than what I made in the last year.

Moral of the story : "Making great profits in a bull market is not attributed to intelligence."

More importantly, I learnt that trading and long term investing are not the same.
In value investing, it doesn't matter much if the stock that you invest in falls 10% after you invest in it. For there is hope that someday patience will pay and the investment turns out to be a big multibagger.
But in trading, especially short term swing trading, a sound strategy - entry and exit timing, plan, discipline are needed. More so, if one is trading in a leveraged manner i.e. in Futures and Options.

If I have to sum up my first year's experience tersely it would be something like this,"In the last year if I had not made any losses and only profits, then my portfolio would be more than 400% of the initial capital that I started off with. On the other hand, if had made only losses and no profits, then my portfolio would have been wiped off a few times over by now."

Nevertheless, I have decided to take this as a learning experience and try to trade on for one more year and evaluate my prospects at the end of it. Here are some of the important things that I learnt, and some of which I have already started consciously incorporating in my trading plan.

1. Trade less.
This is something that doesn't come naturally to people like me. As a student, I used to always study more than 8 hours a day just to get decent enough marks in the exam. And now, as a software engineer I am required to work atleast 9 hours a day, in order to get my full salary.
In trading, its all about waiting for that opportunity to get the best possible entry into a trade. Large profits have been made in trades that have lasted for 3 days or sometimes even lesser.
Trading more in my case meant that a lot of guessing around, a lot of emotional trades, gut feel trades which slowly but surely chewed into the profits, and sometimes into my initial capital itself.
In the last 2 months I have consciously made an attempt to just have 2-3 trades in every month. Even if one of them is a very good one, it greatly enhances the portfolio value.

2. Use multiple time frames.
This approach is good and essential if one is trading in leveraged instruments like futures. The downside is that one can get stopped out before a big move actually occurs. But the upside is that if stopped out, the losses are smaller when compared to using daily values for calculating stops.
Only recently have I started to use this approach, and I'm pretty sure that with more practice, this shall be a very useful technique.
Professional traders suggest a 1 day, 60 minute and 5 minute time frames. But since Google Finance doesn't support 60 minutes time frame, I am somehow managing with a 30 minute time frame for now.

3. Cut your losses, let the winners run.
Barring one instance till now, I have managed to cut my losses at the earliest in all my trades. This also means that one should not take up too many trades at the same time, or have too many lots in one trade at any time.
But I have rarely been able to let my winners run. At times, I have kept my SLOs a bit wider and made smaller profits when the market quickly turned direction.There have been atleast 3 instances which I can remember where I have closed the trades a bit too early due to the fear of losing out on my profits. Where I could have easily made a risk free 50% profit, I made just 10%.
Somehow I need to find a middle path between fear and greed.

4. Time the market entry and exit.
This was one thing that I learnt in the last 2 months. Its best to totally stay away from the markets when there is some news expected, or when there is a slew of holidays one after the other.
It is common practice among professional traders to stay in cash during quarterly earnings of a company, during RBI meetings or during major policy announcements as its difficult to place logical exit points and also  there is excessive volatility during these times.
I have been caught on the wrong side of the trend in the holiday season. This is because our markets are correlated to global markets to a great extent. Keeping a position open just before the holidays begin is being exposed to the risk of gap up or gap down openings after the holidays are over due to news on the global front.

5. Work out a clear plan before entering a trade.
So far, in most of the cases when I have had a good plan and have stuck to it, I have either made decent profits or taken small losses. But in the cases where I have had no plan, or I have not stuck to my initial plan by being emotional, I have had to take big losses.
It's also a good practice to keep a stop loss order placed at all times.

6. Trade with the trend, and stay unemotional.
Well, this is easier said than done. When the markets open, it looks like there is a strong up or down trend. Almost always I get sucked into taking a position, for fear of losing out on an opportunity. And then I have a couple of sleepless nights where I pray that I don't lose money in the trade. And almost always my prayers are never answered.
With short term trading, its very hard to get hold of the trend, as it seems to change every now and then. Hence its pretty difficult to trade with the trend all the time.
After careful analysis I figured that the best time to enter a trade is in the afternoon. In most of the trades that I have taken up after noon, the trades have been successful.
I read this somewhere, "Amateurs control the opening. Professionals control the closing." I believe I am neither, so I guess my best entries have been in the middle session.

7. Stay humble.
There's a saying in the markets which goes like this, "Those who say, don't know. Those who know, don't say." Its best to keep away from discussing one's trades or views about the market on open internet sites, with friends or with relatives.

There are a lot of technical points that I learnt in the past year or so. But I could probably not explain them on my blog. But if anyone wants to learn trading from the basics, I suggest they start from here - Swing Trading Basics. It's got all the good stuff, minus the hype. And its free!

Hope to have a much better year next year. Till the next monthly update, Happy Trading!

August - September 2011 Summary

The last 2 months have been very hectic on the office front. So I couldn't find enough time to update the blog.
To put it in short, in this period I had a few good trades, followed by a few horrible ones, followed by a few good ones again.

In a few of the trades, I tried to predict the market, with disastrous results. I didn't trade along with the trend, but tried to preempt a trend reversal. So when the markets didn't reverse, I panicked and closed my trades taking in big losses. But at that point, the actual trend reversal occurred. The outcome: in some cases, the stocks which I had traded moved 20% in the direction that I thought they would. But I was so scared after taking those losses, that I just watched as a lame spectator.

After all this, I sat back and analysed some top mistakes that I was committing.
1. In most of the cases I was just taking up a trade as if it was a routine task. Not much time was spent in analyzing the charts or the market condition itself.

2. Lack of confidence or overconfidence to enter a trade.
Instead of letting good trades presenting themselves, I was trying to force an entry. Though my analysis used to be right in most cases, my entry point would be wrong - either too late or too early. Market timing strategy was all wrong.

3. In some cases, I ended up giving up some of the gains that I had made as I was not content with the profits that I had in that trade. I thought of waiting a while to see if I can make more profits in that trade. But in that time, the markets used to quickly recover, thus making a profitable trade into a no loss/no gain trade or a small loss trade. In most cases, I waited for my SLO to be hit, instead of proactively exiting the trade with whatever profits I had. I'm not sure whether to attribute it to greed, or my insistence to stick to my initial plan.

4. Trading too much.
I thought in the last year, I overtraded a bit too much. In that process, I also ended up losing bigtime if all my trades lost money at the same time.
But in the last month, I have made a conscious attempt to reduce the number of trades, and increase the profitability in each trade. The first step in this was to take out all my previous profits and start off newly with a small capital. This would be a deterrent for me from trading like a gambler.
Initially it was boring, as some of the trades were no loss/ no gain trades. But now, I am happy with this approach, as just one good trade will make the portfolio look good.

This has also brought in more emphasis on a better chart analysis and analysis of overall market conditions. Exercising self restraint is of utmost importance.

There is, however one aspect that is part of the market and over which I have absolutely no control of.
Since last year, there is an initial period between 9:00 AM - 9:07 AM in which the opening prices of index stocks are determined. This, is making a mockery of my plans, my stop loss orders and also makes a lot of charts look very very choppy.
For example, when I was trading ICICIBank, it hit a 52 week low of 761 and then closed at 779, still down more than 2% for the day. I looked up the charts and saw that it had hit a major support level. So I planned to exit the trade in case a strong reversal occurred. I placed an after market SLO at 800, more than 2.5 percent from the previous closing price. But the next day, during pre-open bidding, the indicative opening showed near 820 rupees, a full 5% up from the previous close.
Fortunately, I modified my SLO and forcefully exited the trade with decent profits.

Since our markets are correlated with global markets, any global news results in abnormal gap up or gap down openings. One, it makes a lot of charts look filled with narrow range candlesticks, even though the actual percentage movement has been in the range of 3-5%. And two, it takes out a lot of trades out of contention, as the stock has already moved away a lot, thereby giving me less confidence to take an entry.

I guess this is a part of market evolution, and over time some solution will be found.

I shall complete 1 year of trading this month end. Hope to post in a lot of my experiences in the next post. But, I am already happy that I have just survived this year, as somewhere I read that more than half the traders don't!

One more interesting update. Now its possible to speculate on DJIA and S&P500 in futures segment. I shall post more about this, after I try out trading them. Soon, FTSE might be added to the list.

For now,  happy trading!

July 2011 Summary

Yet another month of frustration. I was right in my analysis on numerous occasions. But, couldn't get a decent entry in most of the trades that I took up in July.

This has been the pattern in most of the trades that I took up.

Day 1 : 
I take an amateur entry into the trade in the earlier part of the day itself. I see the stock fast moving up or down in the direction that I want to trade in, and take up an entry hoping that I don't miss an opportunity.  The stock chops around in a range for the whole day. At the end of day, I have a very small profit, or almost at my entry price.

Day 2 :
The markets and the stock seem to go in the opposite direction of what I expect it to. It takes out my predetermined SLO. I exit the trade with a small but significant loss.

After Day 3 or day 4 :
The stock eventually goes in the direction that I thought it will. And it does so Bigtime!  

This pattern was so frustrating, because it happened in quite a lot of trades in succession. And the cumulative loss wiped out nearly all my profits that I had made in trading so far.

The markets were choppy, directionless when seen on the daily charts. But as I mentioned in my last month's post, the weekly charts gave a good sense of the direction too. But the big trouble with this, that I didn't (and even now don't) have the knowledge to take a risk free entry.
As seen in the weekly charts, most of the charts displayed triangle(descending or symmetric) patterns.
As a result, I took a relatively conservative entry, but got caught in whipsaws, before the stock actually moved in the direction that I thought it would.
Maybe the only risk free entry would be to take an aggressive entry, i.e. buy at the bottom and sell at the top.

At the end of July, and beginning of August, a lot of global fears have created havoc in the global markets. The US debt rating got downgraded. This seems to have given a better sense of direction to our markets.

The good news is that now the markets seem to have a definite trend. And the bad news is that the direction seems to be down. Way down from where we are right now.

I don't want to give trading suggestions, as I am myself pretty bad at it. But I'd definetely recommend people with decently big portfolios to hedge their portfolio. You might want to buy Nifty PUT options (mid month or far month contracts) for the entire value of your portfolio, especially if you have good exposure to index stocks. I have a bad feeling that this might be 2008 revisited.

This chart of Nifty in both weekly and daily charts gives me good reason not be very optmistic about the markets going up in the near future. I hope I'm right in believing that this is a Descending triangle pattern.

NSE NIfty - weekly chart

NSE Nifty - daily chart

I also was able to see a Symmetric Triangle pattern in ICICIBank charts. I hope I'm right in my analysis of this one too.

ICICI Bank - weekly chart

ICICI Bank - daily chart

These are just 2 examples. Most of the notable stocks that I follow are showing such chart patterns. Some of them have also broken strongly like ICICI Bank has.


Various websites give possible ways to determine possible price targets for such patterns. Only time will tell if these targets will be reached. But they do reach, then we can expect the bulls to be brutalized by the bears. Thats a lot of blood on the street. 

Hope peace prevails! Happy trading !

May - June 2011 Summary

Well, I've been a lot busier with a lot of things lately, which gave me less time for updating the blog regularly.
I also traded a lot lesser, but managed to lose a lot more. The same old things continue to haunt me. Bad entry, bad money management and of course, not having good discipline.
The Pink Floyd line comes to my mind, "Steps taken forwards, but sleep walking back again."
If I made decent profits in 2 trades, then I would end up painfully losing all of it in the subsequent 3-5 trades. My portfolio looks like a chart making lower tops and lower bottoms. Hope there is a reversal in my fortunes. Or else, it could be bye bye to my trading capital.

I dont want to talk much about my trades, as some of them were news based trading. I mean, when a particular company that I track comes up with good or bad results, I take up a position based on the results. The profits are good, but the problem is that one can earn money with such trades in only 4 months of the year. For the rest, a lot more is needed.

Maybe for a change, I'll tell you what I learnt from my mistakes.
1. Always cut your losses.
There were trades in which I seemed to be so sure of my analysis, that I didn't close my loss making position. And the result, I had to take the mother of all losses.

2. Let the winners run.
Tata Motors got pummelled just after its quarterly earnings. I got a slightly later entry in a short sell trade, which was very close to a very strong old support. And since it was a friday and since I was nervous to keep the position open over the weekend and risk a gap up opening on the next monday, I just closed it.
It turned out that the stock tanked close to 15% from there within 2 weeks time.

I was reading a book called "How I trade for a Living", written by an author who has been trading for a living for the past many years. I was truly inspired to see how he turned around his account from USD 2500 to USD 650,000 in a reasonably short period of time. Mind you, its not so easy to learn his way of trading, as he seems to have a button for the market, and knows how to trade it by just looking at the ticker and the news.
But there were 2 big things that inspired me .
1. He was able to start making consistent profits after losing money for 19 years. That's some perseverance.
2. Once he started to make profits, he has not had a single loss making month for some 6-7 years in a row. That's some consistency.

After reading a few sections, I also understood the importance of weekly time frames and trend line analysis. All the while I was wondering why a lot of stocks reverse where there was no obvious support or resistance around there. Once I switched to the weekly view, I understood the game a lot better. Supports and resistances on weekly charts tend to be a lot significant than the ones we see on the daily charts.

I was also reading about the various chart patterns. Its very tough to identify these patterns on the daily charts. But on the weekly charts, its on your face. You only need to spend time in order to find what chart a stock fits into. Also, we can keep Elliot waves aside for stocks in a downtrend.

Some of the notable chart patterns are : Flag, Pennant, Triangles (Ascending, Descending, Symmetric, Expanding, Contracting), Wedges(Ascending, Descending). There are many more, but these tend to be the most common. There are various websites that explain these.

Most of the stocks that I'm following seem to be moving in a narrow range, and with great amounts of indecisiveness when seen from the daily charts. And I'm getting more and more convinced that swing trading technique is best applied when stocks are in a strong trend - upward or downward. Other techniques need to be applied to trade in a non trending market. I'm yet to figure it out.

I just hope all that I learn someday translates into good profits on my portfolio. Till then, I need to try and pay the lowest fees to the market.

Hope to come back with more updates shortly.

Bye for now, Happy Trading!

April 2011 Summary

    I was pretty much apprehensive about April, as I my confidence had taken a hit, due to the losses that I had to face in the March month. The markets started trending, but unfortunately the trend in most of the stocks died down prematurely due to a poor earnings season. A slew of bad results meant that a lot of good strong wave patterns died down prematurely and led to the start of new selling waves.
   As a result, my fortunes in the month of April remained mixed. So here are some of my trades in April.

IOB
This usually turns out to be a very lucky stock for me to trade in. And sure it didn't disappoint. I got a slightly later entry, but I'm going to complain as I had to wait a while to ensure that a good reversal had taken place. From the chart, it looked like a Side Trap Pattern in which I took an entry.
I closed my trade on seeing a hanging man reversal on the charts. Though I like to use trailing stop method, in this case the decision to exit seemed to be a good one.  A decent trade with decent profits.

Bajaj Auto
To be honest, I'm very much embarrassed to talk about this trade. There was no pattern, no reversal yet. I just saw the stock pulling back into the TAZ, and took an entry in a hurry. It turned out that the stock pulled back even more after I took an entry, and took my protective SLO with it. I had to take a slightly bigger loss in this trade, as I moved my SLO lower than what I had initially planned. Bad Money management and bad discipline.

SBI
This was a stock that I had a mixed trade. I took an entry when I saw the stock pullback into the TAZ and form a bullish haraami pattern. There was a small rally and then again a minor selloff. As a result, my SLO got hit, but I didn't make a loss in this (except for brokerage), as the whole process took place over a week, by which time my trailing stop had moved to my buying price.
The above sequence resulted in a kind of a Swing Trap Pattern.This time the reversal looked a lot more convincing, and I somehow mustered the courage to consider a re-entry. It was a good decision, as I was able to close the trade with decent profits, just in the nick of time. As the markets were very volatile and F&O expiry day was nearing, I just abandoned the trailing stop method and just locked into decent profits.

Canara Bank
In this case, though the stock had not pulled back into the TAZ perfectly, I still took up the trade as it showed a strong reversal exactly at the 50% Fibonacci retracement point. Though it was a very short duration trade, I was able to make a decent profit out of it.

Tata Motors, Tata Steel
This is one of the trades where good patterns go bad. Both these stocks had pulled back decently into the TAZ and showed very strong reversal. I was a bit apprehensive to take up this trade in futures, as Infosys was expected to announce its quarterly earnings. The moment Infosys announced a below par result, it tanked 10% and took a lot of these index heavyweights down with it. So I ended up losing on this trade, but since my trade was in Options, my losses were limited. I was worried that my SLOs would not get hit if the stocks went down quickly, and hence this strategy.
Eventually Tata Motors also showed the Swing Trap Pattern, in which I took a re-entry. The trade moved pretty well in my favor on the day of my entry. But since quite a few index heavyweights came out with disappointing earnings, the pattern broke down(so did the overall market) and I ended up with a very small loss.

ICICI Bank
I took an entry into this on the same day as that of the Swing trap in Tata Motors. But since ICICI bank was announcing the results on the day of F&O expiry, I didn't want to take a big chance trading it in futures. I got stopped out as ICICI came out with just decent results, resulting in a knee jerk selloff. On seeing a heavy volume recovery an hour or so after the results, I decided to take a re-entry in Futures. Though it moved well initially, lack of supporting buying meant that I got stopped out of it today, of course at a small loss. 

Though the month was a pretty good one, it could have been even better, had I been more selective in choosing the right stock to trade in.

I also learnt this important mantra,

"Wait...Wait...Wait...Relax...

Let the stock come into TAZ....

Let the reversal occur.....

Now take an entry"

In other words, its important to let the trade come to you. Every time I missed saying this mantra, I have lost money.
A very powerful mantra indeed.

March 2011 Summary

This monthly update is coming a bit late. Well, I have been watching the charts a lot more eagerly these days, since the markets broke out from a region of consolidation to start a new uptrend.

This was a mixed month for me. I made quite a lot of long term investments in my investment account. There is an ocean of difference in my confidence when I'm placing an order in my investment account, and when I'm placing an order in my trading account. Investing is fun, provided you have the patience to see your money growing. 
And since the markets broke away from the consolidation phase, most of my investments have already started to show decent gains.

But for trading, it was a horrendous month for me. I had just one decent trade, and that too a 5th wave trade.

Here are some disasters, which others may avoid after learning from me.

Titan:

I tried positional trading in Titan. But, I placed my SLO too close, and got stopped out. I was kicking myself, when I saw that Titan has gone up by more than 10% from where I got stopped out. 8% of which came in 1 day.
Lesson learnt :
Its better that a positional trader buy in cash segment and not in futures or options.
Once in the trade, the SLOs have to be placed pretty far away, just under a major support.

Cairn:

This was the only profitable trade for me. I got a slightly late entry into this. But, the upmove was extremely slow. On careful analysis, I found that the best part of the rally was almost over, and then I had traded that pullback.
Hence, the profits were too small. Not much to learn from this trade.


Wipro:

This is one of the classic cases where I  run a 100 metre sprint, in the opposite direction 30 minutes before the starting gun.
The loss was small, but good lesson to be learnt.
Always take an entry when the selling wave is over, or about to be over. Usually stocks consolidate in a tight range for a while before reversing their direction. Watch for this consolidation in the 5 min and 30 min chart and then enter the trade. In other words,wait for the trade to come to you.


Sesa Goa, Hindalco:

I shorted these 2 stocks in Futures segment almost simultaneously.  Both of them showed good signs of reversal, were overbought and were at significant resistances.
But what I had not accounted for, was that there were multiple up days before the day I got into the trade, where the volumes were above normal.And the fact that the overall markets were changing direction and these stocks are index stocks, added to the explosiveness of the rally.
I had to take major losses in this combined trade. But valuable lessons to be learnt.

Discipline and extreme money management are always of highest importance. I was in some training, so had not placed a SLO. In the first 30 minutes, both Sesa Goa and Hindalco went up by 2-3% each. In the normal case, my SLO would have hit, and I would have exited with minor losses. But since I hadn't placed one, I had to take the double of the losses that I am usually prepared to take as part of my trading plan.

Waiting for a trade till the reversal occurs is also important. In this case, I just plunged into a trade with bothering to see if a strong reversal had taken place.

Shree Renuka Sugars:
This was a shorting trade, where I took a very small loss, even though the trade moved in my favor. I saw Renuka touching a zone of resistance near the 30 EMA line. I got greedy and took 4 lots of PUTs paying a very small premium. I expected a quick breakdown. But, since this was at the end of the selling waves, it fell about 6%, but very very slowly. As a result, the gain in my options contract was offset by the reduction in its time value.
On expiry day, though Renuka closed just below the Strike Price, it didn't close low enough that I make a profit in it.

Lesson learnt : Options is an option only when the markets are trending well. When the trend has weakened, its better to trade in futures.

Overall, it was a bad month, hope April doesn't make a fool out of me.

Happy Trading !

Futures and Options Part 2

The last post was all about the basics about the class of derivatives called Futures, in a way in which I understood it. I hope folks who read this also understood it to a great extent.


Taking a futures contract is like making an obligation. As the name suggests, Options gives you options.
There are 2 types of Options, Call Options and Put Options. I'll talk about them one by one. 

First lets talk about Call Options.

This is a derivative contract that's highly traded in bullish times.
Say on the first of April, I find that TCS has corrected a lot to Rs.1080, and I find this a good price to buy it. With Options you can choose to buy a stock at preset values known as Strike Prices. For TCS, the strikes are defined at every 50 rupee interval. So you have strike prices at Rs.1000,Rs.1050, Rs.1100 and so on.

The lot size for TCS is 250, as the notional value would then be Rs.1100 * 250 = Rs.275000, which is greater than the minimum Rs.2 lakh notional value required by NSE.

I check that the liquidity in 1050 Call Option is not that great. So I decide to buy a Call Option for 1100 Strike Price. For this I am required to pay a premium of Rs.30 per share(just an illustration). As a result, I pay a total of Rs.7500 as premium. I buy this call option from a trader working for Morgan FIT, through the NSE. In the real world, since this happens through the exchange, I don't know who has sold me the option.A person who sells an Option contract is known as a Options writer.
 
By buying this Call option, I now have the right, but not the obligation to buy 1 lot of TCS shares by the end of April.

So how's money made in this?
Say now, TCS starts to rally hard and touches Rs.1200 within a few days. Theoretically, for every rupee increase in TCS's share price above 1130(accounting for the premium that I paid initially), the value of the contract increases by 1 rupee. There's a time value also associated with it. A complex differential equation developed using Black Scholes method governs this, so we can conveniently ignore it, for we don't make money by solving it.

So the value of the contract now stands at Rs.110 or so. Rs.70 being contributed by TCS's share price and Rs.40 contributed by the time value.
Now, in order to realize the profits, I have three options.
1. I can now sell this contract to someone else at Rs.110 and make a decent profit of Rs.80 per share, which comes to Rs.20000.
2. At any time, I can also choose to exercise my Option. But this is a bit of a risk, as now all Stock Options are settled European style. Which means that even if I exercise my option on the 5th of the month, the contract will only be settled at the closing price on the day of F&O expiry.
So, if I exercise my option on 5th and on the day of F&O expiry TCS falls down to anything under Rs.1100, I lose the entire premium that I had initially paid.
3. I can also wait till F&O expiry day. I get to earn the difference between the closing price of TCS and the Strike Price. Say, if it closes at 1200, then I get to earn Rs.70 per share. Note that at the end of the month the contract has lost all its time value.
That's the reason why most traders choose to make money through option 1.


As of now, all Options are settled in cash, which means that on expiry day I don't get possession of 250 shares for which I would have to arrange Rs.275000. Instead, I get the difference between the Strike Price and the closing price. If TCS closes below Rs.1100 I lose just the premium that I initially paid. Buying Options is a limited loss unlimited gains strategy.

The buyer of a Call Option has the right but not the obligation to buy the underlying security. But on the other hand, the seller of a Call option(i.e. Call Writer) has the obligation to sell the underlying asset at the Strike Price.
So, now the question is, how does the Call Writer make money in this. Well, large institutions try to hedge a part of their large stock holdings by selling Call Options. For example, they would have bought some 200000 shares of TCS at Rs.1050 and they would want to have an insurance to sell some 20000 of them at Rs.1100.


There are many other traders, even large institutions who sell Calls with a slightly ulterior motive as well. They see that Rs.1100 is a key resistance for TCS. So, the moment TCS approaches Rs.1100 there is a good supply of stock and the price drastically falls below the strike price. At the end of the month, TCS is still below Rs.1100 and the seller of the Call smartly pockets the premium.

Its my sincere suggestion for all the followers of my blog to stick to buying calls and puts, and leave the selling of options to large traders, and institutional traders who have all the resources to make the market in the direction that they want.

Now coming to Put Options.

This is a derivative contract that's traded heavily in bearish times. And just like Call Options, they are used both for hedging as well as speculative trading.

Say, the market has rallied nicely for 6 months now, and ICICI bank has been one of the major contributors to it. And I happened to have 250 shares of it, which I bought at Rs.800 or so, at the beginning of the bull run. Currently, its trading at Rs.1060 and I have strange feeling that it might fall badly, maybe well below Rs.900. So I decide to hedge it, by buying a Put Option at Strike Price of 1000, paying a premium of Rs.20 per share, that comes to Rs.5000.
So theoretically, for every rupee fall of ICICI below Rs.980, the value of my contract increases by 1 rupee. My hunch was right and ICICI bank falls to Rs.890 in a few days' time. In the normal case, I would have panicked looking at such a fall. But now that I have the insurance by way of this Put Option, I don't  need to worry at all.
The value of my Put contract would have reached Rs.120 or so now. In this case too, I can choose 1 of the 3 options similar to what I had in the Call options scenario. I make a decent amount of Rs.100 per share, that comes to Rs.20000. Now,I can use this money to buy some more shares of ICICI and also keep the shares of ICICI for myself.

If ICICI didn't close below Rs.1000 this month, then all I lose is the premium amount, which is not much when compared to the initial investment that I made in ICICI.

I could use Put Options purely as a speculative instrument too. As I don't have to really own the shares of ICICI at any point of time, and still buy a Put Contract.

Till now I have spoken mostly about Stock Options. There is a class of options called Index Options, where you can speculate on the different indices. The mostly heavily traded amongst all options are the Nifty Call and Put Options.

In this case, the Strike Prices are defined at 100 point interval, and the lot size fixed at 50.Its like having an option to buy or sell 50 shares of Nifty itself. If you multiply the current price of Nifty with the lot size, you will see that notional value is also greater than Rs.2 lakhs.

Nifty call Options is mostly a speculative instrument. But on the other hand, Nifty Put Options are both speculative and a hedging instrument.

Say, you have a fairly well diversified portfolio of stocks with a greater allocation to index stocks. You figure that the situation is going to get bearish. All you need to do, is buy a number of lots of Nifty Put Options at an affordable price and a likely Strike Price below which Nifty might fall to.
Say if your portfolio is worth Rs.10 lakhs, roughly you need to buy 3 lots of Nifty Put Options. Say today Nifty closed at 5908, and you see that the nearest support is at 5600. So you can take Put Option for 5800 Strike Price at the prevailing market price.

By the end of the month, if Nifty tanks to below 5600, then the value of your contract would have increased to an extent that it nearly offsets the losses that you would have possibly seen due to the fall in your portfolio. On the other hand if Nifty rallies, then all you lose is the premium. Its just like taking a vehicle insurance, isn't it?
This is the reason that bigtime traders and institutions never lose much money, even in the worst of bearish times.


This was about my understanding of Options. There's a lot more to all this. In fact you can even predict in which direction the markets might move, the possible supports and resistances by just looking at the Options charts. Maybe, in some other post. And maybe only if there's public demand to it.

Happy Trading !

February 2011 Summary

   This month, the Nifty pretty much traded in a range from 5200 to 5600. FII's (or FITs as I like to call them), sold around 7200 crores worth of stock in the cash segment. But, thanks to some support from the DIIs, the fall wasn't as severe as it was in January month. However, the F&O expiry day saw the Nifty fall by a massive 3%.
   Well, that was about the markets. My trading account finally showed some hints that it broke out of a range and made some decent profits. I must admit though, that there were 5-6 very small profit trades and 1 big trade. Had I been unemotional and let the winner run just for a day more, I would have raked in bigger profits in that one too. 
   But the highlight of the month for me, "No large losses in this month."

As always, my list of learnings for this month, hopefully might be useful for others too.

• Watch out for the gap between the 10DMA and the 30 EMA lines. The bigger the gap, the better the chances of making a profitable trade. The more closer the body of the candlestick to the 30 EMA line, the better. When you run your scans, give more preference to results that match this criteria.
• Use INDIAVIX in conjunction with the Williams%R (3 day period) for a better market timing criteria.
• Money management : I'd like to explain this with an example, as shown below.

I buy 100 shares of company A at Rs.100. Before entering the trade, I determine the maximum loss that I can take in this trade is 2%, and place the stop loss order at Rs.98.
Now the order moves in my favor in 2 days time and touches Rs.104. I sell half of my shares and lock in some profits. So,effectively now I cannot make a loss in this trade unless the stock touches Rs.96.  And since I use trailing stop methods, even if I get stopped out now, I exit the trade at a price around my entry price.


Though this is an extremely conservative way of trading it helps with me with 2 things.
1. Protect my capital, as I have not made any loss in the trade. Though there is some disappointment that the trade wasn't a great one, atleast it wont dent my confidence, something that's important for amateur beginners like me.
2. This prevents any major losses in any case, in case of extremely volatile market conditions. Something which I has been the case in the last month or so.

Next is What?
   Today the budget was announced. Somewhere deep inside of me, I get this feeling that the worst is over.
The market could be heading for a reversal.Maybe, its time to start slowly focusing on long side trades.
   But as a technical trader, I must learn to let go of my emotions and only respond to what appears on the charts.

That's all for now. Happy Trading!

Futures and Options (Part 1)

   This post is for some of the followers of my blog, who may want to trade in Futures and Options, but don't have much idea about it. The big problem that I faced that there's a lot of information in the internet, but not all of it in one place.


So here are some of the basics about Futures and Options trading.



Both of them are derivatives. As in, they are instruments which can be used to negotiate the price or value of an underlying stock(say L&T,TCS) or index(say Nifty,Bank Nifty).

And this is primarily a trading and hedging tool. I shall tell more about hedging a bit later.

Futures trading :


Say on the 1st of March, I find that the share price of L&T is quoting at Rs.1600. I figure, that this is a good price to buy 1 lot of L&T. But I don't have all the money needed to buy 1 lot(125 shares of L&T).

Lot sizes are defined by the exchanges(NSE, BSE). As a standard, the value of a derivatives contract as stipulated by the exchanges is Rs.2 lakhs or thereabouts.
So if you calculate, I'd need Rs.2 lakhs to take 1 lot of L&T.

So I decide to take a Futures contract, by putting an upfront guarantee money. The guarantee money is defined for the stock by the broker(ICICIDirect, Kotak, HDFC Securities) based on its stock category and traded volumes (and many other factors which we will ignore for now).

My broker decides that I need to put 1/6th of the contract value as guarantee money for L&T. So I need to initially roughly set aside Rs. 33333 for this trade. This is known as initial margin.

On the other side, there might be a trader Chaman Patel who believes that Rs. 1600 is already a very high price for the L&T and he believes that by the end of the month it might fall further. So he decides to sell me the 1 lot of L&T at Rs.1600.

So a formal agreement is entered between me and Chaman Patel, all happening through the NSE, and facilitated by the broker. This is just an example, as in real life I don't know the true identity of the seller on the other side, as the NSE comes in between.

Bear in mind, a Futures contract is an obligation. I am obligated to buy 1 lot of L&T and Chaman Patel is obligated to sell that lot to me on the settlement date. In NSE, the settlement(also called F&O expiry day) date happens to be the last Thursday of the month, of course considering that its not an exchange holiday on that day.

So how is money made in this?
As told earlier, I enter a Futures contract to buy 1 lot of L&T at Rs. 1600 with March 31 as settlement date.Usually there is a slight difference between the Futures price and the stock price, a premium or discount based on the prevailing market conditions.

Say, on the 2nd, L&T rallies by 2% or 32 rupees. Due to this, the value of my contract also increases, because I already have Chaman Patel who has committed to selling me 1 lot Rs.1600 even though the market price is Rs.1632.
Theoretically, I can buy these shares at Rs.1600 from Chaman bhai and sell in the open market at Rs.1632.
So my broker credits Rs.32 * 125 = Rs 4000 into my  trading account.
On the other side, Chaman Patel's broker debits Rs. 4000 from his trading account.

Say, on the 3rd, L&T falls by 1% or 16 rupees. Due to this, the value of my contract decreases by 1%(roughly).
Now my broker debits Rs.2000 from my account, and similarly credits Rs. 2000 into Chaman bhai's account.

This whole thing keeps going in a while() loop as long as the contract is open, at most till the expiry day of the contract.

Say on the 7th, the price of L&T has reached Rs.1760, a nice rally of 10%. I figure that this is the maximum that L&T might go. I decide to close my contract with Chaman bhai by placing an offsetting sell order.

In other words, I exit this trade by selling my contract to some other trader through the NSE. Only now I sell this contract at a notional value of 125*Rs.1760.

So in effect,  I made a cool profit of 125*( 1760 - 1600) which comes to Rs.20000.

In the whole story till now  no shares were actually bought, or sold. And its not even necessary that Chaman bhai actually has these shares, should I choose to keep my contract open till final settlement day.

But, for some reason I keep this contract open till the end of the month. On expiry day, the futures price and the stock price converge. And on that day L&T closes at Rs.1650, and my contract is settled at this price.

My net profit in that case will be just 50*125 = Rs.6250. Even now, no shares are actually bought or sold.

How is money lost in this?
Look at the case of Chaman bhai. He entered into a contract to sell L&T at Rs.1600. On the day of final settlement, he ends up  losing 50*125 = Rs.6250. That's assuming that he has still not closed his contract till then.He could have also chosen to close his contract at any point of time before the expiry day, by taking an offset buy order on his contract.

Why is this risky?
A lot of traders go bankrupt in trying to make money quickly in futures. Due to the leveraging aspect coming in here, money is also lost pretty quickly in futures.

If my analysis of the market and the stock itself is wrong, and there is a major selloff and L&T falls by 10%, then  I make a loss of 160*125 = Rs.20000.  I could also be a subject of margin calls.

What is a margin call?
If you remember, I initially had blocked Rs.33333 as margin money with my broker . If L&T stock falls by  a lot very quickly, then my broker will want me to bring more money as margin, failing which he can choose to sell my contract.By this, he can limit any further losses and also initiate procedures to recover the losses from me.

Not all traders keep cash for margin(guarantee). They keep stocks as collateral with the broker. In case the trader is unable to meet the margin requirements, the broker starts to sell these shares kept as collateral and recover the losses. If this happens on a large scale with thousands of traders facing margin calls, something that's seen during times of major selloffs, then margin calls will add considerably to the selling pressure in the markets, and bring it down very quickly.

Futures hedging:
Say, in 2006 you bought some 125 shares of L&T at Rs.500 as long term investment, maybe with a 5 year perspective in mind. So far its been a good investment where you are seeing decent profit on the money that you put in.

But you figure that markets are entering into a short term correction, or maybe even a bear market, and you want to mitigate your risk.

So you decide to enter into a futures contract to sell 1 lot(125 shares) of L&T at the prevailing market price i.e. Rs.1600. In this case, you can choose to keep your L&T shares as margin.


Your guess is right and L&T falls by a 10% within a few days. You can choose to close your contract by taking an offsetting buy contract. By this you make a decent profit of Rs.20000.
By this, you achieve a few things. One,  your average price on each share reduces drastically. Two, you have additional money with you, which you can deploy in order to buy more shares of L&T (or any other stocks for that matter). Three, you still have valuable stock with you, which you can confidently keep with you for more years to come.

Large financial institutions, especially the FIIs employ hedging extensively in order to mitigate risks. But they use options more that futures to do this.

What are options?
Well , that's going to be another post, as this one has been a very long one. That shall be posted shortly.

January 2011 Summary

The year has started off on a pretty good note for me. Though there were no very hugely profitable trades, there were a lot of things to be learnt.
This line from a Pink Floyd song comes into my mind, "Steps taken forwards but sleep walking back again."
There were numerous trades in which I got a slightly later entry. On day one or two of entering the trade, I used to have pretty good profits. But the very next day, the stock would recover taking out my SLO, and leaving me with very small profits in the end.

The Nifty opened somewhere in 6100 levels, and as on Friday, 30th  Jan, has managed to close at 5512, down nearly 10%. Thanks to the FITs(Foreign Institutional Traders), the selloff was severe, rapid and unchallenged. Technically we are now into a bear market (below the 200 DMA line), with more and more of stocks waiting to be pulled down into bear territory. Need to wait and see how it all progress for the next few days.

When I look at the charts of Nifty, I get this strong feeling that Support and Resistance levels don't have much of a relevance when FITs are trading. They can break through any resistance and break down any support at will.

As an investor, I'm slightly worried about the nature of my long term investments. But, as a trader, I don't really care, as long as the markets don't get caught in a trading range.

Anyway, here are some things that I learnt, which can be useful for others.

1. I was usually getting stuck on the wrong side of the trend, or getting into a trade when the trend was already weak. I found INDIAVIX to be very useful in identifying the possible future trend. An article on Using VIX proved really useful in knowing how to use VIX to your advantage.

2. A real tight entry and exit can be got using the charts in 5 min and 30 min time frames. I found that 200 EMA line is a place for frequent reversals. So once I get a result from a scan, I try to take an entry based on the 200 EMA line in 5 min view. And keep my SLOs just higher than the 200 EMA line in the 5 min view.

3. Using scans and sticking to the results for trading is a good thing to do. Just forcing trades is definitely  not a good idea.

I guess that's it from me for now. Happy trading.

Bulls, Bears and the Nifty

The year seems to have started on an ominous note. A colleague of mine remarked the other day,"In 2008, there was a fall of 100 points in the Nifty on January 11th. A week later there was a big fall of more than 250 points. And then, the rest is history".

Is history repeating itself? We'll have to wait and see. But the signs look very ominous. Look at the graphic below.

Ok, this doesn't show a good picture of the Nifty constituents. Nearly half of the stocks have gone into the bear territory. And some of them are perilously close to being pulled down by the bears.
The index heavyweights, the likes of Reliance, LT, SBI, HDFC Bank are already deep down in bear territory. The other heavyweights, the likes of Infosys, Tata Motors, ICICI are also showing a negative bias off late.
Unless something drastic happens, its just a matter of time that we're into a bear market.

So now what's bull territory and bear territory ?
If any stock or composite(Nifty, Bank Nifty) is above the 200 DMA line, its in bull territory. Else, its in the bear territory.

Who are the bulls and bears?
In the animal farm called stock market, there are 4 types of animals.
1. Bulls : traders who are positive about a stock, push the prices higher by buying aggressively.
2. Bears: traders who are negative about a stock, push the prices lower by selling aggressively.
3. Chickens: traders who always live in fear, make small profits. And follow either the bulls or bears, depending on the market situation.
4. Pigs: traders who buy or sell without making any kind of research.

The bulls make money. The bears make money. The chickens also make some money. But its always the pigs who are getting slaughtered.

You know you are in a bull market when :
1. You can see more and more interviews of legendary bullish traders on business TV channels.
2. You have Diwali specials where Bollywood actresses are discussing stock market investments with these legendary traders on TV.

You know the bull market nearing an end when:
1. A big hyped IPO tanks on debut, sucking out all the liquidity from the markets.
2. A housing loan scam or some other scam of that sort erupts.
3. Indian markets tank 3% in 1 hour, because North Korea fires a few missiles into South Korea.

You know you are in a bear market when:
1. You can see more and more interviews of legendary bearish traders on the same business channels.
2. The pretty presenters on TV no more have a smile on their face.
3. The technical analysts coming on TV seem to look very serious and tense. Maybe their technical buy calls have been used as a short selling opportunity by professionals.
4. You no more get calls from your broker telling you to buy a stock.

But if you were a technical trader, you kind of know what's next when you see the charts. The picture says it all. Here, SBI is just an example. There are many stocks which have fared much worse.

Well, one can see the severity of the bearish phase.The uptrend was slow and gradual. But the downtrend has been quick, but very sharp, with heavy volumes.

And this kind of pattern can be seen on most index stocks already in the bear territory. More so with the banking stocks.






Now, for the bigger picture. Nifty itself is at the edge of the bull bear territory. Another 2% lower on a closing basis, and we're in a bear market technically.

Some things to look out for.
1. Brokerage firms desperately giving dubious research calls. Saying some company will give you 30%  returns within next 3 months.
2. Stock picks in leading newspapers giving vague technical jargon and giving a Buy call on some stocks.
3. Hearing analysts and market 'experts' say, "Sensex down due to profit booking" OR "Markets down due to RBI rate hike fears"

I'm not an expert. But I have learnt one thing in the last few months, "You can invest or trade only on the basis of price. Look at the charts before you buy or sell."

December 2010 Summary

December 2010 was an eventful month for the markets. Nifty reached a low twice in the 5700 levels, and somehow recovered well to close at 6100 levels on the last day of the year.

On the personal front,I celebrated my 30th birthday, which was an eventful non-event in itself.

My trading account nearly remained the same, as the profits of the month, more or less got nullified by the mistakes that I committed. It was not that there weren't opportunities, but  it's just that I got caught on the wrong side of the trend, or lacked in discipline.
The massive selloff by the FIIs before they went on their Christmas holidays, presented a lot of quick money making opportunities on the short side. But I missed them all, as I had got my strategy terribly wrong.

On the positive side, there are a lot of learnings that I hope to take forward in the months and years to come. I also spent some time reading from other people's blogs, which provided me with a lot of interesting thoughts.

Here's a list that I could think of. For future reference.

1. Trade with the trend, but not with the crowd. The crowd always piles in late, but the trend is always defined by professionals. And the professionals always profit from the people arriving late.

2. Discipline is a must. Keep SLOs even when the trade is going in your favor. A decently profitable trade turned out to be a moderately loss making one, for me and my friends as we had all not kept SLOs.

3. I feels it's not a good idea to talk much about my ongoing trades or give stock picks.
Why not take or give stock picks? explains just that.
This puts me in a dilemma," should I post my completed trades on this blog in future or not?"

3. A good stock scanner software is a must. This ensures focus, eliminates unwanted distractions and saves time that would have been lost in manually scanning for stocks.
After I installed one, I've been spending a lot less time in scanning for opportunities, and spending more time in analyzing the results thrown up by the scans.
One word of caution here, scans only give results based on the scan criteria that you select. Choosing the best  amongst them is your responsibility.
Swing trading stock scans gives a very good stock scanning algorithm. You might have to write the actual scans a lot more differently in the software that you use.

4. Trade only in the consistently well traded stocks. I had 2 bad experiences where I had to take a loss. In the first, the stock didn't move up or down for a long time, even though the charts suggested that it was heading for a fall. In the second, the stock just defied gravity, even when it was up against a very strong resistance around the 200 DMA line.

5. Avoid initiating new trades in the week of  F&O expiry. If you look at the 5 minute charts of almost all index stocks in the last half hour of trading in Google finance for expiry day(last Thursday of the month), of the last 3 months, you will know why.
If you have any open trades from the past week, manage them with utmost care.

6. In trading, there is a golden rule, "Cut your losses, but let your winners run". This is something that comes out of discipline and out of experience.
So far, I have been able to cut my losses, but I need to learn to be unemotional, and let my winners run. Trailing stop mechanism is a good way to take out all the emotions out of trading.

7. Coming to emotions, a great trader had once said,"All the candlesticks that you see on a chart are formed as a result of hope, fear, greed and despair". I think I displayed all of these in this month, with pretty bad consequences.

8. Time your entry into a particular stock. Too early, you get stopped out if a reversal doesn't occur before your SLO is hit. Too late, and you get stopped out in the pullback wave. This is true even if all your analysis is 100% right.

9. Use a checklist before you enter any trade. By the time you come to the last point on the checklist, you might have second thoughts on whether to really enter the trade or stay in cash.
I missed using one for some of my trades, and as a result ended up forcing a trade.

10. This is one point that I read in a blog and also observed in some of the trades that  I took up.
If you are selling, sell early in the day. If you are buying, buy late in the afternoon.
That's because amateurs control the opening, while the professionals control the closing.
But when there's a lot of activity in a particular stock due to some news, then this statement might not hold good. In such cases, stay away from the crowd. Don't buy/sell the breakout. Wait for a pullback.

Hope to get some good trades for the next month. That's all for now.

Wish you all a very happy and prosperous new year 2011. And happy trading!