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!

November Summary

Well, this was my first month as a serious trader on the new demat account. I traded mostly in Futures and Options. I had a lesser liking towards options, main reason being the low liquidity in options of the stocks which I wished to trade.
Maybe I need to look at trading Nifty Options. Its a good idea to do trade in options, when there aren't good stocks to pick for trading- both on the long and short side.

I had a few hits - LT, IDFC, Titan(short), Syn Bank(short).
I had quite a few misses too - Infy, Axis Bank, ABB (short) and SBI.

Infy and Axis Bank - bad analysis and bad entry points. Instances where I tried to force a trade.
ABB - analysis was right, but entry was wrong. Another instance of trying to force a trade.
SBI - pattern gone wrong, or my understanding of Bullish haraami pattern was wrong.

In all these cases, I had a 1:3 risk to reward ratio, i.e. for every 3 rupees that I was prepared to earn, I was prepared to lose only 1 rupee. I ensured that I kept strict SLOs(stop loss orders). So the profits outweighed the losses at the end of the month.

I also suggested some trades to my friends and my wife. They got good profits in Shree Renuka Sugars, Sydicate Bank(both on long and short side) and Tata Steel.

In this month, Nifty  has touched a high of 6338(Diwali time) and a low of 5780(today - 25th Nov). I'm happy that I am still surviving this market correction, and my trading account is in green for this month.

Some great trader has said, "Its not important in what direction the markets are going. What's important is a trader's response to it."

Syndicate Bank

Scrip: SynBank(NSE)




Shorted one lot in Futures.
Pattern: Shooting star on a Tall Building with heavy volumes.
Wave: end of 5th.
William %R: Overbought.
Support: 142 - wick of long white candle
Entry Price: 154.25 (155 in futures)
Resistance: 158.5
Planned exit point : 138.5 (140 in futures) - target achieved






Well, this one was another easy short trade to take up. I happened to see Syndicate Bank rally around 8%, and I even got a call from my broker to buy Syndicate Bank. I waited for 2 days, and then shorted the same.
Reason: I saw a shooting star falling from the sky onto the big white building. This was at the end of the 5th wave and in overbought condition.
The outcome: the white building got burnt.

In this trade, I tried to keep my emotions in control, something which had made me lose a golden chance in Titan (Titan sold off a further 300 rupees from where I closed the trade).

I had kept the 50% fibonacci retracement point as my target. Once achieved, I just closed the trade.

But then, the news of a housing scam broke out, which led to a further selloff in most of the banking stocks.
Though it was target achieved in this case, maybe I should have just held on to my shorts :).

Btw, this was a very profitable trade. And for the first time me, my wife (she had bought a 150 PUT OPTION) and my friend Manju made money on the same stock.

Titan

Scrip: Titan (NSE)




Short Sell in Futures
Pattern: Shooting star after a strong upmove.
Wave: 5th.
William %R: overbought
Support: 3822 - lower edge of long candlestick
Entry Date: 12-11-2010
Exit Date: 15-11-2010
Entry Price: 4120 in futures.
Exit Price: 3940 in futures.






This was my first short sell trade. The markets were weak in the last week. But Titan rallied a good 10% in 1 session. The very next day, there was a nice shooting star, in the overbought condition.
The trade lasted just 2 sessions,I imagined this black hammer kind of thing that suggested selling might have stopped.
But it still gave me more profits than any of my previous trades. That's because
1. Fear is a more powerful emotion than greed.
2. It might take a million shares to be traded for the prices to go up. But it takes only a tenth for it to push it down.
3. Gravity pulls down almost any stock. Even if its Titan.

IDFC

Scrip : IDFC (NSE)

Pattern: Swing (Bear) trap.

Wave: Wave C completed. Wave 1 to start.
William %R: Nearing -80. Very close to oversold region.
Support: around 196.

Resistance: 205 

Entry Date: 1-11-2010.
Entry Price: entered at 206 in futures.
Exit Date: 4-11-2010.

Exit Price: 210.

For some reason, I like this stock a lot. And I got a chance to trade this again. 

While looking for new trades, I chanced upon a nice swing trap completed in IDFC. I was skeptical trading this, as the quarterly results were to be announced in a week from the day of my entry into trade. This played on my mind. Though I had got a good entry point, I bungled on the exit. Had I closed my position in the afternoon instead of in the morning, my Diwali bonus would have been even better.

Well, though I didn't  make a lot of money in this, trade. 

I wanted to show 2 things in this.

1. A good pattern in Swing trap(or bear trap or ABC pattern) - though it didnt occur in between the 10 EMA and 30 EMAs.

2. Lesson that one should play it safe and exit the position atleast a day before the results are announced. One can see how the stock sold off in the next few sessions.

L&T

Scrip : LT(NSE) - Larsen and Toubro






Pattern - T-30. Long tail of hammer. Heavy volumes seen.
Results : much better than market expectations.
Wave - Wave 1.
Williams %R - 95 on the day before entry.
Support -  1928 : tail of hammer.
Entry Date: 19-10-2010 and 25/10/2010 in futures. 
Entry Price: 2040.
Exit Price: 2200.
Exit Date : 4/11/2010

This was a tricky stock to trade.  I had to have a lot of patience on this one. I closed my position in cash and entered a position in Futures, as futures trading got enabled on my new account. But I had to do some running around to do that.
I also had a major scare when there was a risk of getting stopped out, as some big time players decided to go in for a vertical selloff on a late Thursday afternoon on the day of Futures Expiry.
Once that was through, it was all smooth sailing.

The final outcome, a nice Diwali bonus. From my old company. L&T ki Jai :).

Tata Global Beverages

Scrip: Tata Global Beverages(NSE)
Earlier this was known as Tata Tea.

Trade Enter Date : 4/10/2010
Trade Exit Date : 7/10/2010
Options : Call
Strike Price : 130
Bought 1 Lot.


Pattern : Swing Trap Pattern
This is more famously known as ABC wave (Elliot Wave Theory).
On seeing the hammer in the marked area, a lot of traders are deceived to feel that selling has stopped.
But this is a swing trap. This wave doesn't go as high as the previous one.
And now when it falls again, a lot of traders have to take a loss. The black hammer in the focused region just shows all the stop loss orders that might have got triggered before buyers pushed prices back to near the day's open.

Now that all the sellers are gone, this stock can rally. And boy, did it rally.

I entered this trade a bit later for many reasons.
1. The liquidity in Options was not very high just after the black hammer day.
2. The sellers were all quoting very high prices, since the time value of the option was high (beginning of the month) .

Ideally, since this was the breakout wave, I could have held on my position a bit longer. But since Options contracts lose value in time, I just took the profit taking decision, and took pretty decent profits on this one.

But there is still money to be made in this stock for now, as its still in the breakout wave. Watch the stock for a pullback, and see if this can be a profitable trade.

Update : I planned to re enter again in the third wave. But got stopped out as the pattern broke down from there. The quarterly results that were announced also didn't give enough trigger for a major rally.

IOB

Scrip Name : IOB(NSE)

Trade Enter Date : 29/09/2010

Trade Exit Date :7/10/2010.

Buy Price : Rs.132.5

Pattern : Spinning Top seen after a strong downtrend.

Oversold condition confirmed by William%R.

Entered trade in anticipation of a trend reversal.


Profit taking:
   a. Sold some at Rs.140.56 on 4/10/2010.

   b. Exited at Rs.148 on 7/10/2010.

Looking at the volumes and the short time in which IOB has gained more than 10%, it looks like a breakout wave. I guess there is more opportunity to make money in this stock once a pullback occurs.

I would want to hold this position a bit longer, but had some other money management activities lined up. So closed the position.

IDFC

Scrip Name: IDFC(NSE)

Trade Enter Date : 30/09/2010

Trade Exit Date : 4/10/2010

Pattern : Bought at the end of pullback after rally. Spinning Top seen.

Bought Call Option.

Lot Size: 2000.
Strike Price: 210.

Since it was entering into the last motive wave, the upward move didn't look strong. So I decided to close the position and took a decent profit.

Had I traded it a week or 10 days earlier, it would have been a far more profitable trade.
Still learning the tricks of the trade you see!

My First Swing Trade

Scrip: Yes Bank(NSE)

Trade Enter Date : 13/09/2010
Trade Exit Date : 4/10/2010

Pattern : T-30.
Since Yes Bank had retraced more than 50% in its corrective phase, this was a slow trade.

Initial buy price :Rs. 324
Profit Taking:
a. Sold Some at 335
b. Sold some at 343
c. Exited at 357

This trade was so slow that it began to test my patience. Finally, I decided to exit with a decent profit.