Some share market equity tips must read
Some facts before trading
It is a given fact that very few traders make money , whether in the stock market or in commodities, whether in the cash market or in futures. However, those who do, make BIG money.
⇒But, why do so many traders lose money?
⇒What is the difference between successful traders and unsuccessful traders?
⇒ Presenting in this post are few insights and rules that will help you succeed in trading.
Some caveats before starting
→ Trading is a high risk, high return game. Retail participants are lured by the returns, forgetting the risk.
→Trading is a high involvement activity. One cannot be a passive trader. It is better to be a passive investor, not a passive trader.
→Trading requires skill, discipline and one needs to follow discipline without any emotions.
→Only discipline with a certain amount of skill can help you make money and not intelligence.
→Trading is nothing but game of probability.
APPROACH TO TRADING
There are some rules to trading. Follow these rules sincerely and diligently and chances are you will avoid some of the mistakes that traders often make.
→ Clearly demarcate funds between investment & trading.
→Allocation for trading depends on ” Risk Bearing capacity to lose money”.
→Lower the risk appetite, lower the trading allocation.
|RISK BEARING CAPACITY||%ALLOCATION TO TRADING|
|LOW||Up to 10%|
INVESTMENT OR TRADING ?
Here, we classify market participation into these broad categories, based on investment styles:
- Investment – Investment is placing money into an asset class ( in this case equities) based on research & analysis on fundamental factors like sales turnover , net profit margins etc, with the expectations of gain over a short term( 1 year) medium term (3 year) or over long term( 5 years or more)
- Trading- Trading is placing money in any asset class ( in the case equities) for a shorter time horizon.Unlike investing where a company’s financials are researched, trading involves taking buy and sell decisions based on news, technicals , short term outlook etc. Trading can be further classified into the following:
- Positioning trading- Positional trading is a speculative position taken in the markets for a time period of anything between 2 days to 3 months.
- Intraday trading- Intraday trading is a speculative position taken in the markets for a single trading session (1 day). All trades are squared off on the same day at the end of trading session.
These are not watertight categories. Participants could be present in more than 1 category at any point of time.
Before entering any trade, be clear whether that trade is for investment or trading. If it is for investment- then do not worry about short term fluctuations of the price. If it is for trading, then use of Stop Loss and Trailing Stop Loss is a must.
S T O P L O S S
- Stop Loss: Is a pre-determined price at which one will exit if the price moves adversely. Eg. If a stock is bought at ₹100 then ₹95 can be the Stop Loss. Below ₹95 trader will exit the BUY position.
Following picture explains the concept of Stop Loss
Types of Stop Loss
- Trailing Stop Loss: A situation where a trader continues to increase the Stop Loss to take advantage of any profitable trade. As price increase, the trader increases the trailing Stop Loss. Trailing Stop Loss hit above his purchase price will be his profit.
- Intraday Stop Loss: To square off position of all intraday transactions. No carry forward.
- Stop Loss based on Price %: A stop loss which is determined as a particular percentage of price of the stock. E.g. SL of 3% of price of stock. i.e. if the price is 100the SL would be 97.
- Time based Stop Loss: A time based Stop Loss is placed with a view to achieve the result of a particular position based on the pre determined time frame. If a Stop Loss or target is not hit within the time frame, the trader exits from the position.
- Stop Loss based on Technical Analysis: The type of Stop Loss is placed by combining the analysis of various charts ( such as daily & hourly chart) or stand alone charts.
Stop Loss + Risk Reward
The risk to reward ratio for any trade should be 1(risk):2(reward). The reward ratio can increase by use of trailing Stop Loss.
As price increase the trader increase the trailing Stop Loss. Trailing Stop Loss hit above his purchase price will be profit.
Why book a profit at ₹ 110 if the price can run up to ₹125 or ₹130 or even more?
Following table describes the returns which you get by using Stop Loss.
No. of times Stop Loss is hit
Total Loss @ ₹1 per trade
No of times profit is earned
Profit earned @₹2 per trade
With a reward risk ratio of 2:1; money can be made even if one is right 40% of the time.
Some Advantageous of Stop Loss
→ Stop Loss is an important part of trading discipline.
→For a trader, putting a Stop Loss is a must.
→Stop Loss costs nothing to implement.
→Allows decision making to be free from any emotional influences and emotional influences are most dangerous.
→It prevents a small loss from becoming a disastrously large one ( when a position is going against you, it is best to cut your losses immediately)
→No need to monitor position continuously after putting Stop Loss, and it prevents the trader from watching stocks for an extended period of time.
The Flip Side
- Argument against Stop Loss- If you are unsure about the position, then why not just bite the bullet and sell instead of waiting for a decline to take you out of the trade?
- At times, Stop Loss gets activated by a short-term fluctuation in stock’s price.
- The price will hit the Stop Loss and then move in the intended direction.
Why putting Stop Loss is difficult?
- Simple things are most difficult to implement.
- There is an emotional aspect and human psychology at work: there is more pain in losing a rupee than earning one.
- Hence, losses are not booked when Stop Loss hit and profits are taken quickly.
Traders play both sides of the market.
- A trader will have a long position if he feels the price are going up ( first buy and then sell)
- He will have to go short if he feels that prices will fall(first sell and then buy)
Most retail traders unfortunately do not go short or keep a Stop Loss and hence lose money when the market falls.
T E C H N I C A L A N A L Y S I S
What is it?
Technical Analysis is the study of market action primarily through the use of charts for the purpose of forecasting future trends- John J Murphy
The purpose of Technical Analysis is not to be able to accurately identify each and every market position all the time. The real objective is to find trading opportunities that have a probability of success- Robert Miner
Basic Assumptions of Technical Analysis
- The market discounts everything.
- Prices move in trends.
- History tends to repeat itself
Benefits of Technical Analysis
- Helps to protect profits.
- Cut Losses
- Profit & Loss figures are known before entering the trade.
- Can Trade on both sides of market.
- Decision is out in short time.
- For short term trading , fundamental analysis is irrelevant.
- Known Stop Loss and Target helps to take quick corrective action.
The Flip side & criticism of Technical Analysis.
- Stop Loss may not be fixed scientifically.
- Frequent Stop Loss
- Prices don’t distinguish quality.
- You could be left holding third grade stocks just because it looks technically good.
- You could miss big moves.
- Charts are great for predicting the past- Peter Lynch
- If past history was all that game, the richest people would be the librarians- Warren Buffett.
If making money is so simple, why do people still make losses?
- Simple things are most difficult to implement.
- There is an emotional aspect and human psychology at work; there is more pain in losing a rupee than earning one.
- Losses are not booked when Stop Loss is hit and profits are taken quickly.
- Trading is a game of defence and not aggression.
- It is a game of patience and discipline.
- Decide your trading allocation.
- Decide whether order is for investment or trading before executing.
- Use this concept of Stop Loss and Trailing Stop Loss religiously
- Have a risk to reward ratio of 1:2.
- Don’t lose more than 2% of your capital in a single trade. Position Size is the key to success.
- Play both sides of the market.
Hope this post will help you trade better , reduce losses, preserve capital and make money!!!