First what is physical delivery of stocks in options & futures (derivative) trading?

All over the world, on the expiry day derivatives are either settled by cash or stocks. Until June 2018 in India all derivatives – options and futures were cash settled. Well no more – Securities and Exchange Board of India has introduced long awaited physical settlements of stocks from July 2018 in 46 stocks only (list below), but soon I assume all the 170+ stock F&O contracts will be physically settled. From July 2018, there will be physical settlement in equity derivatives (options and futures both).

Examples of physical settlement in equity derivatives:

Future Buy:

If you were long future (buy) and did not close the future trade before expiry you will have to take delivery of stocks means buy the stocks equal to the lot size on the settlement date which is T+2 day.

Does it matter if you made a loss or profit? No it does not matter – you did not close the future trade so take the delivery. If course if you made a profit you can buy then immediately sell the stock and book your profits and get your cash back.

Future Sell:

If you were short future (sell) and did not close the future trade before expiry you will have to give delivery of stocks means sell the stocks equal to the lot size on the settlement date which is T+2 day.

What happens if you do not own the stock (the stock is not there in your demat account)? It goes into auction and frankly this is THE WORST situation to be in. In an auction an investor NEVER gets the market price of the stock being auctioned. Once I shorted a stock intraday but did not close it went into auction. Note than in those days (2007-08) the system of stock trading were not that smart like to day (2018). So what happened? A stock for 560 (approx) was auctioned for 582 (approx) – 4% more and given to me. So I lost 4% more than what was my actual loss. Thankfully I traded in only a few stocks so the loss was bearable, however now-a-days lot size is HUGE. If your short futures goes into auction for non-delivery of shares, then we are talking about 40-50 thousand loss (approx) on top of your actual loss. So even if you made a profit you may have to suffer a loss.

Option Buy and In The Money:

Call option buy and In the Money and not closed before expiry, then you have to take delivery of the stock just as a future buy. This is very bad news for Option Buyers. They pay a small premium but can get dangerous if the option was not closed before expiry day.

Call option sell and In the Money and not closed before expiry, then you have to give delivery of the stock just as a future sell. If you are unable to deliver the stock (the stock is not there in your demat account) then you will have to buy from auction and give delivery. Worst case please read above to know.

You must be thinking why auction – why not buy and deliver from the cash market? The reason is simple. Physical Delivery of the stocks must be done in T+2 days. That means the last day to buy the shares from equity markets in cash without auction is the expiry day itself. In this case the equity comes in your account in T+2 days and then is delivered the same day. However on T+2 day you cannot do that – the only option is to get stocks from auction which means buy stocks at a higher price than prevailing market price.

Put option buy (long puts) and In the Money is same as short futures. You have to give delivery of stocks.
Put option sell (short puts) and In the Money is same as long futures. You have to take delivery of stocks.

To Summarize What Happens In Physical Delivery Of Stocks In Derivative Trading:

You have to take physical delivery of stocks in these trades if not closed before expiry on T+2 day:
Long Futures, Long Calls, Short Puts

You have to give physical delivery of stocks in these trades if not closed before expiry on T+2 day:
Short Futures, Long Puts, Short Calls

Will all not-closed futures and options trades will be affected?

No these derivative trades will be affected:

All Futures whether buy/sell but not closed before expiry, and
All IN THE MONEY (ITM) Options whether sold/bought but not closed before expiry.

Here is the list of 46 stocks in which Physical Delivery Of Stocks In Derivative Trading will come into effect from the month of July 2018:

Please note that stock ONE lot size in terms of money is anywhere from Rs. 7 lakh to 10 lakh. So be very careful while trading options and futures in these stocks henceforth. If you trade make sure you close your trades before the expiry day even if your options may expire worthless. You should also hedge your trades so that even if you take/give delivery of the stocks the loss is going to be very small:

1 ADANIPOWER ADANI POWER LIMITED

2 AJANTPHARM AJANTA PHARMA LIMITED

3 ALBK ALLAHABAD BANK

4 ANDHRABANK ANDHRA BANK

5 BALRAMCHIN BALRAMPUR CHINI MILLS LIMITED

6 BEML BEML LIMITED

7 BERGEPAINT BERGER PAINTS (I) LIMITED

8 CANFINHOME CAN FIN HOMES LIMITED

9 CGPOWER CG POWER AND INDUSTRIAL SOLUTIONS LIMITED

10 CHENNPETRO CHENNAI PETROLEUM CORPORATION LIMITED

11 DCBBANK DCB BANK LIMITED

12 GODFRYPHLP GODFREY PHILLIPS INDIA LIMITED

13 GODREJIND GODREJ INDUSTRIES LIMITED

14 GRANULES GRANULES INDIA LIMITED

15 GSFC GUJARAT STATE FERTILIZERS & CHEMICALS LIMITED

16 HEXAWARE HEXAWARE TECHNOLOGIES LIMITED

17 HCC HINDUSTAN CONSTRUCTION COMPANY LIMITED

18 IDBI IDBI BANK LIMITED

19 IFCI IFCI LIMITED

20 JPASSOCIAT JAIPRAKASH ASSOCIATES LIMITED

21 JUSTDIAL JUST DIAL LIMITED

22 KSCL KAVERI SEED COMPANY LIMITED

23 KPIT KPIT TECHNOLOGIES LIMITED

24 MGL MAHANAGAR GAS LIMITED

25 MRPL MANGALORE REFINERY AND PETROCHEMICALS LIMITED

26 NHPC NHPC LIMITED

27 NIITTECH NIIT TECHNOLOGIES LIMITED

28 OIL OIL INDIA LIMITED

29 OFSS ORACLE FINANCIAL SERVICES SOFTWARE LIMITED

30 ORIENTBANK ORIENTAL BANK OF COMMERCE

31 PTC PTC INDIA LIMITED

32 PVR PVR LIMITED

33 RCOM RELIANCE COMMUNICATIONS LIMITED

34 RNAVAL RELIANCE NAVAL AND ENGINEERING LIMITED

35 RPOWER RELIANCE POWER LIMITED

36 REPCOHOME REPCO HOME FINANCE LIMITED

37 SIEMENS SIEMENS LIMITED

38 SREINFRA SREI INFRASTRUCTURE FINANCE LIMITED

39 SRF SRF LIMITED

40 SYNDIBANK SYNDICATE BANK

41 RAMCOCEM THE RAMCO CEMENTS LIMITED

42 TORNTPOWER TORRENT POWER LIMITED

43 TV18BRDCST TV18 BROADCAST LIMITED

44 UBL UNITED BREWERIES LIMITED

45 VGUARD V-GUARD INDUSTRIES LIMITED

46 WOCKPHARMA WOCKHARDT LIMITED

If you are trading in any of the above stock derivative then please close your position at least 2 days before expiry else your RM or your broker will close it any-day without informing you.

And they have the right to do so? Why? Because if you default to buy the stock or give that many stocks as physical delivery the your broker will be at HUGE RISK — he/she will have to pay from their own pocket.

Obviously they will not take a risk and close your trade. Note that you are their not the only customer – that they can try to take risk. But they have many – so they will just close and not take the risk.

Why 2-3 days before? Because they will come into action to save risk of default 2-3 days before expiry.

Is there anything else you can do? Yes Rollover your future and options, or just DO NOT trade the above stocks in F&O segment.

There is a better way.

Just trade Nifty and Bank Nifty future and options. They are not stocks so will never have this physical settlement problem.

You need to know more than Delta, Gamma, Theta to be a good option trader. To be honest Delta, Gamma, Theta are just the theory on how options are made – they do not give direction of options. You can download a file here where I have explained in details about Delta, Gamma, Theta of options. But this is theory after this you need to learn strategies to make monthly income.

See this chat where this person is failing to make profits even after knowing about Delta, Gamma, Theta:

I keep getting calls from some option traders like Sir I am shorting an option with Delta 0.4 – will this make profits for me.

What is Option Delta?

It is the rate of change of the price of the option with respect to its security’s price. When the security’s price changes the delta of the options will also change – all the options whether near or far month – closer strikes or far off strikes.

For Calls the delta of an option ranges in value from 0 to 1. For Puts the delta of an option ranges in value from 0 to -1.

For every 1 point move in the underlying security – the delta of all its options will change.

Delta of far out-of-the-money options are close to 0 like 0.1 or 0.2, whereas near the money (ATM) have deltas like 0.4 or 0.5 and deep in the money (ITM) have deltas near to 1 like 0.8 or 0.9.

Most Important Point To Remember:

Option Delta varies from 0 to 1 but there is no guarantee or even an assurance that 0.4 or 0.5 or 0.6 or whatever Delta will go in the money or expire worthless.

It is better to research yourself to try out which option strikes works for you. Whether you are a buyer or a seller of options there is no point seeing what Delta an option has before proceeding to buy or sell it.

If there was some assurance that 0.6 Delta or 0.7 will go in the money or expire worthless then all traders would have done the same trade in that option strike – resulting in NO TRADE in that option. If everyone is a buyer or a seller in an option then the trade will not take place.

All this comes with research not reading theories which strikes are likely to expire worthless or likely to go in the money and trade then with hedge so that by chance something goes wrong you will not lose much.

My course will teach you which strike to buy and sell to make a monthly income peacefully.

You can enroll for the course here.

Hedging is an insurance of a trade which comes into action when the original trade starts losing money. Hedging is a great way to protect your capital when trading or your portfolio as a whole.

Do you know that HIIs (High-Net-Worth Individuals) and DIIs (Domestic Institutional Investors) & FIIs (Foreign Institutional Investors) always hedge their portfolio against any odds. It does not matter they pay a price for hedging but they know very well the importance and necessity of hedging. They have crores at stake they are not fools to trade derivative naked (without hedge).

Options are a great hedging tool. The Institutional Investors use it perfectly to keep their account protected.

Hedging makes sure the losses if any are small and negligible. Institutional Investors DO NOT trade intraday, they are positional traders so they always use hedging to ensure smooth growth of their portfolio.

Its unfortunate that retail traders pay price for DIIs and HIIs hedging. Retail traders trade blindly while DIIs and HIIs take their money away.

Let me give you a simple example of hedging to help you understand how peaceful it can be.

Suppose you have a big portfolio of Nifty 50 stocks. More than 5 lakhs and they are in good profit but you do not want to sell. In that case how do you protected your profits? You can buy puts to protect a huge fall in Nifty. If your stocks fall, its obvious that the stocks in your portfolio will also fall. But since you have bought hedging you do not have to bother much. The put you bought will make you some money. But by chance Nifty does not fall the put will expire worthless. I hope you can understand that hedging comes into action only when your hard earned money is in threat of going away. Otherwise they keep quite.

But as in above example if stocks fall the person who has bought puts will make some money out of it and his loss will not be as big as someone else loss who did not hedge.

This is just a small example of how hedging can help you survive the volatility of the markets. Hedging is a must for positional traders. Without hedge you will not be able to save your capital if anything goes wrong in your trades. 2 or 3 big losses may wipe out your capital.

Therefore in the ever uncertain markets it is very important to learn hedging. You can do my Nifty option course to learn how to hedge properly options, futures and equities to make a monthly income.

A lot of traders who call me to inquire about my course ask me this question after I tell them about the course – “I want to become a full time trader, I want to make trading my profession – is it possible?”.

Well the answer is yes, but there are certain criteria.

1. What experience you have in trading? 5 years or more is good.

2. Are you trading on tips or advisory service? If the answer is yes you will never become a full time trader. Tips/advisory service do not work and will never work in stock markets.

3. What knowledge you have in trading? Please note that this includes all – equity, options and futures. The mainstream trading. If you only invest in equities you can not become a full time trader because equities take time to make money. With derivatives you can make a monthly income, with equities you cannot. However it is very important to invest in stocks for long term as well.

4. Have you made profit trading at least over 10% a year consistently since the last 3 years? If the answer is no you cannot become a full time trader as of now.

5. How much money you have to trade? This I will explain later but with 1 lakh or 2 lakh you cannot become a full time trader.

Now lets get deep into this topic – what is the ideal time to become a full time trader.

Within days of opening a demat account, a trader starts dreaming of becoming a full time trader. Obviously its great to work from home but it isn’t that easy. You must be having some qualities to be a full time trader.

If you look at point 1 I have said that you must have some experience. Just because you have a trading account, you have bought a few options, done some future trade does not mean you can become a full time trader. To know something is very different than being an expert on something.

Assuming you have 10 years of experience but still trading on speculations or tips, you are still not experienced. An experienced person is someone who has the caliber to decide a trade and properly hedge it to insure it from risk. Even after the hedge he has a plan to execute and his success rate it above 60%. This kind of person is called an experienced person. He can have just 3 years of experience in trading but if he has the above qualities he can be a full time trader.

Note: My courses – Nifty & Bank Nifty can teach you hedging strategies. If you are interested you can contact me.

Another important part is risk management. In my experience I have seen that not many traders have any risk management capabilities. Even if you are a good trader you must have a sold risk management in place. Risk management is not limited to trading account only – I am telling about 100% financial risk management. This is a very complex topic, in fact I can write a book on it, but as of now all I am saying is you must have sold money management skills.

Some of the money management skills include:

Note: From 2nd July 2018 onwards, SEBI has made it mandatory for both SPAN and exposure margin to be blocked in order to take and carry forward an overnight position. If it isn’t, margin penalty will be applicable. Click here for the circular from NSE.

Your broker will now block both Span & Exposure margin. In some parts of India some brokers used to block only Span margin, so this rule was made. Now every derivative trader is on the same platform – earlier some traders had an advantage of paying less and making more but losing the same. Now they will also have to pay the same money (margin block) to trade futures and sell options.

But according to the new rule if your account is going in the red (loss a.k.a MTM (Mark To Margin)) then at end of day your broker will block more money to make sure FULL Span & Exposure margin is blocked again for the position to continue overnight. But if your account does not have the money then you may have to pay a margin short penalty, and the risk management team may close the trade without informing you.

Whatever new rules are being made they are forcing retail traders to either hedge their positions in derivative trading (which DIIs and HIIs always do) or stay out of the stock markets. Hedging is getting more important than ever. First lot size increase, then full SPAN and Exposure margin and then from Oct, 18 trading allowed from 9.15 to 11.55 pm. Without hedging you will not be able to survive in the markets for long.

Margin Short Penalty Explained 2018

As per SEBI regulations, margin shortage penalty is levied on overnight positions held in the trading account without sufficient margin. Please note that both SPAN and Exposure margin will be taken into consideration. Earlier only SPAN margin was taken into consideration for margin short penalty, but from July 2018 onward, both SPAN and Exposure margin will be taken into consideration.

Note that For intraday positions (day trading) shortfall margin penalty is not levied. It is levied on Equity Derivatives, Currency Derivatives, and Commodity derivatives segments. (For currency derivatives both the SPAN and exposure margins have to be maintained, if not margin penalties will be applicable).

Both SPAN & Exposure margin will be blocked.

Let say you buy a future and your broker blocks SPAN & Exposure margin of 60,000.

Assuming its a NRML (overnight carry forward position) and by 3.15 pm your MTM is 3000. Now the system will check if your account has 3000 or not. Let say your account has 3000 – then fine – I think that money will also be blocked. What they are trying is that both SPAN & Exposure margin should be there in your account else you pay a fine.

Suppose there is a shortage of 3000 by the end of day, then either your RMS will close the trade or you have to pay a penalty.

But in some cases it gets difficult for the RMS to close the position as there may not be any liquidity – in that case you will have to pay a penalty.

Here is the margin short penalty:

For less than 1 Lakh margin Or less that 10% of applicable margin short per day, penalty charge of 0.5% on the short money per day.

For example your MTM is 5000 you will be charged 0.5% of 5000 that day which is Rs.25/-

Next day if you make a profit it does not matter – you will still pay the margin short penalty.

For margin short equals to Rs 1 lakh or more Or equals to 10% of applicable margin, penalty charge of 1.0% on the short money per day.

So What You Should Do?

Make sure you have extra money in your account so that you never pay a penalty. Keep at least Rs. 20,000 extra. And make sure your MTM never exceeds 50% of it – that is 10000. This will ensure you never pay a penalty and your broker does not close your tarde without informing you.

Or, hedge your trades so that MTM is ever is very small. Hedging is better because the trade NEVER sees a big loss ever. Hedge ensures the losses or MTM if at all are small. Since the whole account MTM will be taken into account the MTM money can be reduced to 5k for small accounts.

The Best way to keep your MTM (Mark To Margin) low in your trading account is to do hedging. If you hedge your position you may never see an MTM (Mark To Margin) over 5000 and you will escape the margin short penalty by just keeping 5000 extra in your account. This is huge money saved. You can learn hedging strategies in my course. For more information you can contact me.

Hedging also ensures you can sleep peacefully in the night without worrying what will happen to your account the next day when markets opens.

My course teaches proper hedging in options, futures and equities. Moving forward it is very difficult to survive in this market without hedging your trades. Call is yours.

You can do my course and learn proper hedging strategies to make a monthly income. Stop taking losses now.

Hope that helps – to save this margin short penalty keep at least Rs. 20,000 extra in you account and DO IT TODAY.

I am trying to save your money and do not want you to pay a margin short penalty.

When there is no movement in Nifty it becomes very difficult for option traders to decide what direction to trade – in fact same for future traders. See this:

Nifty 25-06-18

Its like a small mountain – down, then up, then down, then up, but over all its just 26 points move – so which direction to trade?

This is confusing for traders.

This is the reason trading volume in derivatives drop when there is little movement in Nifty. By looking at the intraday chart most traders will buy puts only to see Nifty rising to hit stop loss and then fall.

Call buyers will have similar fate.

Its sad that in-spite of this traders keep trading on hope to see success.

Here is one such trader who is my free newsletter subscriber since long but is still not willing to do my course because he believes 3% a month is too less so trying out technical. I do not believe technical analysis because technical analysis is past not future. The 3 or 10 red candles consistently, does not guarantee that next candle will also be red. Then in that case isn’t technical pure gambling? In fact I Googled for “person who made a lot of money by trading technical analysis” – the result was like what is technical analysis, will it make money etc. But no names were given in Google search.

See how he is failing in technical too – though now he is slowly understanding the importance of hedging after probably losing money trading by technical indicators:

Until and unless you have a plan that works and you have hedged your position properly all you are doing is gambling. If you want to continue gambling in the stock markets I have nothing to say. But if you want to start real trading with proper practice you can do my courses.

Nifty is for beginner traders and bank nifty is for experienced traders. Since the support is for one year its better to do both the courses with a discount. Click here to know the fees and pay for the course.

See this bank nifty intraday profits:

After paper trade client trades one lot:

Rs.208/- profit intraday. Results may vary for users

Then he got exited and traded this:

Took some risk and traded the bank-nifty aggressive strategy in Voltas and made a stellar profit of Rs.37,650/- in a single day. Results may vary for users

I told him to calm down and take it slow – stock markets will not close tomorrow:

So this:

Rs.17,952.00 profit again in a single day. Results may vary for users

Then this:

Rs.18,192.00 profit again in a single day. Results may vary for users

He is still doing great almost everyday.

If you are a trader losing money my course will help you to make a start like above though it might take you sometime to send me such testimonials.

But somewhere down the line you have to start.

Nifty is for beginner traders and bank nifty is for experienced traders. Since the support is for one year its better to do both the courses with a discount of Rs.3000/-.

Click here to know the fees and pay for the course.

In this post you will learn 10 rules of successful trading.

Problems start from misconception of share market. It all starts with “Share Market is Gold – I will invest and become very rich very soon and leave my job”. Well dreaming is ok but over-dreaming is not.

Its not the fault of a new investor or trader – the way things are marketed – its their fault – the media and people who get benefit from your trading like tip providers, trading software providers, high cost brokering firms etc.

And yes some fault lies with people I mean you too – most of them even today believe that traders who have done technical analysis are laughing to the banks every day. They also believe that there is some magic where they can make 50k every month from 50k. This is simply not possible. But to make 50k a month they start losing 50k a month but still do not understand unless a big damage is done.

I was having a chat with a trader who said that 3% a month is very less – technical analyst make 2000 everyday with 50,000.

My next question was – please name that person I will pay him 25k to learn what he does.

Silence…

2k everyday with 50k is 44k a month (22 trading days a month) – this is a return of 88% a month. 88*12 = 1056% return a year… does it make sense?

If you have something in mind – all you have to do is take out a calculator and see if what you have heard makes sense. If not – do not believe in any theory that does not support what you are not seeing on Earth.

I agree some people may be doing very well trading options or futures – but they are less than 0.1% traders in the world. Ravi is one of them – but the question is can you reach that level? If yes how fast? Have a look at this:

Rs. 16.26 Lakhs on Rs. 38 Lakhs margin blocked – 42.78% return in 5 trading days – Results may vary for users

The above you are seeing is real trade results but exceptional. He is still doing very well but I am yet to find another Ravi. Yes some of my clients are doing very well but they are still not near Ravi.

It’s a myth that you can double your money every year in stock markets – this even an excellent trader like Ravi is not able to do. So what makes you believe you can?

Frankly there is not hidden formulae. To be successful trader you must have a good logic, proper hedging, patience and discipline. And there is more – in one financial year if you took 12 trades and DID NOT lose money – then welcome to the club of successful traders. Please note I am not talking about profits here – I am only talking about NOT LOSING Money in a total of 12 trades or an entire year with minimum of 12 trades. Then your next target should be 10% – 20% – 30% a year. Anything more than this – you have to do a lot of research and hard work. With my courses I can help you reach level one which is more than 25% a year – anything more you have to do your own research which Ravi did and succeeded.

Read what you should have in you to be a successful trader and investor – the Top 10 Rules of Successful Derivative Trading:

1. Time is Money:

If you have decided to be a trader then get all the knowledge possible to set up your trades and start paper trading. Do not put money on the line if you are researching something. Do paper work or home work like you used to do in school. Once you get a good strategy start trading. Wasting time on speculative trading does not only destroy your money but your time also. The more you delay the more profits you are losing. The more time you are losing the more time you are letting go the power of compounding.

2. Increase your trading income once you see success:

You see 3% of one lakh is three thousand, but 3% of one crore is 3 lakhs. Can you see the difference? Percentage wise both are same but money wise 3k vs 3 lakhs. If you start with 1 lakh and start seeing success, bring more money to the table to increase your returns. Even if percent remains same, you will make more every month.

Side note: If you are making more than 10,000 per month from trading – take out 20% of it to enjoy your success. Watch movies, eat in costly restaurant, go on a vacation etc. You see you should not leave all the money for compounding – just take out a small portion to enjoy your hard work else after some time you will lose interest in trading.

3. Trading has nothing to do with bear of bull markets:

Bear market is good for investing and bull market is good for booking profits but only for stock investors not traders. Remember the phrase “Buy when everyone else is selling”, by none other than Warren Buffett. This still stands good for investors but for trades time is short – expiry comes in one month so you cannot and should not take your trades based on bull or bear markets. A bull market or a bear market is not for one month – it runs for months or years. For example the 2007-08 bear market and then 2009-10 bull market. It took three years to complete a bull market and a bear market.

So do not take your trades based on bull or bear market – take your trades based on your research.

4. Look for yearly returns not intraday returns:

It’s foolish that most traders start with Intraday without any research or plan and lose money almost every-day. They look at everyday return for fun. Everyday return is not important. A months return is important and more important is yearly return. You will certainly not be able to make profits in every trade but you must limit your losses to ensure you are in the game for long.

5. Think 5-6 years from now not next month:

Most traders want to get a return of two-three times in the next six months. They so not have patience to wait. You have started to invest and trade that’s fine but do not think your life will change in a month or six months. It will take about 5-6 years for your life to change. Be patient till that time but do not take the current time easy whether you are losing money or you are making money.

Note your trades and study them everyday. You should write why you took a loss and why you took a profit. If you study your trades with time you will become a smart trader.

6. Do not trade with all your money in one strategy:

Strategies require a certain amount of money. If you find a good strategy that’s fine but its always better to find other strategies that work in different market situations so that you can divide your cash. In my Nifty and Bank Nifty course you will get strategies for both volatile and non-volatile market condition. The idea is to make sure your cash is divided into different strategies.

This will keep you relaxed.

7. Do not take a loan to invest:

I have said this several times in my blog. Here is one article that explains it well.

First get rid of your debts then invest in stock markets. If you trade with loaned money you will be under severe stress and you may not be able to perform at your best.

Trade with the money that you can afford to lose to some extend not all.

8. Trade in strategies that have limited risk:

You must make sure that whatever strategy you are trading – it has limited risk. If you are trading positional futures and not hedging it then you are playing with fire. Future trading is leverage on top of that no hedge is financial suicide. You may not survive for long trading naked futures. You can learn future hedging in my course.

9. Keep reading business news:

Factors that affect stock market should be known to you. These factors are market movers. For example as soon as the Nirav Modi case came out, it was clear that PNB stock will fall. A good trader would have gone short in PNB with proper hedge and of course you know the result. Business news can help you take trading decisions. Keep one hour aside everyday for reading news. Please ignore what experts say – that is not news – I am talking about real business news – what has happened, not what experts are saying.

10. Never repeat a mistake:

If you repeat a mistake you will see the same result. Once you know your mistake write it down and never repeat it. Please note that occasional losses are fine but mistakes are not. Mistakes are like not taking a stop loss ever after you had defined a stop loss. Not taking profits in hope of higher returns. Trading without hedge etc.

Hop you learned top 10 rules of successful derivative trading in this post.

It’s a myth that technical analysis works great in stock market trading. Technical Analysis is just a beautiful drawing of the past but not an assurance of the future. Otherwise all technical analysts would have been sitting in huge pile of cash trading the stock markets. But this is not happening.

There was a time when I used to believe a lot on technical analysis but I saw that it had a success rate of only 50%.

If you also trade on 5 min candle stick charts you will know what I am saying. TA is a beautiful presentation of what is happening in the markets but NOT what will happen in the markets.

When I saw the success rate to be 50% then I thought what is the difference between speculative trading and technical analysis? To me they both are same. I know may be you will not agree with my views as you are hearing it for the first time in your life.
I don’t know but maybe some guys are really good at it and are making a killing using TA. But they must have great methods. The real picture is, for most, Technical Analysis does not make money. And this I am saying after talking to at least 25 traders who are doing Technical Analysis in stock markets. 100% of them lost money using TA.

Social Science Research Network – a research company based in US, did a research on individual traders doing Technical Analysis and found that most traders doing TA lost money. Here is the link.

If you want to download the research report you can download it here.

Here is the abstract:

We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors. The data on which this claim is based consists of transaction records and matched survey responses of a sample of Dutch discount brokerage clients for the period 2000-2006. Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of unsystematic risk to total risk, engage in more options trading, and earn lower returns.

Anyway if you still want to learn technical analysis its your choice – but frankly you will get the same answer as mine. It works only 50% of the times. And if it works 50% of the times – the rest 50% of the time when you lose money it takes away whatever you made in the 50% of the profitable trades.

In any case if you have to limit your unlimited loss you should learn proper hedging. And then there are strategies that are direction independent in my course which even a new trader can learn and start making monthly income.

You are struggling to make profits trading because you are trying to make too much from trading. This is where you are doing a mistake. If you had made just 30% a year in last 4-5 years of trading you would have had a lot more money in your account than what you have today.

You can do my course and learn strategies both conservative and aggressive to make trading profits. Low risk Low Returns to Low Risk High Return Strategies are there in Nifty and Bank Nifty Course.

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In this article you will learn how to trade using the risk to reward ratio.

Risk to Reward Ratio is the concept where a trader knows before taking a trade where to take a stop loss and where to take profits out.

A novice trader never writes anywhere before taking a trade where to take a stop loss. However an experienced trader knows very well what risk he is taking in a trade and what reward he is expecting. An experienced trader will never move away from a decision he/she takes.

Let me take an example of a Long Call. Let us assume that Nifty ATM CE is trading at 100. A novice trader will buy it “thinking / hoping” that Nifty will move up without realizing that options have time value that melts away with time if there is no move. They treat an option buy equal to futures buy which is not.

However an experienced trader will write somewhere where he will exit the trade either profit or loss.

Side-Note: I have seen new option trader averaging out option buy if the position is going in loss. IT IS VERY DANGEROUS TO AVERAGE OUT AN OPTION BUY IF IT’S GIVING LOSS. In fact if an option is making a profit you must not still buy more of it in hope of bigger profits. Once an option buy or sell is done you must not increase the lot size whatever happens. You may decrease the lots when the trade is on – its perfectly ok – but you must not increase.

Before taking the trade write somewhere where you have to exit

Taking a call where to take profits and where to take a stop loss is not as easy as you may think but with experience it gets easier.

I have written here how to use the trailing stop loss method. This will help you to decide how to take stop loss.

You see if you are trading with many lots you can take your time to take both trailing stop loss and trailing profits.

Here is an example:

Anil bought 5 lots options of XYZ stock at 50. Now its 55 he exited one lot. Four lots left, 5 points profit. At 60 another option sold. Three left and 15 points profit.

Option is back to 50. Anil decides to sell two more at 50 and keep one. Sold off 2 more lots. One lot left and 15 points profit. Option is now 45. Anil takes a stop and takes a loss of 5 points.

Trade over total profit = 15-5 = 10 points. Assuming 1 point equals Rs.1000/- which is quite common in stocks in India. His total profit stands at Rs.10,000/-.

Assuming 500 goes away in brokerage and STT 0 still he is left with Rs.9500/-.

Can you see a well-planned strategy can yield great results? If he did not take a stop loss at 45 and waited in hope that the option will reverse then he could have lost (15-45 = -30) Rs.30,000/- in a trade where he made more than 9k profit.

I hope it is now clear that Risk to Reward Ratio is NOT what your software made a P&L graph for you. It’s not final – the Risk to Reward Ratio is what YOU DECIDE and NOT what a graph decides.

Here is the Risk to Reward Ratio of a Buy Call Option – but reality is where a trader decides to exit. This P&L graph gives an illusion that option buy is an unlimited profit – many traders fall in this trap and do not book profits waiting for MORE profits because they fall for making an unlimited profit according to the P&L graph.

Long Call Risk Reward P&L Graph

But the fact is Long Call or Long Put is not unlimited profit – you have to decide both your risk and reward – failing which you may lose all your money in this trade.