Before new traders start trading they have “high hopes”. Here are some of the high hopes:

1. I will invest 5000 and make 10000 every month. They forget that its 100% return a month.
2. If Nifty will open gap up I will buy calls, if it opens gap down I will buy puts and make money. Its a myth that if there is a gap up the stock will keep going up or if gap down the stock will keep going down. Reversal is always possible.
3. Thought process of a new but rich-son trader: I will invest 1 lakh and make 1 crore in one year and prove my dad that he is a fool working hard in his business making just 30% return a year.
4. In five years time I will be a multimillionaire.
5. New option trader: I will buy an option for 10 and sell at 20 – doubling my money every time I trade because I have seen that happening many times.

Reality: ALL of the above are just a myth, not a reality.

With time the stock markets teach them the reality.

Here are checklist for new traders before you start trading:

1. Make a list of all your trades – its profit loss and the mistakes you did

When I say each trade it means that. Buy a note book (yes a note book – not just a soft copy – but make a hard copy). Write date of trade, time taken to trade, closing time of the trade, total money at risk, why you took the trade, profit or loss and reasons for profit or loss. Everything is important.

Review this note book at the end of every trade.

2. Money Management

You must know how much you are willing to risk in each trade. When starting new do not risk more that Rs.1000 per trade even if you are son of a very rich man or you have a very high salary. 1000 rupees is 1000 rupees – it has same value whether in hands of a beggar or Mukesh Ambani (one of the richest man in world and the richest man in India). Later when you have some experience you can increase the stop loss limit.

Therefore you must keep a stop-loss in the system as soon as your trade is triggered. Read this for more information on stop loss:
Best Ways To Keep Stop Loss For Intra Day Trading

3. Moving Averages

If you want to be day (intraday) trader focus on moving averages. If you want to trade in very small time frame then 5 minutes moving average is the best indicator. Read this: How to trade moving average

4. Do not trade as soon as markets open

New traders cannot stop themselves to start trading as soon as markets open. This is a very wrong time to trade. During the first half hour and last half hour it is the new traders who are quite active in markets. First half hour belongs to the novice intraday traders, the last half hour belongs to the stop-loss takers and BTST (Buy Today Sell Tomorrow) traders – hoping to trade the gap up and down.

Fact: Markets take time to settle down when professional traders enter. Professional traders enter only after 9.45 am and leave (close their trades) before 3 pm.

5. Plan your trade before you enter

You cannot trade without a plan, you will most likely fail. Therefore you must know exactly what you are doing in your trade. Just trading to trade (speculative trades) will not make you money.

6. Educate Yourself

Keep reading and researching if you want to be a serious trader and make it a full time income. Anything that you find yourself good at, research more on that subject. For example due to good liquidity, proper fills and trading volumes I mostly trade Nifty options and Bank Nifty options in a very conservative way.

Contact me if you are interested in doing the course.

Making trade adjustments can help you reduce losses to some extend but not eliminate loss. For example sometimes option buyers average out buying options. Like buying at 10 then 7 then 5, thinking that since the average buy rate has come down, if the stock takes a U-Turn they can exit in profits.

Very rarely it happens, their entire money invested becomes zero (option expires worthless). There is only 1% chance that within limited time-frame the stock revives and takes a U-turn and the trade becomes either profitable or the trader exits with a small loss.

Fact is, if the trade was entered poorly the Trade Adjustments will not be helpful at all. It can either minimize losses or sometimes increase the loss.

For example if a trade with 80% success rate makes 1000 rupees and loses 4000 rupees then that 80% win rate is useless.

Here it is:

+1000
+1000
+1000
+1000
-4000
+1000
+1000
+1000
-4000
+1000
=======
Net ZERO
========

Imp Tip: If you make sure that your losses are reduced by 50% then the same trade above will be profitable.

+1000
+1000
+1000
+1000
-2000
+1000
+1000
+1000
-2000
+1000
=======
Net +4000
========

For this to happen you have to ensure:

1) Good entry points – entry time is very important for the trade to be profitable.
2) Proper stop loss placement.

Note that one trade is not enough. If you decided to trade something you must trade at least 10 times to see if it’s a good trade for the long term or not.

Swing trading is buying low and selling high in a short span of time. Some traders do it Intraday called as day traders and some take position for a few days.

Swing trading combines fundamental and technical analysis in order to find the stocks direction from the current position. Swing traders do not look for only up direction, if they feel the stock may go down they short them. All they are looking for is short momentum.

When they see the stock is not poised to move they do not take the trade. The benefit of swing trading is efficient use of time and money and higher returns. However their are drawbacks as well like high brokerage commission and high losses if their trade goes wrong.

Swing trading can be difficult for the average retail trader who is not equipped with either technical or fundamental knowledge. Some of the good technical indicators are Bollinger Bands, Candlesticks, moving averages, Average True Range – ATR etc.

Using the above indicators a trader finds quickly if a stock has the potential to move up or down. Based on this they are able to take the trade.

Please note that swing trading is not intraday trading, its short-term stock movement trading. It is usually taken for a few days with proper stop loss. Of course it is better to hedge a position. I personally do not recommend trading without a hedge. The only trade that you should take without a hedge is equity cash buy-hold-sell. By the way equity cash buy-hold-sell is not trading, its investing even if its taken for one second or many years.

Benefit of awing trading is that you do not have to follow trend. Swing trading is to find out short term moves which are independent of the trend. For example a stock may be going down for 2-3 months, but a good swing trader will find out the short term support and buy the stock for short term. When the stock bounces back, the swing trader benefits and exits the stock.

Most swing traders hold the stock overnight or a few weeks, rarely it goes beyond 30 days. To minimize risk position size is very important. The risk word is very important here. For example if the trader is 60% sure the trade will go through, they may increase the lot size compared to a trade where they are 50% sure. This is pure professional trading.

What is the philosophy of Swing Trading:

Every stock goes through four stages of movement:

1. Base Stage – Trending and moving in almost straight line – here both buyers and sellers are same so stock does not move much.

2. Advancing Stage – Some good news has come in, or the company performance is better then market expectation. Now the stock goes into second stage – it starts to move up. Swing trader buys the stock in this stage.

3. The Top Stage – After an up-move buyers starts to decline and the stock surge stops. This is knows an topping out. Here the stock will decline some and rise some giving a head and shoulders pattern. This is signal that the stock will fall. Here is where the swing trader will sell and book profit in the stock.

4. The Falling Stage – Sellers increase and the stock falls and goes into a downtrend.

See this image you will understand the different stages of a swing:

Explanation:

After the consolidation (Stage 1) – the breakout starts (Stage 2), this is where the Swing Trader enters the position. This can be anywhere from the rising trend. Good Swing traders do not get caught at the tops. Stage 2 is where most good swing traders enter when the uptrend is confirmed.

How Is the Uptrend Confirmed?

When a stock is in an uptrend its close will be above the previous close with increased volume day by day. If this happens for a few days then the trend is confirmed. This is the place where a swing trader enters.

How Is the Downtrend Confirmed?

Its exact opposite of uptrend. The stock will close below the previous close for a few days and the volume will also decrease. This is the time for a swing trader to exit and take out profits.

Do not forget that this cycle is will repeat.

Experienced swing traders keep on radar 4 or 5 stocks only as it becomes difficult to keep a watch on more than 10 stocks.

Within three months they become well aware of the average volume in the stock, support and resistant levels of the stock. After six months the stock makes a new support and resistant levels.

Please note that its very rare that swing traders enter Stage 2 at the best point and exit at Stage 3 at the best point – but its about making profits. They have a target in mind and if that is achieved they exit the stock.

Are you a swing trader? What are the problems you face?

PE Ratio is one of the most overlooked by novice investor and sought after and studied by experienced investors of a company’s stock since ages.

PE Ratio gives an idea on whether the stock price is undervalued or over valued at a given time.

Most of the times when a stock is overvalued it falls and if undervalued it goes up.

PE Ratio is just one of the indicators to invest in stocks, there are others as well but PE Ratio is a very important indicator.

Let say you are undecided to buy shares between two companies in the same business field, then PE Ratio is the best indicator to look at before buying share of a company.

PE Ratio gives an indication whether current price is justified to buy the stock or not.

How Is PE Calculated?

PE is calculated by dividing the current market price of the stock by its Earning Per Share (EPS). It shows the sum of money you are ready to pay for each rupee worth of the earnings of the company.

PE = Market price / EPS

Let us assume there are two companies XYZ and ABC both in the IT sector and have almost same services, products, pricing of services & products, financials, infrastructure, debt etc. In that case how to decide which company share to buy?

Here is where PE ratio helps.

Let us take example of Wipro and Infosys – both are Information technology consulting company. Assuming Laxmi wants to buy either Wipro or Infosys as a long term investment but is undecided which company to pick. Both company looks good in future, so she decided to look at the stock’s PE ratio.

She gets Wipro stock PE from moneycontrol.com site here:
http://www.moneycontrol.com/financials/wipro/ratiosVI/W#W

WIPRO EPS (Rs.) 33.61 as of Mar 2017.
WIPRO PE = 285/33.61 = 8.47

Then checks Infosys stock PE from moneycontrol.com site here:
http://www.moneycontrol.com/financials/infosys/ratiosVI/IT#IT

INFOSYS EPS (Rs.) 60.16 as of Mar 2017.
INFOSYS PE = 902/60.16 = 14.99

If you are comparing two stocks then the stock with lower PE ratio is a better buy as the market price has not gone up to reveal the earnings prospects of the company. However this does not mean that the higher PE company has no growth prospects, it may have better growth prospects but still there are chances that the company stock with lower PE may generate better returns in near future than a company stock with higher PE in the same sector.

This means Laxmi will buy WIPRO stocks as it has lower PE 8.47. than INFOSYS 14.99.

PE can be very high in certain sectors, and can be very low in other sectors. Therefore PE comparison is important in the same sector business. Any major announcement of a major order or acquisition by the company will push up its PE. You need to keep this in mind while calculating PE.

Note: PE ratio cannot be considered to be a totally reliable indicator of cheap, good stocks. In future the company may not perform as expected and the share price may fall. Still, PE ratio remains one of the most important ratios when it comes to stock selection.

Covered call is very popular among the high net worth individuals who buy shares for the long term. These people take benefit of covered call to make money every month. Covered calls are very poplar in US where high net traders are many.

What Is Covered Call

Covered Call is a method to sell shares in a future date with no obligation to buy back if certain conditions are not met.

When you own a stock you have the right to sell anytime at market price or in future at a higher price using options. Covered call is selling the stock to someone else at a higher price in a future date for an agreed money as shown in in system. This money varies from stock to stock and price to price.

Basically when a covered call is done the owner of the stock sells the stock to someone else at a agreed price to get cash today. This is done at a higher price than the current price of the stock. This means that the owner of the stock gives the buyer of the option the right to buy his shares before the option expires, at a predetermined price, called the strike price.

Now What May Happen In Expiry

If the stock does not reach the predetermined price or the strike price which the owner sold the stock for, the Call Option expires worthless and the owner of the stock keeps the money he got to sell the stock at date price.

If the stock reaches the predetermined price or the strike price which the owner sold the stock for, the Call Option becomes In The Money (ITM). In this case since the sell price is lower than the buy price the owner have to take the loss on the option sold, but can cover the loss by selling the shares he owned.

Most of the times the sold options expire worthless so the owner of the stock keeps the money he got while selling the call. Otherwise they can always sell the stock to cover the loss.

This week I finished reading a book written by Robert G. Hagstrom about Warren Buffett – the best investor in world entitled “The Warren Buffett Portfolio.”.

This book is different than what I have read on Warren Buffett in other books.

Here I would like to point out some very important highlights of the book.

Stock Is a Business

Before you buy a stock you must think whether you want to be a part owner of that business? If you are not comfortable being its owner then do not buy that stock.

Think Long Term

If you want to start a business, do you want to keep making money for the short term or long term? Of course you will plan for the long term. Same should be the case if you want to buy a stock for investing not trading.

Note that stock investing is not the same as stock trading.

Stock trading is buy and selling a stock for intraday, few days or few months. Stock investment is holding a stock for at least about a year. Though Warren Buffett average holding period is more than 5 years.

Increase Your Investment Size and Do Not Diversify

Warren Buffett did not believe in too much diversification neither keeping all eggs in one basket. He did thorough research and invest a lot of money in a stock for a long timeframe. Warren Buffett did not invest in mutual funds also as he was against too much diversification. His exact number of stock holding is unknown.
.
However if you are not as good investors as Warren Buffett, it is advisable to invest in mutual funds.

Reduce Turnover

Warren Buffett believed not to churn in and out of stocks frequently to avoid paying taxes on gains made. In India long term capital gains are not taxed. For that one needs to hold the stock for at least one year. Warren Buffett that taxes will reduce the profits coming out of the stock investments.

In India long term profits are not taxed because the company has already paid their taxes. The profits you get after selling the stocks after one year is after paying the taxes by the owners of the company. Since the taxes has already paid there is no need to pay taxes again. However short term profits (less than one year holding) are taxed.

Ignore What Experts Say

Warren Buffett rarely listened to experts forecast on future of a stock price long or short term. He focussed on fundamentals of a company. If believed that if a company is good at fundamentals the stocks will price in that in future.

Traders trading Intraday should know where to take a stop loss. This article discusses some stop loss methods that you can follow.

Points / Cash Stop Loss Method:

This is the most common method that most Intraday traders use. Basically it is the amount one trader is willing to lose. Let say his total margin blocked is 1 lakh, and he is targeting 2%. This is 2000 profit a day. In that case his stop loss can be anywhere between 1000 or 2000 not more. This way if the trader is successful in 60% of the trades he makes money. This cash can be converted to points also. For example if 1 point is Rs. 2000, then profit can be 1 point and loss can be 0.5 to 1 point.

Average True Range (ATR) Stop Loss Method

Read my post on Average True Range (ATR). It goes into details of the ATR method calculation and how to use it for taking a stop loss.

Day High And Low Stop Loss Method

This is strictly for Intraday traders only. They can take a stop loss if the stock breaches the days low. For this the ideal time to start the trade is at 10 to 11 am so that the days low is clear. For positional trading last 30 days low is a good way to keep the stop loss. However if the last 30 day is way to low and you are not comfortable losing that much money then the Points / Cash Stop Loss Method is a better way to take a stop loss.

Software Indicator Stop Loss Method

This is advanced way to decide a stop loss. This is used by professionals with technical knowledge. These indicators can be moving averages, RSI indicators, stochastics, rate of change, trailing stop method (keep increasing the profits stops as the stock move up and keep booking profits in certain percentage of holdings until all is sold), etc.

Note that trailing stop method can be done for both booking profits and taking a stop loss.

For example a trader buys a stock at 100 and keeps 50% sell as stop loss at 99, if hit he brings the nest stop for rest at 98 – then there is a possibility that stocks bounces back and the trader ends up in profit.

As you can see the trailing stop method to take out profits or losses needs a lot of patience and is possible on big trade positions only.

Recommended Reading:

Average True Range ATR Stop Loss Method

Where Should You Take A Stop Loss In Stock Trading

Percentage On Margin Blocked Stop Loss Method

Second Stop Will Ask For Extra Margin

Learn why averaging out options does not make sense – it is a pitfall of losses.

In one word if I have to answer that if averaging out options makes sense. The answer is

NO

Why? Because when you buy options you are racing against time. This time can be few months, or few days or even few hours.

The option you are averaging has to be above average for you to profit – for that it has to take a “U” turn.

Assuming Nifty ran from 8000 to 10000 levels like it did from Jan 2017 to July 2017 and a trader thought it will run more and bought 10100 Call Option at 100. Now Nifty fell at 9900, the trader bought few more lots at 75 premium of the same strike. Nifty falls more, on hope that it will reverse, the trader buys more at 40, and “averages” the option at 50. The option is right now at 40.

Next day Nifty does not move, India VIX drops and option price drops to 35. The trader gets nervous.

He starts praying to the almighty forgetting that he did the mistake, not almighty.

Nifty starts to recover, but time remaining is 1 day. Nifty is still 200 points far from the 10100 strike.

What are the chances of 250+ points move in next 2 days? Less than 1%.

This is life of an option buyer trading on hope.

Please refer this article – option trading is science or art. I had said both option traders trading on Greeks and hope lose money.

The above article is inspired by a real trader who called me yesterday and told his story sobbing.

This is what he did this month itself, August 2017 – please do not attempt this:

Buy OTM (Out of Money )10500 CE, then buy more to average it out
Buy OTM (Out of Money 10100 CE, then buy more to average it out
Losing a lot of money mid-August, so in frustration:
Buy ITM (In The Money) 9500 CE (ITM options are VERY COSTLY – NEVER BUY ITM OPTIONS), then buy more to average it out.

Now tomorrow – 31-Aug-2017 is expiry. All his OTM options will expire worthless. Means his money to buy these options will become ZERO.

Not sure what will happen to ITM option of 9500 CE since he did not tell the price at which he bought, but I am sure losses here will be more than the OTM options he bought.

At last he did the course and his financial destruction will stop.

Let me warn you. If you are trading in hope or speculation – and /or you are averaging out options to make money – YOU WILL LOSE MONEY AND IT CAN BE UNLIMITED MONEY.

Traders who are firm believers of Technical Analysis and try to trade Greeks of Options, they feel option trading is a science. They try to derive a formula so that they come out winners every time.

Traders who trade on hope think option trading is an art. They “Feel and Trade”.

As it is obvious they both lose money.

No one can predict what is the future option Greek for a given option. Neither can anyone predict what premium the option will have in 2-3 days time. This is the reason most option traders who trade on hope or who trade trying to manage Greeks lose money.

One of the biggest losers are the Delta Hedging traders. This sounds so technical that traders get attracted to it.

In US Delta Hedging is automated. It is done my software perfect to manage Delta of options. The trades are so fast that humans will not be able to manage it. Within milliseconds an option is bought and sold which is impossible to be done by humans.

On top of that the automated system keeps a check on Delta of every option strike of that stock or Indices. As soon as the Delta is breached, it gets out of one position and gets into another in less than half a second.

However these are done by high net worth individuals or finance institutions. It takes millions to make a automated system to trade.

Since it is out of reach for retail traders they should trade with a proper plan, else there can be losses and it may continue for years.

Trading on hope is self-explanatory. Another great way to lose money trading the stock markets.

So who makes money? Trades who trade with a plan. Without planning you cannot manage your finances so how can you win trading options?

Want to learn how to trade with a plan? You can do my make monthly income from options course. Traders who have done it are doing well today. They were losers before doing my course. For any questions contact me.