Moving Average aka “MA” is a very popular technical analysis tool. This is very useful for short term traders. Moving average is based on past prices. It helps traders to find the direction or the trend of the stock for the short term.

Two commonly used moving averages are the Simple Moving Average (SMA), and the Exponential Moving Average (EMA).

Simple Moving Average is very simple. It is average closing prices of a stock over time.

Exponential Moving Average (EMA), is also the average of closing prices of a stock over time, but it gives more importance recent closing prices.

Moving averages are used to determine the trend of stocks. It can also help to know the support and resistance level of a stock.

Explaining Moving Averages

Assuming stock XYZ closed at the following prices in last 15 trading days:

Week 1) 102, 104, 110, 105, 107

Week 2) 106, 111, 108, 105, 108

Week 3) 112, 109, 113, 115, 119

How To Calculate the 10 Day Moving Average

Adding the first 10 days moving average:

102 + 104 + 110 + 105 + 107 + 106 + 111 + 108 + 105 + 108 = 1066

Moving Average of Day 1 through Day 10 = 1066/10 = 106.60

You can similarly calculate the Day 2 to Day 11 moving average for 10 days.

However for long term prediction 200-day moving average works better.

See the image below – It is a graph of closing prices of last 200 days of a stock:

For short term:

When consecutive two highs are less than the previous one it is time to sell. When consecutive two lows are higher than previous one it is time to buy.

As I have said earlier, for long term prediction 200-day moving average works better.

For 200-day moving average follow this rule:

Sell the stock if the price of the stock falls below the 200-day moving average.
Buy the stock if the price of the stock rises above the 200-day moving average.

Important Note:

Please note that 200-day moving average will only predict but not confirm the direction of a stock. Therefore it is not a gurantee that if you follow only the 200-day moving average the stock will move the correct direction. There are other indicators as well that that Technical Analysts follow all over the world.

If you are a long term investor there are simpler ways to find stocks to invest for the long term.

Learn Intraday trading tricks, techniques and ideas for Nifty and Indian stock markets.

Retail traders journey starts from investing then to Intraday day trading. Intraday trading is very attractive especially to the younger generations. However most lost money because they either speculate their trades or take to tips providers.

What is Intraday Trading?

Intraday or day trading is buying and selling or selling and buying a financial instrument in same trading day. It attracts traders because they are eager to make money every day.

It can be a very good way to trade if you are good at it else day trading has lots of dangers involved. 95% intraday traders lose money. Almost 100% intraday traders lose money. Trading without plan, no financial management, no basic knowledge about trading – all this combined make traders lose money.

Here are some ideas to become better Intraday trader.

Get knowledge

Any business needs knowledge to succeed otherwise the business will fail. If you want to become a better trader it is very important to know what you are day trading and why? How much money you are willing to risk. You should know basic trading procedures – like difference between “MIS” and “NRML”.

For intraday day trading MIS orders are used. MIS stands for MARGIN INTRADAY SQUARE-OFF. These orders are closed before the market closes the same day.

For positional trading NRML orders are used. NRML stands for Normal Margin. These are derivatives delivery based trading. These can be squared off any day before or on the expiry day.

Intraday traders must keep a watch on the business news and related information that can affect stocks. Government policies, its economic effects and the companies it may effect. Like the recent news of Cigarette taxation to raise revenue made ITC stock fell by 15%. Those who knew this would have shorted ITC and made a lot of money in a single day.

Yesterday I read a news and traded Axis Bank and made quick Rs. 850 in 40 minutes of trading. See this image:

If you read current business news before start of day trading chances of winning will be more.

You Must Know The Amount You Are Willing To Trade

Intraday trading is more risky than positional trading because there is no way to hedge an Intraday trade. Hedge is very important in positional trading as it can limit losses to a large extend in an event of a stock market crash.

There is no need also as the position is closed the same day. But you cannot have a job and still do day trading. Intraday day trading needs your 100% attention else you can never become a good day trader.

Therefore it is very important to know how much you are willing to risk every day. This may change from day to day depending on your view. If your view is very strong then you may increase the risk to give some room for the stock to move.

But risked amount should not exceed 3% of the margin blocked for the trade. Average is 1-2% per day. Profit percentage should be double of the loss percentage every day.

Never day trade with borrowed money, you will trade in panic.

Never trade with the money you need in the next six months. You must be absolutely sure you have money to manage your daily expenses for the next six months.

Keep a Separate Time to Day Trade

Even if you are a full time Intraday trader you must fix a time to trade. Intraday trading is very stressful so it is highly recommended that you fix a time to trade. Note that you cannot take break in day trading. You have to watch you trades like an owl. If a break is necessary then put a stop loss order and profit booking order both in the system, then ask your broker to cancel the not-executed order once any one is executed – either the stop loss or the profit booking order.

Some people trade Intraday who have night-shift jobs. In that case you need some rest. You cannot trade without proper sleep and with bad health. In that case make sure you set your time to trade and take rest.

For example it could be from 1 to 3.30 pm. You can take rest before that to prepare well for Intraday trade and your night-job.

Start Day Trading With A Small Amount

When you start Intraday trading it is almost likely that you will lose money. Therefore it is very important to start small. Do not start with more than 10000 rupees. Try to trade with this money for one or two months then if making profits increase the amount.

Do not increase your trading money if you are losing money. This is one of the worst habit of traders. Once they have lost money they bring more money to take a “revenge” on stock markets. Remember stock market is neither your friend nor your enemy. It is an indicator or demand and supply. If there are more buyers than sellers it moves up, if there are more sellers than buyers it goes down.

If you try to take revenge on stock markets you will never succeed. If you trade with a plan you will.

Take Only Two Trades A Day And Learn From Every Trade

As a beginner Intraday trader it is important that you do not take too many trades in a single day. Start with one or two stocks trading a day and then you must learn from every trade. Write down every trade details in a notepad and what you learned from it. Make sure whatever you learn from every trade, you never repeat that mistake again. This way within six months you will be a better trader.

Do Not Trade Penny Stocks

Penny stocks looks great to trade because of their movements. But they are not stable and could result in fatal loss in a single trade. Penny stocks are not liquid as well. It is better to avoid them and trade only in the large cap stocks.

Yesterday a young man just out of college called me in the night and inquired about the option course. I told him what I tell everyone. Then he asked about the returns. I said approx 2-3% a month. Then he said in Bangalore I will get a loan at 18% per year then how can I make a living with just 30% return a year. 30-18 = 12% return a year. He went on to say if I drive a rickshaw I will make more. He wanted to loan at least 10 lakh and trade. He told me that Rs.30k is not good enough to survive in Bangalore.

I told him the first principal of stock markets is that trade with the money you can risk. It is not at all a good idea to take a loan and trade.

Here is the article that explains why it is not good to take a loan and trade.

A young graduate should first take a job and then think about trading. When I told him this, then he said he do not want to do a job he wants to make trading a profession. When I asked him how much money he has to start trading business? He said 50,000.

Think about this? Which business in the world you can start with 50k?

Anyway there was no point in talking to him anymore, so I told him – young man first get a job, think about becoming a traders later. Then I kept my phone down.

If you want to make trading a profession make sure you have at least 20-30 lakhs to risk. You should have some extra money to run your home for the next six months at least, so that you are not worried about day to day expenses.

Even after this you must trade conservatively. At least do not make losses. Even 1% profit initially as a trader consistently every month for six months is much better than making 10% a month then losing 12% next month then making 20% next month and losing 26% next month.

Small steps every day ahead will take you ahead, not a big jump then a big fall.

Think about it.

I have been telling this for years now but it looks like – well what can I say?

Learn conservative options trading and make small profits a month. Small profits are much better than huge losses to make huge gains.

Update: After I wrote this article. One of my email subscribers wrote an email that I would like to share with you all.

His email:

Dilip you are absolutely right, I am reading your mails since last 2 years. I also asked same question from you in 2015 & you gave me exactly the same answer.

But I took risk on my own hope of becoming rich & I took Personal Loan of Rs.3.50 Lakh.

Initially I started with equity cash and I was making small profits too. But after few days I entered into the ocean of F&O.

And after 3-4 profitable trade. I started loosing it. And in emotions and hope of recovering I kept trading without any SL & Hedging.

Mean time I was also reading your mails. Always I thought why to give you 5 or 6K for course, I will learn hedging by myself as you (Mr. Dilip) has learned.

But till now I don’t know ABC of hedging. At that time one of my heart corner was always have feeling that Mr. Dilip is right I should take the course. But I ignored that every-time.

Anyway, I kept making positions overnight & one day came when I put all my money in averaging DLF CE of 170 in year 2015 without any stop loss. And you can guess what would happened with me.

I quiet trading completely & then I realized you was always right.

I understood one lesson that greed & indiscipline in trading can destroy you completely.

Now I am paying my loan EMI from my salary. 🙁

I want to restart but I don’t have courage & I fear to loose.

Many time I thought that I should share all this with you but I didn’t. Today I saw your email with same subject I decided to reply this guy that you are right don’t take Personal Loan for trading & if you take than at least maintain discipline.

In the end I have high desire to learn hedging techniques. May be soon I will pay you course fee.

Thanking you for your free but highly Valuable daily mails.

Keep in touch.
Name Withheld

To him I then replied:

Sad to know this. What has happened has happened.

Tell me one thing. What stopped you from doing the course?

1. Course fee too high?
2. Dilip is wrong? 3% a month is less, profits are more so I will not do his course.
3. Hedging cannot make money.
4. I do not have 75k.

Or any other reason?

You see like you there are many traders who do not do my course and suffer.

Of course the course cannot be free as it takes too much of my time plus free is not valued.

So tell me frankly, please do not feel shy saying the truth.

What was the reason that you did not do the course?

I will not mind even if you say something disturbing but please open up and tell the truth.

To which he replied:

Dear Sir

If I say true then.

I thought that 3% per month is too low because I had taken Personal Loan @14.5% interest annually.

Secondly I did not want to give 6K in one go just to do your course in which I didn’t have full faith.

Regards,
Name Withheld

I think this is very common. 3% too low. Why to pay for the course for such a low return. etc. Fact is it is not a low return if compounded.

And of course some traders are doing much better than this. So take your call.

If you also think 3% a month is too low then think about this. When will you ever make more than 3% a month? After 50 years? By that time you will have lost 50 lakhs or more then even 10% a month will look small. Then you will try for 15% a month, then you know what. Everything ends.

Those who think making 10% a month is possible every month let me tell you clearly – it is just not possible at least every month.

Over all if you make even 25-30% return a year on your trading capital then it is a great return.

Another email:

To answer your questions:

1. Course fee too high?
Answer: There is no cost that one can pay for good education.

2. Dilip is wrong? 3% a month is less, profits are more so I will not do his course.
Answer: This is good return.

3. Hedging cannot make money.
Answer: It can, but only if required trades execute at asked price.

4. I do not have 75k.
Answer: I have this much for trading.

I am skeptical to buy your course because I think everything is available on google and I have read a lot :). The hedging techniques I have learned are only good if they execute at asked prices. If the price is not right then you have to buy overpriced Item that will end up with loss. Do you suggest your courses will control prices 🙂 ?

My reply:

Thanks for the answers.

Limit Orders is your answer. But frankly if trading Nifty, this thing is not required as Nifty is highly liquid.

My course strategies except one, needs to be traded in Nifty.

Instead of trying to control prices – try to control your emotions, plan your strategy, have an entry exit plan. Rest hedging will take care.

Hope I was able to solve your problem.

And yes just because you read hedging techniques online does not mean you learn hedging.

To become an expert in hedging like strike selection, entry, exit all this takes time.

You are paying for that, not just the “hedging” word.

One more thing – there are a lot of people who keep waiting for a discount to do my course.

Let me tell you clearly this course deserves Rs.10,000 at least. And the price you see is already discounted so there is no need for any discount.

In any case 1k saving is not a big amount.

That’s the reason I have made my course 100% risk free for you. If you do not like the course within 7 days just ask for a refund and I will refund your money.

You are now at 0% risk while paying for the course.

So go ahead and pay, at least try to learn something or keep loosing money trading – the choice is yours.

Once you pay I will be with you.

Stock markets have recently seen growth in huge percentage. This kind of amazing growth comes after at least three range bound years.

Nifty – the most popular stock Index in India has grown from 8000 to almost 9900 in few months. From 26-Dec-2016 to 14-Jul-2017 it has increased from 7908.25 to 9886.35.

In percentage terms this is: 9886.35-7908.25 = 1978.10 = (1978.10 / 7908.25) * 100 = 25.02% growth in 6 and half months.

Now what is the question in most traders mind. In fact at the time of writing it is 9918.50. Highest in the history of stock markets in India.

What you can do in rising markets? Here are some ideas that you can do:

1. Book Partial Profits: If you are a long term stock investor, this is the time to book profits. Yes stock markets may go even higher but at least take some part of your money out and book partial profit if not all. Now the partial profit depends on how much you want to book profits on your investment. This can vary from 10% to 80%. This comes purely under your financial management plan. Decide and book partial profits on your holdings.

2. Do Not Stop Your Mutual Fun SIPs: History is proof that most mutual fund investors stop their monthly SIP when they see that markets have hit high. This is trying to time the markets. Stock investing is different that mutual fund investing. In mutual funds you allow your fund manager to take decisions on your behalf with you money. Give them a free hand. Mutual funds are always for the long term not short term. Let them grow with time. Do not stop your SIPs in a down market or an up market. Let them continue. However it is very important to chose the right mutual funds that can do wonders to your saved hard earned money. If you do not chose the correct mutual fund you may end up getting returns less than stock markets. This is not good. Therefore choosing the correct mutual fund to invest is very important.

Read: How to choose the correct mutual funds to invest.

3. Futures and Options Traders Must Hedge Their Positions: Naked trading is financial destruction for 95% of traders who lose money. If you are not good at naked trading then it is better you stop trading or learn how to hedge your trading. Hedging is a big arsenal in the hands of stock trader. Hedging not only limits the losses but gives confidence required for trading.

Hedging is a kind of insurance for a trader. It protects your capital to a large extend. Learn good hedging strategies in this course. Once you know hedging methods then you can scale up your trades as you will be confident and fearless in trading. Once you know that 98% of your capital is protected then the fear of trading will go away and you can bring in more money to trade and make more. Naked trading will not allow you to bring more money to trade because of the fear of losing it. Hedging will ensure the fear is gone.

4. Do Proper Financial Planning Even If Trading On Charts: Some traders trade seeing technical charts. Do not forget that charts can also go wrong therefore financial planning is important. Just because your chart says this stock is headed up you must know before investing how much you are willing to risk. My advice is do not risk more than 25% of your capital in one stock. Anything more can be dangerous if the stock does not perform. Moreover you still have 75% capital left to invest in other stocks. So even if the first one does not perform you have some money left to try another stock.

5. Do Not Go Against The Trend: There are many contrarian traders. Contrarian traders bet against the trend. There is nothing wrong in doing but be willing to take a stop loss if markets prove you wrong. I am sure at 9000 – a huge psychological mark of Nifty – a lot of Future traders must have gone short on Nifty. They must have huge lots of money. Contrarian traders have a lot of ego discussed in next point.

6. Do Not Be Egoistic In Trading: Especially the contrarian traders have a lot of ego in rising markets. They think that speculators have taken the markets up and it is bound to fall huge and they take large bets without hedging. Because they are absolutely sure stock markets will fall. Understand that stock markets does not have any ego or does not favour or is against any trader. Stock market is a non-living thing. They will do what most investors do. There is no point showing ego to stock markets. Plan your trades take a stop loss or take out your profits when they come. Trading without a plan is a great way to failure.

Date: 13-July-2017

This bull market is not showing any decline at all. It is getting frustrating now. I think GST has a big role to play.

Current position Nifty as on 13-07-2017 at 11.22 am:

Last six months graph of Nifty:

India VIX also hovering from 10-12.

So what are option traders trading?

The answer lies in trading volume or most active options open interest. This information can be obtained from the NSE site here.

According to today’s data as of 11 am:

Highest open interest at Call Options (most active option):

OPTIDX NIFTY 27JUL2017 CE 10000: 41,71,575

Highest open interest at Put Options (most active option):

OPTIDX NIFTY 27JUL2017 PE 9600: 68,13,525

Highest Open Interest means both option buyers and sellers are doing the most trading in these 2 strikes.

What do you infer with the Highest Open Interest?

You see open interest only tells where most people are trading. But for every buyer there is a seller.

So here the most speculative trading is going on. 50% of them are buyers and 50% of them are sellers.

Now which side will you take? That is the problem with open interest.

Lot of traders see daily open interest and trade there. Obviously 50% become buyers rest become sellers,.

50% of them make a profit, 50% make a loss.

Here is where it can create a confusion. You can’t flip a coin and become seller or buyer right?

Open interest will give you data of where most traders are trading but it never reveals what is going on in their minds. So there is not much to do with open interest. Just trade conservatively without being biased for any direction and keep making profits consistently. Though conservative trades make small profits – but a profit is a profit not a loss. Even a small profit is better than a small loss for a big gain right?

You can read about the conservative option course here.

Lots of traders do not know where to take a stop loss. This article discuses where to take stop loss.

85% of the traders who enter the stock trading business (not stock investment business) start with day trading. In India it is known as Intraday trading.

The reason is pretty simple.

They know that risk is involved in derivative trading. Derivative trading is trading options and futures. They start with Intraday equity trading. Once they start making losses they enter into derivative trading. In both the trading losses are there, therefore they do not want to take the position forward and try day trading.

Moreover the satisfaction of day trading, to see they made (or lost) money each day excites them. However they forget that making money is important. Whether it is made from positional trading or day trading is not important. They realize this fact only after losing money.

More Intraday traders lose money than positional traders. In Intraday trading money has to be made the same day or within hours, however in positional trading the trader has one month or more to make money.

Do you know even stock investments for long term is positional trading? For example if Ravi invests Rs.10,000 in a stock 40 years ago and when he reaches retirement sells that stock at 800 crores which is absolutely tax free, then this is positional trading. This is possible read this: How to Make Crores from the Stock Markets.

For positional trading in long term investments stop loss is not required. However for equity or derivative trading stop loss is required.

Some people do take stop loss in long term equity trading also. Like holding a stock for six months but then selling it at a loss of 10%. This is stop your loss.

For derivative and short term equity traders stop loss is very important. In fact it is compulsory. You cannot be in the game if you do not take a stop loss somewhere.

This article discusses where to take a stop loss.

Whenever traders read some bad news about a sector or a company they tend to believe that their stock may fall. Intraday traders short the stock in equity markets and positional traders may short a future or buy a put. What strike put they buy is their decision. But it is seen on most days that most active options are at the money options. This means most option sellers or buyers will trade the ATM options. So most option traders buy ATM puts if they feel the stock may fall.

Short selling is selling a stock that the trader does not own. But they have to buy it back one day. Derivatives traders have time to buy it back before or on expiry day. However equity traders have to buy it back the same day. Positional short selling in equity is not allowed in India, only Intraday is allowed.

Difference Between First Buy Then Sell And First Sell Then Buy

When a trader buys a stock or option all they want is Buy Low – Sell High.

Similarly when a trader sells a stock or option all they want is Sell High – Buy Low.

If the above happens it is profit, else it is a loss.

Who Are The Biggest Short Sellers

The biggest short sellers are the institutional investors. They short sell to hedge their positions. Among institutional investors hedge funds are the most active short sellers.

They use short selling mostly buying puts, not shorting calls, in some stocks that they hold to hedge their long positions in these stocks.

This strategy is known as married put.

But Where Do They Take A Stop Loss?

Institutional investors and hedge fund managers know very well their risk appetite. Unlike retail traders non of their trades are without a plan. Retail traders if they short do not do anything if the stock keeps rising. They trade on hope. Trading on hope and without a plan is not trading, it is gambling. All speculative trading is gambling.

How many times retail traders buy an option and see it expire worthless? This is the case with most new comers in option trading.

Do not let this happen. Never even average your buy position in options if it is making a loss.

All your money will go down the drain – it will become ZERO.

Decide a stop loss position and exit there.

Hedge funds also have a plan. It is obvious what they do is not known to anyone.

But I am sure this is what they do:

Suppose they have 10 crores worth shares of XYZ company and they fear it will fall.

These are the things hedge fund managers may do when they fear a fall in the stocks they hold:

1) They may short sell shares of another company in the same sector to the value up to 10% of their current share holdings.

2) Buy puts to the extent of 5% of the current holdings. In this situation it is 50 lakhs. They may take a stop loss at 25 lakh. Which means all they are putting at risk is just 0.25% of their holdings.

3) Sell Futures with a proper stop loss (though this they do rarely).

As you can see they have a proper money management plan they succeed to make millions from trading.

In US hedge funds are very popular, however in India hedge funds are not that popular. Equity mutual funds are very popular. If you do not know how to select stocks or mutual funds for the long term you can do my course here:

https://www.theoptioncourse.com/stocks-and-mutual-fund-selection-course/

Where Should A Retail Trader Take A Stop Loss?

If you keep your profits at 5% then your stop loss should be at 2.5% of the margin blocked.

If you are successful 10 times trading, it will take 20 times for you to get back to no profit no loss zone.

As you can see with such a simple planning in place your trading results will become better than what it is now without a proper money management plan.

Hope this article helps you in deciding taking a stop loss while trading stock markets.

Article Written on: Thursday, 08 June 2017

Learn how volume in stock or derivative trading can help traders set up their winning trades.

What Is Volume?

Volume is a count of total trading done at a given period of time.

See today’s highest volume in Bank Nifty:

Source: https://www.nseindia.com/live_market/dynaContent/live_analysis/most_active_contracts.htm

You can find historical contract-wise price volume data of NSE here:
https://www1.nseindia.com/products/content/derivatives/equities/historical_fo.htm

As you can see as on June 08, 2017, 11:31:22 Indian Standard Time:

Most volume of trading can be seen in BANK NIFTY of strike 24,000 CE.
Volume: 2,74,121
Turnover in lacs: Rs. 26,31,617.52
Open Interest: 15,83,280
Value of Underlying: 23,631.30

Bank Nifty at the time of writing is currently at 23,610.45:

Source: https://www.google.co.in/search?q=banknifty+share+price

Today – Thursday, 08-06-2017, is Bank Nifty weekly expiry. As you can see since strike CE 24000 is Out of The Money Call Option, a lot of traders are trying to make money here there.

Read The Reality Of Very Far OTM Out Of Money Options, to know why Out of The Money options are highly traded on expiry day.

I that article I had written – They get attracted by low premium and low risk options.

This you can see comes true in every expiry day.

Volume is overlooked because not many trades know how to utilize it.

Volume is created because for every buyer there has to be a seller, and for every seller there has to be a buyer. When in a certain stock or derivative too much volume is created, there is definitely something going on.

In stocks with high volumes the ask and bid prices are very close. In low volume stocks the ask and bid prices are far.

Especially in stock options, the out of the money options have very low volume. Sometimes are volume are so low that there are buyers but no sellers, and the trade cannot take place.

Volumes can be great indicator to trade a stock.

How To Use Volume as an Indicator of Direction?

Before reading I need to add a disclaimer: Volume itself is not the only indicator of the direction of the move. It is just one part of the indicator of the direction.

Most traded stocks, option strikes and futures can be found in many websites. One link I have already given above, but there are many brokers who show the high volume stocks for their clients to take a decision to trade. Here is another link to see the volume, most active stocks traded during the day, last 5 day performance, Gain Percentage, SMA, Deliverables, live when the markets are open:

http://www.moneycontrol.com/stocks/marketstats/nse-mostactive-stocks/nifty-50-9/

As traders it is better to participate in stocks with more volume than stocks with less volumes. This is better for a short term trading not long term investing in stocks.

Long term investing can sometimes produce stellar returns, I offer a course on selecting stocks for long term investing. For long term investing volume is not important.

However for short term trades, volume is a strong indicator of trading though it is not a strong indicator of success of trading.

Indicators to help you take a trading decision

If the price of a stock is decreasing, but its trading volume is increasing then there is a chance of the stock price rising. Reason – good interest by trades. This is signal of an uptrend.

Possibility of success is high if the volume in the above situation is very high. In low volumes it may be a wrong signal as in low volume trading the volume can change any time.

Example:

When a company comes out with great quarterly result, there is a very high chance of high volume and rising stock price of that company. Similarly when a company comes out with bad quarterly result, there is a very high chance of lack of interest, low volume and falling stock price of that company.

What is the problem with the above volume based trading?

Volume has to be constantly monitored. This is a serious drawback as within seconds volumes can change. This is the reason we see a high volume stock suddenly falling, or a high volume stock suddenly rising.

Have a look at Yes Bank trading chart on 09-June-2017:

At 1.41 pm the stock suddenly started moving up from a intraday low of 1475.20. Exactly here the volume must have increased.

This is where is the problem with volume based trading. Seeing the decreasing volume some intraday traders must have shorted the stock at 1.40 pm only to see the stock going up from 1.41 pm and must have exited in loss.

In extraordinary volumes some stocks become very volatile. They move up and down in a rapid way leaving the traders in a frenzy mode. When volume increases it goes up, when volume decreases it goes down. This happens intraday.

It is seen that most intraday traders get caught in the market tops seeing the volume and vice versa.

Is Historic Volume is Of Any Help?

No. Historic volume will produce irrelevant data. If traders need to compare volumes then maximum they can go back to 14 trading days.

Conclusion:

Lots of traders trade only out of the money options. Read to know the reality of trading Out of The Money OTM options.

There are two types of speculative option traders:

1. Those who trade only ATM (At The Money) options, and
2. Those who trade only OTM (Out of The Money) options.

Very few trade In The Money ITM options.

Most traders start with At The Money options then move to Out of The Money Options to try their luck.

Buyers when they lose become sellers and sellers when they lose become buyers. And most option traders start trading with Index options. In India Nifty Options is the most traded options.

Therefore there is rarely low liquidity in Nifty Options trading.

Option Buying or Selling is a Game of Probability

NSE spot price is 9,642.15 as on 01.01 pm, 06-June-2017.

Today NSE is falling, so for most traders probability of success of selling Call Options is more than that of probability of success of selling Put Options.

Tomorrow the story may change.

To avoid taking chances traders try to sell very far Out Of The Money options, especially near expiry. This is more fun oriented than logic oriented.

One plunge down on expiry day can even push far out of the money options into at the money options and it may take away years of profits of the far out of the money option sellers.

Story is same with far out of the money option buyers.

They get attracted by low premium and low risk options. On expiry day or a few days before expiry when option premiums are low, these traders buy very far out of the money options hoping the stock may take a drastic move and they can make a lot of money.

Most of the times it does not happen and they end up losing money.

When move actually comes they are either not trading that side, or they exit in a small profit.

Buying low premiums out of the money options is like buying a lottery. At least if they win a lottery, they end up making a few lakhs or even crore, but in options trading maximum profit also has a limit. One trade cannot make lakhs of profits.

Unfortunately by the time a trader understands it’s too late.

Once they realize they are doing a mistake they look for tips – again a huge mistake and they lose more.

Then they start looking to educate themselves or do a course. Some of my clients have been though the above hell then did my course.

Conclusion:

Educated yourself before trading options and getting into the game of speculative trading or playing the game of probability.

Date: Monday, 05-June-2017

Nifty has rallied from 8000 levels to the highest in history today: 9685.15

Today highest:

Learn why you should avoid temptation to buy stocks in a bull rally, wait for a fall and then buy stocks as per your choice.

In a bull rally most investors get lured by temptation to participate in the rally and make quick money and end up getting caught at the peak.

In the history of stock markets which bull rally ran permanently? None. What goes up has to come down and what comes down has to go up. This is the nature of stock markets.

Mistakes To Avoid In a Stock Rally

1. Temptation to Buy Stocks – Too many investors are now in a buying frenzy mode as if stocks will never fall. This is a huge mistake. This is the time to sell not to buy. Of course to sell you must have stocks in your portfolio that are making good profits. If you did not buy earlier when the stocks were at attractive prices, you did a mistake. If you buy now you will do a double mistake. Avoid your temptation to buy stocks now.

2. It is A Very Costly Market Now You are getting a deal but its very costly. Will you go for this deal? Yes there is a feeling that Nifty may touch 10,000 who knows but the deal is costly and the risk is too much. It is better to leave a costly deal and wait for a better deal.

3. Chance of a Bubble – Agreed now government across the world have taken considerable steps to avoid the recession like situation in 2007-08, but who knows what is happening? Why risk your money when it can be avoided. There is little chance of a bubble, but its better to sit sideways.

4. Aggressive Shorting – There are a lot of contrarian traders. They always short the markets whenever they see a bull market. Positional shorting cannot be done on stocks so they take aggressive bets on options shorting. I am sure a lot of traders are now shorting at the money options or just out of the money ones trying to capture the maximum profit. They forget that in a bull market option premiums are very low so the risk reward ratio is very bad. See India VIX on 05-June-2017. It is less that 11. Range of 9-12 is considered low for VIX. VIX or Volatility Index has a big role to play in deciding option premiums. It forces trader to come near the money to short options to make more money. They do not even hedge and if the rally continues they end up making huge losses.

India VIX as on 05-June-2017:

Learn proper option hedging methods in my conservative options trading course.

5. Depending on Trading Software – I am sure all trading software must be giving a buy signal. A software does not have a brain. When it sees no downfall for days it will obviously make a straight line up. The software cannot predict a fall. No software ever predicted a bull run or a great fall and they will never do. I have never traded based on any software because I believe business is done by humans not machines. The article you are reading now is written by me not a machine. Similarly, the money you will keep to trade will be yours, the profit and losses will be yours – then why follow a software? Like your place in your job/business cannot be replaced by a robot or a machine, what makes you think software can trade?

Read this how automated trading systems can fail big time. Here are the disadvantages as per the wiki article:

Disadvantages of Automated Trading System:

An algorithm that performs very well on backtesting could end up performing very poorly in the live market. This point is very important for traders who backtest a strategy, get great results and think the strategy will work in future as well. This is simply not true. Good performance on backtesting could lead to overly optimistic expectations from the traders which could lead to big failures.

The following text has been taken from Futuresmag.com:

The system wins only 38% of its trades. The average winning trade lasts 153 days, whereas the average loser lasts only 55 days. If we look at monthly returns, however, six out of 10 months make money. Our winning months average $7,028, and our average losing month is –$5,805. At first glance, this may seem like a paradox—how can only 38% of the traders make money, while 60% of the months are winners? The answer lies in the role of time. This is a trend-following system; as such, a large percentage of trades shows an interim profit at some point even though (per the rules of the system) only 38% are closed out as winners.

Because the average winning trade lasts 153 days, we can assume we must trade for at least 600 days before we make money. That would be just four winning trade periods. Even though it may seem like a long time (almost two years), it is still a short period measured in terms of trade time frame.

The following text has been taken from https://en.wikipedia.org/wiki/Automated_trading_system:

On May 6, 2010, the Dow Jones Industrial Average declined about 1,000 points (about 9 percent) and recovered those losses within minutes. It was the second-largest point swing (1,010.14 points) and the largest one-day point decline (998.5 points) on an intraday basis in the Average’s history. This market disruption became known as the Flash Crash and resulted in U.S. regulators issuing new regulations to control market access achieved through automated trading.

On August 1, 2012, between 9:30 a.m. and 10:00 a.m. EDT, Knight Capital Group lost four times its 2011 net income.[14] Knight’s CEO Thomas Joyce stated, on the day after the market disruption, that the firm had “all hands on deck” to fix a bug in one of Knight’s trading algorithms that submitted erroneous orders to exchanges for nearly 150 different stocks. Trading volumes soared in so many issues, that the SPDR S&P 500 ETF (SYMBOL: SPY), which is generally the most heavily traded U.S. security, became the 52nd-most traded stock on that day, according to Eric Hunsader, CEO of market data service Nanex. Knight shares closed down 62 percent as a result of the trading error and Knight Capital nearly collapsed. Knight ultimately reached an agreement to merge with Getco, a Chicago-based high-speed trading firm.

One small mistake by the software and the trader loses his shirt or may have to sell his home to at least put food on the table.

Never do these mistakes in your trading life especially in a Bull Run which attracts most investors to stock markets.

Conclusion:

Do not let Automated Systems take ownership of your trading money – if they do mistakes you will pay the price not automated systems. Take control of your money yourself. God has given you a brain and two hands to take control of your future so do not let anyone else either a machine or an unsolicited advisor or tip provider take control of your finances.