Hedging is sort of Insurance. Like when we buy a car we also buy an insurance. Similarly other insurance products like life insurance, loan insurance etc. These are basically hedge against certain problems in our lives.

Hedging is the same. If take a trade and hedge it properly rest assured that the loss will be limited because hedge will make sure the losses are limited.

Hedge reduces or eliminates fear, one of the worst enemies of trading. It reduces fear because the trader knows that his loss is going to be limited. In that case hedging allows him to take a bigger trade.

Imagine a trader trading 10 future lots without hedging vs a trader trading 10 futures lots with hedge – both taking a long buy call. And if this is an overnight position the trader trading without hedge will not be able to sleep.

Hedging is not just an insurance as written everywhere, its most important feature is it reduces fear of trading.

What Exactly Is Hedging?

It is an investment or trade with negative correlations. It is like becoming a broker. Take money from one trade and give back money on another – the difference is the profit of the trader.

It is obvious that if the trader is reducing risk in the trade, then profits will also reduce. However, if the original trade makes a loss then the insurance pay off a lot which in turn reduces the losses.
Which type of traders are big hedgers?

Portfolio managers, high net worth individuals, conservative retail traders, and corporations trading in millions of dollars almost always hedge their positions.

Just like insurance hedging comes at a cost. But the benefit far surpasses the cost of hedging especially when the trade goes against their bet.

Instead of losing millions of dollars or rupees, they lose only a few lakhs. But when they make money, it’s only a small price they pay for hedge. All in all over a long period of time they make good money.

Even if it is 30 crores profit made on 100 crores of rupees this is a great return.

It is due to hedge that they are able to risk 100 crores, otherwise it is impossible to trade with 100 crores naked trading.

Do High Net worth Investors Hedge?

Yes they do. They trade with a lot at stake. Sometimes they also trade with borrowed money. When they are trading with millions of dollars they cannot even think of taking a big risk. Naked trading is winner takes all and loser loses all.

Winner takes all is fine, but when it comes to losers lose all, they have a problem.

HNIs mostly buy stocks worth crores and they hedge it with derivatives. When they feel stocks may fall they buy Put to protect the losses from the fall.

How many puts to buy and the strike price to buy puts depends on the pricing of the puts and the risk they feel on the stock’s fall.

If their data suggest there can be a huge fall they buy more puts and if they feel the stock may not fall too much they buy less insurance or hedge. This strategy is known as Married Put mostly done by high net worth individuals.

As soon as a trader enters the world of Options the first thing that comes in their mind is to buy options.

These are the reasons they start off by buying options as told by brokers, or friends or reading in websites:

1. Option buy has low risk – It is a myth. Agreed you can buy an option for less than 100 rupees but do not forget that it does not guarantee that it will make money. That 100 rupees can become ZERO. There is no business in the world where you buy something then there is a possibility of losing 100% of the money on it. Low risk if combined for one year can be very high risk. Ask any three year experienced option buyer how much he lost. I bet the average will be more than 1 lakh rupees.

Low risk is to lure option buyers to buy options.

2. Option buy has unlimited profits – This is only in theory. Have you ever heard of an option buyer who started with 500 rupees and went on to make 5 crores. Unlimited profit right? so why stop at 5 crore, why not 10 crore or even 100 crore?

Nobody has ever done that, no one will ever do that.

In reality option buyers book profit at some stage. This they call as target. There is nothing wrong in keeping a target for stop loss and profit because this is how this business is done, but then when there is a target to book profits and exit where does the word unlimited come from.

Beware of this myth of limited loss unlimited profits of buying options.

3. Best option trade in the world is to buy both at the money call and put because if the stock moves down out will make money and if the stock goes up call will make money – This is actually one of the worst option trades in the trading history.

In that case why not every option buyer does that? I mean buy both calls and puts of the same stock and keep laughing all the way to the bank every month?

Why this does not make money?

Do not forget that options do not come for free. What an option buyer pay for is the premium built inside the options.

Options are made up of Delta, Gamma, Theta, Vega and Rho. The worst of them is the Theta – the time value and Vega – the implied volatility which depends on India VIX.

At The Money options have the maximum time value built in them. And statistics suggest that most trading is done in ATM – at the money options, which has the maximum time value.

Last 10 days time value of options evaporates like melting ice. Time value evaporation means money getting evaporated in the sky. This is like throwing money.

Greedy traders who want to take advantage of movement in last 10 days actually buy options during last few days only. Imagine the kind of risk they are taking. It is like putting their money on fire.

Sure sometimes option buyers get lucky here and there, but long term they lose money. The real reason is written above – options slightly overpriced compared to the expected move of a stock. Overpriced means Theta and Vega is added to their pricing.

I hope now it is clear why most of the times option buyers lose money even if they buy both long calls and puts.

I know a lot of you want to either come to me for class room training or want me to visit their city for class room training.

I can understand why many people want it.

Here are a few reasons they told me:

1. They want to see me. It is strange, do you make money seeing me? If no then why you want to see me?

2. They want to ask questions face to face. This is fine but what is the difference between asking questions on email, mobile or whatsapp? It is the same. What is more important is the quality of the answer not the way the answer is delivered.

3. They have a feeling that they will learn more in class room training. History is proof that many students have failed in class room training and many students have excelled in distance education. Do you know a lot of highly paid executives do distance education MBA from reputed institutions? They earn money while they do their MBA. It is just that they take three years to complete MBA, compared to two years who do it full time.

Almost all Universities in the world give distance education. Do they not get students? They do. Do all the distance education students fail in exams? No. The pass percentage is same as the students who attend classes.

4. Quality of education. Now this is the most important part.

“What You Learn Is More Important Than How You Got That Education”

It is a myth that class room teaching quality is better than distance teaching.

I have never attended a single class room trading training class. All my teachings and research came from books and online magazines on stock markets. I do not even watch YouTube videos on stock trading.

When you buy a book do you tell the author you will only buy his book if he teaches you face to face?

It is strange that when it comes to learning to trade stocks, people ask for class room training.

Assuming that I take class room teaching, then will the quality of what you learn be better? No. You will learn the same thing that you learn from what I teach you by sending the strategies to your email.

Then there is support for months. In that case you will have to stay in the class room for months. Is that possible?

Here is an email I received form a person doing PhD but wanted to do my course in class room:

Hi Dilip,

I want to take class room training on derivatives but would only need class room training. I know getting class room training is not feasible due to time conflict but we can work on the timing. Reason for class room training is I am doing PhD in derivative, and I have so many question which I think will be only answer in class room training.

I have done sufficient self study & read 100s of research paper on derivatives so that why doing this derivative training on email will not make sense to my problem for which I am trying to get an answer via class room training.

Thanks,
Name Withheld

My reply:

Hi,

Bang on 🙂

Not a single PHD done graduate doing research on derivatives made lots of money trading derivatives. 🙂 I mean in the history of stock markets.

Is Warren Buffett PhD in stock markets? Or what about Rakesh Jhunjhunwala?

Options trading is NOT a research subject – here logic is more important than research. Option may be a research subject, Option trading is NOT.

Sorry no class room training I take. For 5000 that’s not feasible.

Dilip

His reply will surprise you:

I took PhD out of passion for the derivative topic. Till now I have not traded in stocks or derivatives.

I totally agree with you that no single PhD done graduate made money trading stock markets, but I am sure who made it somewhere PhD must be attach in term of advice or strategy.

I am business analyst and it will help me in my day to day work.

Thanks
Name Withheld

Did you see a person doing PhD in derivatives NEVER traded in option, future or equity?

Then what is the point of doing research in stock markets if you cannot trade yourself and make money?

This is the reason I do not do class room teaching.

You must be more interested in whether you will be able to make money after doing my course. If the answer is YES, then it does not matter how the course is conducted.

If you feel it will help you then do it. If you can read my blog and understand, then what makes you think that you will read my course and will not understand?

If you trade in options and know English you can do my course.

After this email was sent I got an instant reply from one of my free subscribers:

With due respect to you sir this is the dumbest email ever all time I have received. Historically it is proven that a person grasps a higher understanding and retention amount in a class room with a teacher to face him in a conducive ambience. True universities now offer online courses. But even today these degrees have no value when applying for a job. Have you ever tried? Top universities from IIT, IIM, to Ivy League – still run their core classes in a class room Sir, and don’t argue and cry like your points you have made.

May be many people think that way therefore they ask me for a face to face class room trading class. But we are humans and our views may differ.

This was my reply:

I agree with you, but my experiences are different.

Here are my qualifications:

MA (Master of Arts) in English – Distance Education.

MBA (Master of Business Administration) – Distance Education.

Most of my higher education were Distance Education.

Now coming to this site and the course I provide:

All the knowledge I acquired on stock & derivative trading – Distance Education.

Articles I write in my site – Distance Education.

You are reading my emails – hey 14,500+ people read my emails everyday for free – Distance Education.

100% 100+ Testimonials in my site – Distance Education.

Ok fine since for you Distance Education is dumb, then I am willing to give you a face to face class.

Now tell me what you will pay me?

Please note that Distance Education is cheaper than face to face education.

Eagerly awaiting your reply.

I don’t think he will reply. But if he does I will update here.

In short do not expect face to face trading class room teaching to be possible with such a low fee of Rs. 5000. I know many stock trading face to face classes room teaching being conducted In India. The minimum charge is Rs. 22,000.00, going up to Rs. 1 Lakh+. Compare it to my course fees, then decide you still want Face to Face Class Room teaching or Distance Education?

Read this article to know the real meaning of volatility and its importance in stock trading. Hedge fund managers and big investors buy put to protect their funds.

Before reading this article I want to clear a confusion:

A lot of traders get confused between Volatility and VIX.

The stock is very volatile means it moves a lot.

The Index VIX is stable means there is not much panic in the markets and if the index is stable. Stable does not mean the Index is not moving. It is moving but not very Volatile.

For high volatile stocks, VIX will be high.
For low volatile stocks, VIX will be low.

For traders volatility is very important.

During April-May 2017 India VIX is hovering at historically low levels. 9-11 is considered low VIX.

You can find India VIX here:

https://www.nseindia.com/live_market/dynaContent/live_watch/vix_home_page.htm

See INDIA VIX as on 18-May-2017:

INDIA VIX 18 May 2017

Today Nifty has fallen so VIX has risen:

NSE 18 May 2017

Over the long period stock markets and VIX are inversely proportional. If stock markets fall, there is panic in the markets and VIX increases. And if stock markets rise, there is no panic in the markets and VIX falls. Like since the last 3-4 months Nifty went from 8000 levels to 9400 levels and India VIX from 17-18 levels to 10-11 levels.

See this graph for proof. You can see that when CNX Nifty rose VIX fell and when CNX Nifty fell, VIX rose.

Nifty vs VIX

Source:
http://www.moneycontrol.com/indian-indices/india-vix-36.html

What hedge fund manages do when VIX is low?

This is the time when options are available at cheaper prices to hedge. For them this is a great opportunity. They start buying puts to hedge their positions in stocks against a fall. How many lots they are willing to buy depends on how much money they are managing.

Do not forget that they manage millions, some fund managers manage billions. This is when they use options to do exactly what they were meant for. To Hedge.

Of course this will not come in the media. This is their personal decision on the job, and they will not disclose it in public.

Another time they hedge their positions is when the markets become very volatile. This is to protect from volatility.

Suppose a bad news comes in, the HNI (High Net Worth Individuals) and fund managers start buying puts.

When a lot of Puts is being bought, the markets gets into fear and the VIX goes higher and markets move lower.

In simple worlds it is profit booking by most investors or put buying by fund managers.

Why do you think when markets move higher, it starts to fall from some point? There is no bad news as on 18-May-2017, but Nifty has fallen? Why?

This is pure profit booking, not a fall because of a bad news.

It is a common mistake by most retail investors. Whenever in media they say the markets are volatile, they think that stock markets are falling. This is not true.

Period from when Nifty went from 8000-9400 is also volatile, same as when Nifty went from 8800 to 8000 levels.

Volatile can be going up or going down. Unfortunately volatility is associated with stock markets going down.

Volatile means fast movement, not necessarily the stock or Index going down.

Learn the difference between market, stop and limit profit or loss orders.

New traders often get confused between market orders, stop orders and limit orders. I am writing this post to clear their doubts.

In short:

Market Orders are the ones that gets executed immediately at whatever price is available in markets.

Stop Order becomes Market Order as soon as the price is reached mentioned in the stop order. Which as soon as the stock reaches the price given in the stop order, it gets executed immediately.

Limit Order has two variables. Maximum and minimum. Order is triggered only if the price reaches the maximum or minimum mentioned. Limit Order will be executed only between the maximum and the minimum price given in the order. If there is a jump in the stock price and the trade does not gets executed between the maximum and minimum price then the orders stays pending.

Explanation:

Market Orders

Stock XYZ trading at 10. Ask (best sell) price is at 10.50 and Bid (best buy) price is at 10.25. A new trader wants to buy the stock and hits Market Order. He order is triggered immediately and he buys the stock at 10.50 – the best sell price at the moment. Why the best sell price? Because he hit market order. A market order to buy is to get the stock at the best sell price, and the market order to sell is to get the stock at the best buy price currently available in the market. Please note that if a buy market order is hit and order is approved to go to the market place, but if there are no sellers then the order is rejected immediately by some brokers or is kept pending by some brokers.

It is advisable before hitting market orders please see the ask and bid prices.

Stop Order

Let us take the same example above.

Stock XYZ trading at 10. Ask (best sell) price is at 10.50 and Bid (best buy) price is at 10.25.

An experienced trader wants to sell the stock at 10.90. Let us assume he is an Intraday day trader and bought the stock at 10.15 and keeps a stop order to sell at profit of 10.90-10.15 = 0.75 points.

Note that a Stop Order not necessarily means a Stop Loss Order. Most traders in India think a stop order is a stop loss order. A Stop Order can be a stop “profit” order or a stop “loss” order depending on what trader does.

In the above case he has put a stop “profit” order.

His stop order to sell the stock at 10.90 will show as pending in his order books.

Trading keeps going and as soon as the bid (best buy) reaches at 10.90 his order becomes a market order and will immediately get executed. The buyer who bid at 10.90 will be given the shares and the sale is complete.

Note that anything above 10.90 can also be triggered, but not below 10.90 as this is the limit to sell by the trader. If lucky, the stock is jumping and someone bids to buy at 11 then the order may get triggered to sell at 11 also.

Limit Order

Let us take the same example above.

Stock XYZ trading at 10. Ask (best sell) price is at 10.50 and Bid (best buy) price is at 10.25.

Let is assume there is some good news in the stock and suddenly there are lot of buyers in the stock and the stock is zooming up very fast.

An experienced trader wants to buy the stock to go with the trend. But he feels at current price of best sell 10.50 which is technically a market price it is quite high so he sets a stop buy order at 10.40 and the order gets filled after sometime.

Now after sometime a bad news hits on the stock and traders started selling the stock. It now starts to go downhill.

The trader who bought the stock at 10.40 panics and keep a stop loss limit order.

As written above limit order has two variables – low and high.

He keeps the stop loss limit order at 10.10 (high) and 9.90 (low).

In other words he orders the system to sell the stock between 10.10 and 9.90. Not below 9.90. Note that any buyer bidding between 9.90 and 10.10 will get the stock but if there is a swing and the stock nose dives to 9.50 then the limit order will remain pending and will not get executed.

If the order was a stop loss order at 10.10 then it will get executed at 9.50 if it nose dives there.
Hope the difference between market, stop and limit order is clear now. If any questions ask in the comments section below.

Since the last one month INDIA VIX is hovering around 10-12 range. This is historically at a very low range. Average range of INDIA VIX is 14-16, above 17 is considered high. Above 22 is very high. Above 30 it is better not to trade.

Right now at 9.35 am, 11-May-2017, INDIA VIX is 10.7050.

On top of that NSE is showing little movement since last one month. See this image below, Nifty has moved very low from 10-April-2017 to 11-May-2017:

This is just 1% move.

When there is no panic in the markets

VIX gets low.
Volatility is low.

Please note that volatility is the speed of movement. VIX is Volatility Index, which shows the market’s expectation of 30-day volatility. When the market is not expected to move much VIX will obviously fall.

Problems with lower VIX and if markets are stable not moving at all

1. Stocks give returns lower than or equal to Fixed Deposits.
2. Option premiums are low not encouraging Option Sellers to Sell as they get less for more risk.
3. Option buyers are at more risk as the lower premiums lure them to buy more options at the same cost. But when markets are not moving at all, the premiums gets evaporated and buyers in hope of a move keep the trade on hold. End results – option expires worthless and all their money goes down the drain. It becomes ZERO.
4. Trading becomes boring. See this, a major investment firm in USA tweeted this:

Same happening in India too as seen in the image above.

Does low VIX a sign of a Storm?

Most of the times it does happen. In stock markets whatever goes down has to come up and whatever goes up has to come down. So if not today, may be tomorrow or later VIX has to rise, and since stocks markets are inversely proportional to VIX, if it rises stock markets will fall.

Rich investors will hedge their portfolio against a fall.

Some mutual fund managers also hedge their funds.

Retail derivative traders who know hedge also hedge, but as most do not know are option buyers. In times like these money of option buyers goes to rich stock investors who hedge their investments, hedge fund managers and smart derivative traders who know hedging methods.

To end, I can only say is if you are an option trader and do not know how to hedge you are doing a big mistake.

Whether it is high volatility or low volatility, high VIX or low VIX, hedging is something that almost always helps you in trading properly and increasing your winning ratio.

My hedging course will help you to learn good hedging methods.

RSI is Relative Strength Index. The name itself gives some idea of what RSI is. Strength obviously refers to what is stronger? Buy or Sell.

Disclaimer: Please understand that RSI or Relative Strength Index is just an indicator of the strength of a certain condition which you will read in this post. It is not a guarantee that if SELL strength is strong it means that the stock will fall, and if BUY strength is strong it means that the stock will rise. Please keep this in mind before reading.

RSI is basically a momentum indicator. Momentum indicator is what is happening at the moment in that stock. It was developed by technical analyst Welles Wilder.

RSI is a indication of what is recently happening over a period of time in that stock. It checks for gains and losses. Every stock has a different RSI.

RSI attempts to know the following:

1. Recent gains and losses over a period of time,
2. Measure of speed and change of price movements, and
3. Try to identify overbought or oversold conditions in the trading of the stock or Index.

What Is The Formulae For Strength Index – RSI?

To know RSI two things are required:

1. Find out average gain during specified time frame.
2. Find out average loss during specified time frame.

Then take out the RS value for each closing day.

RS = Average gain of up periods during the specified time frame / Average loss of down periods during the specified time frame.

Average Loss equals the sum of the losses divided by 14 for the first calculation.
For subsequent calculations multiply the prior value by 13, add the most recent value and then divide the total by 14.

Bit complicated but people who trade on RSI values find it.

The same applies to Average Gain.

This is the formulae to calculate RSI:

RSI = 100 – 100 / (1 + RS)

RSI values range from 0 to 100. The default time frame for comparing up periods is 14 trading days.

Note that RS is the most important value to find. You will need to use an Excel sheet to get it done faster.

But you will have to write the closing rates manually.

You can get this data from your broker.

Or historical close data from NSE website:
https://www.nseindia.com/products/content/equities/indices/historical_index_data.htm

What To Do With Data of RSI?

Traditionally RSI traders do this:

RSI value of 70 or above indicate that a security is becoming overbought – it is a signal to SELL as the trend may reverse.

RSI value of 30 or below indicate that a security is becoming oversold – it is a signal to BUY as the trend may reverse.

Note: Advanced traders do not only depend 100% on RSI indicators, they also have other signals in place to decide the trend.

For example sudden drop may indicate a SELL signal by RS, but the stock may reverse.

Some traders use extreme RSI values to buy or sell. Like they treat 80+ as overbought and 20- as oversold.

RSI is one of the easiest technical tools there to find out direction of a stock and trade, still you can see how complicated it is. Further there is no gurantee of even 70% success, this is the reason I highly recommend Non-Directional, No Technical Analysis trading.

Read how a trader stuck with stock market trading basics and made crores.

Please Read This Disclaimer Before Reading This Article:

Stock market investments are subject to market risk. Please invest carefully after thorough research. This article explains how if you stick to the basics of investing and do proper research, you can make millions or even crores.

Year 2005: I started reading bits and pieces about stock markets, but never traded until 2007. Finally I started trading the stock markets in 2007, though for 2 years had read a lot about stock market investing especially basics. Like other retail traders, initially for first three years I made huge losses, now recovered, fact is even after knowing the stock market basics when I was making losses I did not stick to the basics of stock investing.

My regret is that even after I knew the basics I did not stick to it and lost more than 7 lakhs. You can read the mistakes I did while trading here.

I was yearning to meet a trader since 2007 who stuck to the trading basics and made a lot of money.

As luck would have it I met him via my site, www.TheOptionCourse.com. He contacted me through WhatsApp on April 30, 2017. Here is the screenshot.

A Stock Trader Who Sticks To The Basics Of Trading

What follows is a long and interesting conversation.

What Is Stock Market Trading Basics Dilip?

Well it is just one line which 99% or more traders DO NOT follow. Here it is:

Cut Short The Losing Trades Fast, And Let The Wining Trades Ride As Long As They Can

That one single line 99% traders do not follow instead they do this:

Cut Short The WINING Trades Fast, And Let The LOSING Trades Ride As Long As They Can ON HOPE THAT THEY WILL RECOVER

Next what he said amazed me, because this is only the second time someone called me in the last three years and said he is in profit. The first time was sometime back in 2015, but his profits were negligible. This trader is in huge profits.

This is what he said:

I am also trading in stock since 2001. Currently now in profit of around Rs. 1 crore.

WOW! 🙂

I wish everyone said that, but alas it is not the case. 🙁

I asked him what kind of strategy you follow or it is tips/advisory service?

He said, no he never take tips, but used this strategy:

Book Loss At The Earliest And Carry Profit As Long As Possible

There you go. At last I met one trader who stuck to the basics of stock trading and made a whooping profit.

Rs.1 Crore is not a matter of joke, right?

Obviously my next question was: This is amazing then why my option course?

He said he is keen to learn new things, that is the only reason.

At the time we were having chat, Nifty was around 9300. (30-April-2017)

Now this is what he said that surprised me the most:

Presently carrying 450 (6 lots) nifty @ 7950, but not booked profit till.

I thought strange.

Since I am mostly into options I asked him – you mean 7950 CE (Call Option)?

He said, no I bought Nifty Futures at rate 7950 in November, and rollover-ed till now.

Let us do some simple calculation.

He is not a small trader for sure. 450 means 450/75 = 6 lots.

Here is his profit if he books at 9300:

9300-7950 = 1350 * 75 * 6 = Rs.6,07,500.00

Profit of Rs. 6 Lakh, 7 Thousand, 500 in 5 months.

Average profit per month:

6,07,500.00 / 5 = Rs.1,21,500.00

Rs. 1 Lakh, 21 Thousand, 500 profit per month.

How many people earn this much per month in India from stock trading?

Amazing. This is what stock markets can do if you stick to the rules of trading.

I think it is an art, not a science.

So where do we go wrong?

Panic, Greed, Emotions is the answer.

Panic: We book profits early.

Greed: Not managing our finances well and taking a loan sometimes to trade (bad idea), or trying to make 10% every month from trading. Impossible. See how much this greedy trader lost and this trader lost 2 crores.

Emotions: In hope that losses will recover, we let the losses ride.

All of the above combined, traders keep doing mistakes time and again.

He fixes loss or takes a stop loss at a certain percentage but profits, he did not tell exactly where he takes.

This stop loss percentage can be flexible depending on the trade taken but it should be fixed before the trade is taken, not after.

I agree that this trader does good research before selecting scripts and I think he is a naked futures trader. Naked trading means he does not trade with a hedge. I personally feel this is not good for most traders. But if you are an exceptional trader with proper planning and full control over your emotions then it is fine on some percentage of your account not all.

Look at his today’s (04-May-2017) profit. Rs.67,000 profit in one day, isn’t this amazing?

Your Results May Vary

Yesterday one of my free subscriber whatsapp me that this person is FAKE as Petro Eng does not have futures trading.

I think it is misunderstood.

He traded in CASH not Futures and this was an Intraday trade.

Though I personally do not like Intraday trading looks like this person is good at his job.

If you are so good then fine, but if you are not then please stay away from Intraday trading.

Intraday trading has the power to suck you in, but for most traders it is a lose all trading game.

My advise is stay away from intraday trading.

Look how this traders lost 40 lakh trading intraday.

And he is the father of all losers in intraday trading – he lost 2 crores.

Read the above and I bet your bones will shiver.

If you are losing money trading intraday, stop trading today

I respect your money and it is completely your choice to do my course or not. But as you can see a lot of traders are doing very well after they did my course.

Positional hedged trading has a lot of benefits like low tension, no need to watch markets every second like intraday traders do, and it has the benefits of compounding which intraday day trading lacks.

In this post, read the mistakes to avoid day trading or Intraday equity, options and futures trading. Also read other intraday mistakes traders do.

Any novice equity investor or trader does these mistakes when they start investing or trading the stock markets. Even I have done these mistakes. Hell I lost 7 lakhs. Though 7 lakhs looks a small amount, percentage wise, it was 99% of my savings. I had to take a Rs. 1 lakh loan to survive at a time when we were expecting our first child and looking for a bright future. Life was hell at that time. Thank God things have improved now.

You can read about the mistakes I did in stock trading here.

Day Dreaming To Instant Riches

Just because brokers give a lot of margin on Intraday day trading does not mean you should take benefit for it.

Since I get a lot of calls from novice Intraday traders I know what most of them are doing. They want to start with Rs.10,000/- and want to make Rs.50,000 a month. That’s a return of 500% a month. No doubt why they get trapped seeing ads of tip providers who tell them to make Rs.10,000 everyday by investing just Rs.5000. Avoid these traps to save your money.

Please understand these kind of returns are impossible to get over long term. May be ten or twenty days in a year you may make 200% to 300% return in a single day, but over a year which has 250-252 trading days, you will be in huge loss, if this is what you are trying.

Do not try to attempt to make 100% return in a day or a month. You will fail.

Stock trading is a business. There is risk involved and stock trading is NOT Get Quick Rich business. Even traders like Rakesh Jhunjhunwala, who is worth more than Rs.220 crore, did not try to make 100% a year. These great traders know there is no point in running after something which is impossible to get.

They make money slowly but compound it over long time to create huge wealth. Great traders and investors are very patient and know it will take years to create a lot of money.

Lesson:

Stop day dreaming to create huge wealth in one day, month or even a year

Making Wrong Sense Of The Margin Requirements

Margin given on Intraday trading under MIS (Margin Intraday Square-off), is more than margin given for overnight positional trading under CNC (Cash N Carry). This is the reason traders try to take too much leverage on intraday day margin given.

This is pure greed psychology. Mindset of a Intraday day trader is – we will make more on very less money and very fast in a single day itself.

In real world, there is no business in the world that will generate too much money with too little money. If this was possible Mukesh Ambani would be an Intraday trader. Why work so hard to make money? For such a rich person like him, he can invest one hundred crore everyday, and make two hundred crore everyday. Do you really think its possible?

If this was possible, in this world there would be no Doctors or Engineers if Intraday day trading would have resulted 100% return everyday.

The Real Reason Why More Margin Is Given In Intraday Day Trading

First let us see if it is true that more margin is given in MIS (Margin Intraday Square off) trading.

See this image:

MIS Intraday Equity Margin India

This image was generated real time at 10.30 am, on 28-04-2017.

As you can see for positional trading CNC, there is only 1 time margin, but for MIS (Margin Intraday Square off) trading, 14 times margin is given.

CNC Margin Calculations:

Assuming Reliance Ltd. is at 1400, cash available with trader is Rs.10,000/-.

So total he/she can buy: 10,000/1400 = 7 Shares.

MIS Margin Calculations:

For MIS intraday margin the trader is allowed 14 times margin.

So total he/she can buy/sell: (10,000*14)/1400 = 100 Shares.

Do not know why the calculator is showing 102, but that is not important. What is important is that for Intraday trading 14 times margin is given.

Here is the reason why more margin is given in intraday day trading by brokers:

The trade will be automatically closed by the system at around 3.15 – 3.20 pm, even is the trader forgets to close the trade.

Historically it is seen that in one trading session a stock rarely moves more than 5%.

Let say at 9.30 am the trader bought 100 shares of Reliance Industries Ltd. for intraday trading.

Price of the stock: 1400. Margin blocked: Rs.10,000.00

At 3.00 pm the stock fell 5% and is at 1330.

The trade is closed in panic by the trader.

Total loss:

Buy price: 1400 * 100 = 1,40,000.00

Sell price: 1330 * 100 = 1,33,000.00

Total Loss: 1,33,000.00 – 1,40,000.00 = Rs. -7000.00

Money blocked was 10,000.

After the loss money remaining in the account:

10,000- 7,000 = 3000.

As you can see even in a huge downfall of 5% intraday, the money lost was well within the margin required for trading.

Please note that for more volatile stocks less leverage is given.

As I can see, for Bajaj Financial Service Ltd., only 3 times margin is given for intraday trading.

Brokers see historical movement data intraday for any stock, then decide the margin to be given for intraday trading.

Less volatile stock, more margin. More volatile stock less margin.

Please note that for CNC (Cash n Carry) positions, all stocks get 1 time margin only, because for CNC positions the stock has to be delivered to the buyer. For CNC (Cash n Carry) positions, shorting a stock is not allowed. Here are the reasons why.

For option buy positions, full margin is blocked. It does not matter if it was closed intraday or the trade was taken overnight to next day or until expiry.

For option selling, and future trades buy or sell, the brokers may block different margins for intraday and overnight positions. It is obvious that for intraday less margin is blocked, and for overnight positions more is blocked.

So the real reason why for intraday day trading (MIS) less money is blocked is not because that the traders can make more money, but because that there is less risk for the brokers.

Unfortunately most intraday traders fall for greed and try to make too much money from too little money, forgetting that if they can make 14 times the money, they can also lose 14 times the money.

If profits are calculated on the final price of buy or sell, then the loss is also calculated on the final price of buy or sell

Keep this in mind before taking any intraday trade.

That is the reason I have stopped trading intraday trading, and have become a complete conservative option trader. Right now while writing this at 11.09 am on 28-Apr-2017, I know the hedge trade is protecting my capital, so I am not much bothered about my traders. At 2 pm I will see. Do not forget that it is all positional trading, there is no need to keep watching the markets every second like intraday traders.