Saturday, December 27, 2008
The Nature of the Trading Business
Consider the following: As a trader you are in a business. Your strongest opponent has plenty of capital. He follows a program and he does it without emotion. He is totally aware of the fact that no one knows where the next tick will fall. Whereas he usually has good insights regarding the major forces that drive the market, he does not fool himself into thinking he can explain the vagrancies of price movement intraday or even from day to day. He knows that no one truly can.The successful trader has learned his lessons by actually trading.
This is a business driven by fear, greed, and selfishness, and very few worthwhile pointers are given out by the industry, other traders, or the myriad of so-called trading gurus who plague the pages of trading magazines and pages of their websites. The most valuable information is closely guarded and not often put in books or on web pages.
Learning about trading is a 'forever' experience.As the markets change and as we adjust to them, we learn. The learning is ongoing. It stops only when you no longer trade. During the time we trade we can always improve.Trading is a great business for those who master it, and those who master it are traders who have mastered themselves.
The Secrets of the Super-Traders
The first and perhaps most important "secret" is to realize that your methodology or approach (no matter how good) is only part of being a highly successful trader. This applies to any trading style including, day trading, swing trading or position trading. The simple fact is that a bad trader can screw up a fantastic trading system. Conversely a talented trader can take a mediocre strategy and make money with it.
Why? Please read on and I will explain.Many traders/investors that I have talked with think that to be a "Super-Trader" that they must possess some type of highly advanced trading techniques or software along with nerves of steel and a highly developed intuitive feel for the markets. In addition they think that these elite group, have some "inside information" that they don't. You will be relieved to know that the above is not necessary.
There are actually only a few things that separate traders who consistently make money and those who don't. And here they are?
* Skilled traders find a strategy or market pattern that offers a high probability for success. They make money by exploiting this edge over and over again.
* Skilled traders never deviate from their methodology or "wing it".
* Skilled traders never enter a trade without a entry and exit strategy. They know exactly when and where to cut their losses as well as taking profits.
* Skilled traders never ever let a winning trade turn into a losing one. The easiest way to ensure that this doesn't happen is to place a protective stop at or a few ticks in the money once your position is up several points.
* Skilled traders never hope, pray or wish that their stock would go up. They understand that when they are wrong they are wrong and the best thing to do is cut their losses short.
* Skilled traders never trade with their emotions. They don't allow themselves to get caught up in the latest and greatest investment hype.
* Skilled traders always have one goal in mind: To preserve their capital at all costs. They do this by never taking on too large of a position. A good rule of thumb to adhere to is never use more than 5% of your funds on any one trade. This way in the worst-case scenario the stock could drop to zero and your account would not be severely affected.
* Skilled traders never get too greedy. There is an old saying that "Pigs gets fed and hogs get slaughtered". These traders don't try to make one big trade that will turn them into instant millionaires. They don't try to hit home runs, instead they understand that it is better to keep hitting singles and making smaller consistent profits.
* Skilled traders enter and exit trades swiftly and decisively.
* Skilled traders listen to no one else's opinion concerning the market or particular trade they are in.
* Skilled traders are often contrarians. They will be buying when others are too scared to and sell when the crowd starts buying.
That's it, the secrets to making big money in the markets. Perhaps that is a bit of a let down as you were hoping for something a bit more esoteric and complicated.
Why? Please read on and I will explain.Many traders/investors that I have talked with think that to be a "Super-Trader" that they must possess some type of highly advanced trading techniques or software along with nerves of steel and a highly developed intuitive feel for the markets. In addition they think that these elite group, have some "inside information" that they don't. You will be relieved to know that the above is not necessary.
There are actually only a few things that separate traders who consistently make money and those who don't. And here they are?
* Skilled traders find a strategy or market pattern that offers a high probability for success. They make money by exploiting this edge over and over again.
* Skilled traders never deviate from their methodology or "wing it".
* Skilled traders never enter a trade without a entry and exit strategy. They know exactly when and where to cut their losses as well as taking profits.
* Skilled traders never ever let a winning trade turn into a losing one. The easiest way to ensure that this doesn't happen is to place a protective stop at or a few ticks in the money once your position is up several points.
* Skilled traders never hope, pray or wish that their stock would go up. They understand that when they are wrong they are wrong and the best thing to do is cut their losses short.
* Skilled traders never trade with their emotions. They don't allow themselves to get caught up in the latest and greatest investment hype.
* Skilled traders always have one goal in mind: To preserve their capital at all costs. They do this by never taking on too large of a position. A good rule of thumb to adhere to is never use more than 5% of your funds on any one trade. This way in the worst-case scenario the stock could drop to zero and your account would not be severely affected.
* Skilled traders never get too greedy. There is an old saying that "Pigs gets fed and hogs get slaughtered". These traders don't try to make one big trade that will turn them into instant millionaires. They don't try to hit home runs, instead they understand that it is better to keep hitting singles and making smaller consistent profits.
* Skilled traders enter and exit trades swiftly and decisively.
* Skilled traders listen to no one else's opinion concerning the market or particular trade they are in.
* Skilled traders are often contrarians. They will be buying when others are too scared to and sell when the crowd starts buying.
That's it, the secrets to making big money in the markets. Perhaps that is a bit of a let down as you were hoping for something a bit more esoteric and complicated.
Types of Trading
Day trading and day trader -Day trading is buying or selling of various financial instruments such as stocks(shares), futures, options & currencies, with a goal of making a profit due to volatility in the prices during the day.Thus day trading differs from other style of trading as positions are never held overnight irrespective of profit or loss.Day traders are momentum traders who take profits fast and cut losses even faster and a trade which is entered and exited on the same day, and often within few hours or minutes. The day traders will not hold overnight positions, irrespective of profit or loss. These traders are the ones who bring liquidity and cause increase in supply and demand in the market.Position trading and positional trader -Position trading is opposite of the day trading as the goal is to profit from the move in the primary trend rather than profiting from fluctuations that occur during the day.Positional trader holds trades for an extended period.The position trader is like the investor in stocks with a shorter time perspective, which is not necessarily limited but generally takes a week, months and is not concern with day to day fluctuations.Long term investing and long term investor -Long term investment, as the name indicates is buying of various financial instruments such as stocks(Shares), commodities and currencies with a goal of making profit in the long term. Such an investment calls for fundamental analysis rather than technical analysis.Long term investor may hold positions for several years. Thus a long term trader acts completely opposite as compare to a day trader.It should be noted that, in longer run, long term investors make big money as compared to what is made ever by a day trader, keeping exceptions aside.Advantages and disadvantages of day trading -Advantages -
Increased Leverage - As day trades are closed on the same, margin requirement of such trader are lower. Hence increased leverage can increase your profits if used wisely. It is therefore possible for a trader to maintain a relatively small cash in his or her account say Rs. 20,000 and do day trading transactions worth Rs. 1,00,000 to 1,25,000. Note - Brokers generally give exposure of 5 to 7 times (of your deposit lying with them) depending on your volumes and number of other factors.
No overnight risk - As positions are closed prior to the end of the trading session, news and events that affect the next trading day opening prices do not effect trader, thus a trader can have a sound sleep, every night and does not have to worry about how market will open the next day.
Advantages of forced exit - This at times, acts as blessing in disguise. It is better to close a losing position on the same day, without hoping that it would perform better the next day, as many times(but not always) it prevents the loss from becoming larger the next trading day. Also if a position is carried overnight, then the trader has to immediately arrange for the huge margin amount that is required to be deposited with the broker.
Immediate Feedback - Feedback in terms of profits or losses is much quicker i.e the same day by end of trading session than it is in the case of position trades, which may take few days to week.
Profit in any market direction - A day can take advantage of bullish and bearish trend of the market. During bullish trend, he can buy first and during bearish trend he can short sell. Thus, short selling is the advantage in hands of a day traders or a derivatives trader as compared to a delivery based trader or an investor., who has to buy first, take delivery of the shares and sell it later on.
Low transaction cost - Low transaction cost i.e brokerage is lowest in case of day trading transactions as compared to delivery based transactions. Generally delivery based transaction brokerage is in the range of 0.25% or 0.50% both while buying and selling where as brokerage incase of day trading is 0.08- 0.15% and that too on one side i.e either buying or selling side.
Disadvantages
It is considered to be very risky as one cannot predict market movements with good accuracy over a long period of time.
Increased Leverage - As day trades are closed on the same, margin requirement of such trader are lower. Hence increased leverage can increase your profits if used wisely. It is therefore possible for a trader to maintain a relatively small cash in his or her account say Rs. 20,000 and do day trading transactions worth Rs. 1,00,000 to 1,25,000. Note - Brokers generally give exposure of 5 to 7 times (of your deposit lying with them) depending on your volumes and number of other factors.
No overnight risk - As positions are closed prior to the end of the trading session, news and events that affect the next trading day opening prices do not effect trader, thus a trader can have a sound sleep, every night and does not have to worry about how market will open the next day.
Advantages of forced exit - This at times, acts as blessing in disguise. It is better to close a losing position on the same day, without hoping that it would perform better the next day, as many times(but not always) it prevents the loss from becoming larger the next trading day. Also if a position is carried overnight, then the trader has to immediately arrange for the huge margin amount that is required to be deposited with the broker.
Immediate Feedback - Feedback in terms of profits or losses is much quicker i.e the same day by end of trading session than it is in the case of position trades, which may take few days to week.
Profit in any market direction - A day can take advantage of bullish and bearish trend of the market. During bullish trend, he can buy first and during bearish trend he can short sell. Thus, short selling is the advantage in hands of a day traders or a derivatives trader as compared to a delivery based trader or an investor., who has to buy first, take delivery of the shares and sell it later on.
Low transaction cost - Low transaction cost i.e brokerage is lowest in case of day trading transactions as compared to delivery based transactions. Generally delivery based transaction brokerage is in the range of 0.25% or 0.50% both while buying and selling where as brokerage incase of day trading is 0.08- 0.15% and that too on one side i.e either buying or selling side.
Disadvantages
It is considered to be very risky as one cannot predict market movements with good accuracy over a long period of time.
How To Handle A String Of Losses
Everybody hates to lose and unfortunately no one is blessed with the ability of foresight, therefore losses are an unavoidable part of trading. When we enter a trade we will either be right, or wrong, and even if we broke-even we'd still be classed as being wrong - as nobody enters into a trade just to break-even!
When unsuccessful traders encounter a string of losses they begin to engage in self-destructive patterns that help them escape the pain they are experiencing.In this article we bring to light these self-destructive actions that can help you realize what you are doing before it takes hold of your physical health.
If you find yourself already engaged in these patterns hopefully this article can help you to get you back on track as quickly as possible.
The Destructive Patterns - If you find yourself caught in a string of losses or a bad performing week/month be sure to monitor your behavior. It is during this time that you will be at your most vulnerable. You will begin to indulge in activities that at first seem harmless, but upon excessive use (or in time), begin to cause physical damage to your health.
Ask yourself the following question: during during drawdown periods do I find myself over-indulging in these activities:
Food (especially junk food - eg. chocolate, ice-cream, chips)?
Sex (includes viewing pornography)?
Alcohol?> Drugs (includes excessive smoking)?
Laziness (find it difficult to wake up in the morning)?
Entertainment?All of the above taken in excessive doses can be detrimental to your own physical health (some even in small doses!).
These activities above during your losing period are only covering up the pain of confronting the true issue, and your body tries to rid the emotional pain by trying to "fix" it with physical pleasures. Unfortunately it is going about it in the wrong way, so what should you do?
Firstly... REALIZE WHAT YOU ARE DOING AND STOP IT!You need to realize what you're doing and you need to STOP doing it immediately! You can either decide to stop, or you'll be forced to stop when your body eventually breaks down and prevents you from any form of movement. It will be much more beneficial to you in the long-term if you can decide to stop *NOW*.Once you have stopped you now need to figure out a way to solve the pain - not by cutting out or neglecting it, but by staring it in the face.
Bring your problems out into the light, be honest with yourself. There can be no growth without pain, you are experiencing the emotional pain, now it is time to find the error and therefore your growth.
Begin Your Review
The review process begins in two separate areas: You & Your System. Here are some checklists for you to go through to find out where the problem could lie:
"YOUR SYSTEM" CHECKLIST
Was your system thoroughly tested prior to trading it (or paper traded if you do not have the capacity to programme your system into backtesting software)?
Did you test with out-of-sample data?
Do you even have a system???? If you do not, how do you even know if the method that you are trading is even profitable??
Is your system's code correct?
Did you over-optimize your system? (what have we discussed about over-indulging?)
Did you paper trade your system prior to placing capital on it?
Did you trade with a small amount of capital prior to placing the rest of your funds on it?
Do you know the system's limitations?
Did you properly drill your system? (see our blog article on why I am the system designer from hell)
"YOU" CHECKLIST>
Is the current drawdown you are exhibiting with your system normal?
Are you comfortable with your system's historical drawdown performance?
Are you fully aware of the risks involved with your system and the instrument(s) you are trading?
Are you trading with funds that you are comfortable risking?
Are you relying too heavily on your performance?
Have you set realistic goals?As you can see there are generally two areas that you need to explore:
the mechanical aspect - your system - and the emotional aspect - you.
Both can be responsible for making the way you feel the way you do. It will either be an error on the system's side with how the system was tested and/or programmed, or it can be your own psychological profile not being comfortable with the system's performance.
Your Answers = Change = Your GrowthWhat steps should we now take?
Now that we have begun a corrective process where we have stopped the evil nature of our over-indulging ways to take control we should continue our "corrective nature" by invoking our findings and taking ACTION in correcting our errors.
If the problem was mechanical - fix it, if the problem was emotional either go about setting up new thought patterns, or change your current system. The answers lie in whether you need to expand your knowledge in system development, or whether you need to grow emotionally as a person.
Unfortunately there is no easy road, and even if there was everybody would be doing it. Hopefully this article has made you ponder over some of your behaviors during drawdown periods, be sure to keep an eye on yourself and as always take care of your body, because there's no use in making all the money in the world when you don't have the physical capacity to enjoy it.
When unsuccessful traders encounter a string of losses they begin to engage in self-destructive patterns that help them escape the pain they are experiencing.In this article we bring to light these self-destructive actions that can help you realize what you are doing before it takes hold of your physical health.
If you find yourself already engaged in these patterns hopefully this article can help you to get you back on track as quickly as possible.
The Destructive Patterns - If you find yourself caught in a string of losses or a bad performing week/month be sure to monitor your behavior. It is during this time that you will be at your most vulnerable. You will begin to indulge in activities that at first seem harmless, but upon excessive use (or in time), begin to cause physical damage to your health.
Ask yourself the following question: during during drawdown periods do I find myself over-indulging in these activities:
Food (especially junk food - eg. chocolate, ice-cream, chips)?
Sex (includes viewing pornography)?
Alcohol?> Drugs (includes excessive smoking)?
Laziness (find it difficult to wake up in the morning)?
Entertainment?All of the above taken in excessive doses can be detrimental to your own physical health (some even in small doses!).
These activities above during your losing period are only covering up the pain of confronting the true issue, and your body tries to rid the emotional pain by trying to "fix" it with physical pleasures. Unfortunately it is going about it in the wrong way, so what should you do?
Firstly... REALIZE WHAT YOU ARE DOING AND STOP IT!You need to realize what you're doing and you need to STOP doing it immediately! You can either decide to stop, or you'll be forced to stop when your body eventually breaks down and prevents you from any form of movement. It will be much more beneficial to you in the long-term if you can decide to stop *NOW*.Once you have stopped you now need to figure out a way to solve the pain - not by cutting out or neglecting it, but by staring it in the face.
Bring your problems out into the light, be honest with yourself. There can be no growth without pain, you are experiencing the emotional pain, now it is time to find the error and therefore your growth.
Begin Your Review
The review process begins in two separate areas: You & Your System. Here are some checklists for you to go through to find out where the problem could lie:
"YOUR SYSTEM" CHECKLIST
Was your system thoroughly tested prior to trading it (or paper traded if you do not have the capacity to programme your system into backtesting software)?
Did you test with out-of-sample data?
Do you even have a system???? If you do not, how do you even know if the method that you are trading is even profitable??
Is your system's code correct?
Did you over-optimize your system? (what have we discussed about over-indulging?)
Did you paper trade your system prior to placing capital on it?
Did you trade with a small amount of capital prior to placing the rest of your funds on it?
Do you know the system's limitations?
Did you properly drill your system? (see our blog article on why I am the system designer from hell)
"YOU" CHECKLIST>
Is the current drawdown you are exhibiting with your system normal?
Are you comfortable with your system's historical drawdown performance?
Are you fully aware of the risks involved with your system and the instrument(s) you are trading?
Are you trading with funds that you are comfortable risking?
Are you relying too heavily on your performance?
Have you set realistic goals?As you can see there are generally two areas that you need to explore:
the mechanical aspect - your system - and the emotional aspect - you.
Both can be responsible for making the way you feel the way you do. It will either be an error on the system's side with how the system was tested and/or programmed, or it can be your own psychological profile not being comfortable with the system's performance.
Your Answers = Change = Your GrowthWhat steps should we now take?
Now that we have begun a corrective process where we have stopped the evil nature of our over-indulging ways to take control we should continue our "corrective nature" by invoking our findings and taking ACTION in correcting our errors.
If the problem was mechanical - fix it, if the problem was emotional either go about setting up new thought patterns, or change your current system. The answers lie in whether you need to expand your knowledge in system development, or whether you need to grow emotionally as a person.
Unfortunately there is no easy road, and even if there was everybody would be doing it. Hopefully this article has made you ponder over some of your behaviors during drawdown periods, be sure to keep an eye on yourself and as always take care of your body, because there's no use in making all the money in the world when you don't have the physical capacity to enjoy it.
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Tuesday, December 23, 2008
How to enter Stock market
You have always known people who have made good money from your locality in stock markets. Like them, you too wanted to try your luck in the stock marketsbut were not sure about how to go about it. This blog is for you. We will talk about demat opening, broker selection and how to open your trading account
Opening of Demat Account -
Demat refers to a dematerialised account. Just as you have to open your account with a bank if you want to save your money, make cheque payments etc, in the same fashion you need to open a demat acount if you want to buy or sell stocks.
Once you approach your DP (they are like bank branches), you will be guided through the formalities of opening an account. You must fill up an account opening form and sign an agreement with your DP. The DP will ask for some documents as proff of your identity and address.
Note :-
1) Collect deliveryinstruction book from your DP ( with whom you have opened demat a/c). When you sell any of the shares(securities) you will have tofill slip in this book to instruct your DP to transfer the shares to you broker very next day. In case you fail to do so, the shares sold by you will be auctioned by the exchange. It would attract heavy penalty and hence insted of erning, you may end up losing money in the process.
2) In case of Intraday trading you do not have any carry forward position, yet you have to have this demat accountfor opening trading account with broker.
Opening trading account with broker -
A stock broker or brokerage house is entity affiliated ti a stock market who bridges the gap between an investor and a stock market to buy or sell shares. Approach any sebi registered broker and register your self to open an account with him. For registration, you will have to provide certain documentary credentials.
Most prominient brokerage houses now even help you buy or sell shares online. You just need to have a reliable internet connection; download or install their trading software and you are all set to trade in the stock markets. Also you can trade on phone or face to face at brokers place, for this you can register with offline brokers.
However , it is advised that if you want to do day trading, then online version is more suitable then the offline version. For day trding always prefer a broker who offers to its customers , both online and offline services so that incase of power failure or loss of net connection you can always placeorders by calling your broker, on phone.
Points to be considered for selection of broker :
Opening of Demat Account -
Demat refers to a dematerialised account. Just as you have to open your account with a bank if you want to save your money, make cheque payments etc, in the same fashion you need to open a demat acount if you want to buy or sell stocks.
Once you approach your DP (they are like bank branches), you will be guided through the formalities of opening an account. You must fill up an account opening form and sign an agreement with your DP. The DP will ask for some documents as proff of your identity and address.
Note :-
1) Collect deliveryinstruction book from your DP ( with whom you have opened demat a/c). When you sell any of the shares(securities) you will have tofill slip in this book to instruct your DP to transfer the shares to you broker very next day. In case you fail to do so, the shares sold by you will be auctioned by the exchange. It would attract heavy penalty and hence insted of erning, you may end up losing money in the process.
2) In case of Intraday trading you do not have any carry forward position, yet you have to have this demat accountfor opening trading account with broker.
Opening trading account with broker -
A stock broker or brokerage house is entity affiliated ti a stock market who bridges the gap between an investor and a stock market to buy or sell shares. Approach any sebi registered broker and register your self to open an account with him. For registration, you will have to provide certain documentary credentials.
Most prominient brokerage houses now even help you buy or sell shares online. You just need to have a reliable internet connection; download or install their trading software and you are all set to trade in the stock markets. Also you can trade on phone or face to face at brokers place, for this you can register with offline brokers.
However , it is advised that if you want to do day trading, then online version is more suitable then the offline version. For day trding always prefer a broker who offers to its customers , both online and offline services so that incase of power failure or loss of net connection you can always placeorders by calling your broker, on phone.
Points to be considered for selection of broker :
- Broker should be located as near as possible.
- Broker should be a SEBI registered broker
- Services offered ( NSE, BSE, FNO, Commodities, etc.)
- Brokerage rates.
- Convenience of placing ordrs for BUY/SELL with him (by phone/online trading).
List of Major online brokers :
- ICICI direct
- Sharekhan
- Indiabulls
- 5Paisa
- Motilal Oswal Securities
- HDFC securities
- Reliance money
- IDBI Paisa builder
- Religare
- Geojit
- Networth stock broking limited
- Kotak securities
- UTI securities Ltd.
- Angel trade.
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