Technical traders believe that “price” tells everything and therefore analyze charts of various active stocks to study price behaviors on various parameters. Signals picked from charts are combined with Money Management Rules to suggest Trades.
2. What are Money Management Rules and how do we follow these?
Money management rules are fairly simple and basic like: How much to risk and in how many positions at any time, keeping a watch on Risk/Reward/Probability ratios, etc. All these are elaborated separately.
3. What is a Stop Loss and how do we manage it?
Stop Loss is a key to trading as it helps in two ways:
Minimizing loss and protecting profits. Stop Losses need to be followed religiously and strictly without any second thoughts/getting confused during market times. It is generally easy to book profits but very painful to book losses and losses if not booked in time could be fatal.
Stop loss is nothing but a way of limiting the risk in a trade...
4. How many trades will be profitable and how many is loss making and, Is there any guarantee of profit or can I lose more than my capital?
Generally we will have less number of winning trades and more numbers of losing trades BUT the amount lost in losing trades will be smaller than the amount gained in the winning trades and that is how overall the account should become positive. This happens because even if you pick good signals, market volatilities can get you stopped out. Another way of looking at it is market gives lot of wrong signals/moves before giving a right move.
This is trading and we are only trying to improve the chances of winning and it is different from speculation in that manner but like any other trading there could be big losses or entire wiping out of the capital. However, we advise you to take a small exposure every time compared to the capital in hand; therefore, it will take months to lose capital even if we start losing in every trade. We cannot lose more than the capital IF we keep following stop losses and other rules.
5. What is risk capital, exposure, risk at any time, no. of positions, etc.?
We should consider entire capital deployed in this kind of trading as Risk Capital. Ideally, we should take risk of only up to 5% of our Risk capital at any time. This 5% amount is further divided into five positions. For example, if we have risk capital of 25 lakhs, then we should not take risk of more than 1.25 lakh at any stage. Further, this should be spread over five positions, which means we can take risk of 25000 in each such trade. Risk in each trade (in case of a purchase transaction) is equal to the purchase rate minus stop loss rate x qty. For example if we buy 1000 Reliance at 830 and keep stop loss of 805 that means we are taking a risk of 25000. In such case the exposure in the market works out to 1000x830 = 8.3 lakh and the risk in the trade is 25000.
6. If we are taking a position in a particular share, does that mean we have that same view on the share/company for short/medium/long term?
This is very important. While in this kind of trading, we are only trying to pick some trades based on certain technical factors thinking they can give a particular move and it does not amount to any view on the particular stock/industry/market. For all you know we might be taking a reverse position on the same stock same day (as getting stopped out on same day is good signal that actual move may come in the reverse side).
7. What is risk: reward and probability, etc. and how does that relate to trading?
While taking a trade, we take a risk. We should know how much risk we are taking (given above), we should also estimate how much return can be there, which is called reward and we should analyze whether it is worth taking the risk. Now whether it is worth taking the risk or not also depends on the probability of winning combined with risk: reward ratio. Consider the example given below and you will understand:
In one case, the risk reward ratio is 1:1 that means if you are taking a risk of Rs 1000 the gains can also be Rs 1000 only. Now if the probability of your trade coming right is also 50 % then at the end of number of trades, there will be no profit and no loss, so either the risk reward should be better or the probability should be higher so as to result into profit at the end of a longer period.
8. What do you mean by Standard Risk amount??
This is also very important. Consider the frequent case where you deploy some money and make profit in the market and then you deploy more money and still make profit and then you get confident and deploy lot of money (maybe borrowed) and then something happens and you lose everything. What we mean by Standard Risk Capital is that we take same amount of risk in all trades and not be over confident or under confident about any trade (specially knowing the chances of the particular trade going right). Only after sufficient time and after number of trades (at least 100), if one has got convinced on the type of working, should one increase the risk capital and once increased it should then stay at that level for again a long time. Specially varying the risk capital from trade to trade can spoil the whole working as there are more chances that we make smaller profits and bigger losses in that case.
9. What do I do if the Stop Loss is triggered and I have not yet cut my position OR if the market has suddenly opened with a gap much away from the stop loss rate?
Stop Losses are meant to be FOLLOWED without fail. Generally, when the stop loss is hit , one should exit position without any second thought. A stop loss of 500 means that the moment there is a trade at 499.95, you exit the position. Do not give it any second thought at that moment. Generally only in the openings, sometimes there could be spikes in the market and we should not treat spikes as normal rates. Only when there is regular trading at those rates should one exit the position. Coming to the point when market opens down or up with a big gap much away from the Stop loss rate. In such rare cases also, one should exit from the market at the then prevailing rates. In such cases we will be giving some guidance during running market but one can normally assume exit at the opening rate in such cases.
10. What is SAR??
SAR stands for Stop and Reverse. Which means if the stop loss is hit, you also take immediate position on the reverse side? These are usually given when we are feeling that market is going to give a good swing one way or the other.
11. Which are the shares we will be trading on and whether we will be trading index? Will there be long or short positions?
Technical trading is best suited for very high volume stocks and therefore we will be mostly trading in Futures/options stocks. Index is also traded like a high liquidity stock so we will be trading in that as well. We will be taking position in either side i.e. either going long or short. Long positions can be taken either in futures or in cash segment whereas the short positions will necessary have to be in futures.
Another important operational point is that our analysis is based on cash prices of stocks and therefore the stop losses need to be monitored on the cash side though we might be executing a future trade. For example, we might take a trade saying Buy Reliance at 840 with stop of 825. That means when cash price of Reliance is 840 then you buy – and you may buy in cash at 840 or in futures at the prevailing rate, which could be 845 for example. Similarly when Reliance cash price of 825 is hit then you exit the position in whichever segment you have taken.
For the same reason, though one can enter the stop loss trade in advance into the system for cash positions but for futures, one should observe the prices manually in “cash” and then execute in futures.
12. What will the end results look like and can we have an idea of the results of a sample/model portfolio?
End results could look like this:
No. of trades done – 50. Winning trades 15. Losing trades 30. No profit/no loss – 5.
Assuming that risk of Rs. 2500 was taken at each time.
Amount gained in winning trades 7500x15 = 1.25 lakhs
Amount lost in 30 trades 30x 2000 ( average amount could be less than the stop loss amount since in some cases the revision of stop loss will ensure lesser amount of loss ) = 6.0lakh.
Net profit = 5.25 lakhs
13. How often we will get trading calls/recommendations? And should we take all the trading calls?
Trading calls will be given when we see an opportunity where risk reward ratio justifies making a trade. Sometimes you may get five calls in a day and sometimes you may not have a call for 10 days. Also at any point of time , we may have number of calls which are given and which are running BUT YOU ARE SUPPOSED TO TAKE ONLY A FEW CALLS OUT OF THAT (MAX 5 POSITIONS AT A TIME) BY RANDOM SELECTION ---- this will be further fixed in detail in the next communication called “ System/Rules to be followed”.
14. What are the supports we will get from the Technical team at NIFTY GENIE?
It will be the effort of the Technical team to give you worthwhile calls from time to time. Apart from this, we will try to bring discipline in trading. We will be happy to entertain portfolio review and analysis queries from customers in this regard. Such queries will have to include complete details of their portfolio for us to analyze only for trades done out of our recommendations.
15. How much of my capital I should block towards this trading and is there any guarantee of profits or protection of capital?
Amount of capital blocked for this activity purely depends on the risk appetite of the customers. There is NO guarantee of profits or protection of capital. Trading is a risky business and NiftyGenie will not be held responsible in any manner.
Overall, it is purely an ADVISORY product from NIFTY GENIE.
- Adithya Karnekar