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How to do SIP (Systematic Investment) in Stocks?

“History is written by the winners” -Napoleon Bonaparte I won’t be writing about the SIP which is already covered in the public doma...

Sunday, October 18, 2009

A Simple Strategy for Consistent Intra Day Trading

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There are a lot of ways to do intra-day trading of stocks. The beauty of intra-day trading is that it makes you feel like you are doing a full time job out of trading shares. Even with a single strategy you can keep trading all through the day. There is a simple strategy that I want to share today. This is really the simplest one as it does not take much effort on our part to find stocks and execute the trades. But it does have considerable risk and accordingly higher chances and potentially higher rate of returns.

Intra-Day Trading Needs Persistence

When day trading shares, most important thing to consider is to note the boundaries of the time that is fixed within that day. This is what makes the intra-day trading to be difficult, if not encouraging, for most traders. Even if you learn to accustom to this time boundaries still to persist all through the day is challenging. What if I tell that by sticking to one simple strategy you can persist all through the day?

That is what I am going to share now. When trading shares intraday consistently trade after trade, we need to make the task easier. Each trade consists of several activities within the same day. You need to find stocks, you need to look at their charts, order books, second order and if possible third order quotes as well, before deciding to make an entry. After making an entry, you should place it on auto-pilot with a trailing stop order and move on to other trades.

Trading Only Stocks at Their Highest or Lowest Levels

Now to make these tasks easier we can choose to trade those stocks that are closer to their intra-day highs or lows. Plan to go long on stocks that are trading near their intra-day highs and go short on stocks that are trading near their intra-day lows. As long and short trading share similar principles but in the opposite direction, it suffices to explain one direction.

Let us take the case of stocks to go long. It does not matter what time it is during the day. You can always find some stocks that are just closer to their highest value of the day. To find such stocks you should not just look at the list of top gainers, losers etc, though these also give the stocks list with least effort on our part. If these lists are exhausted meaning you took advantage of them already and they are still gainers of the day but not at their highest points of the day, then you need to go deeper in search.

Finding Stocks

Fortunately it is pretty easier to find such stocks by going to nseindia.com and keeping a list of stocks that show open, high, low and close prices at any point of time during the day. If your brokerage account’s terminal can show the same list as a table in one window that will be even better because they show real time quotes as close as less than a second. NSE India site shows with a delay of 15 seconds. It can be considerable time lag when trading volatile stocks with this technique.

Once you find a stock that is moving near its high of the day, place an order to buy just a little above high price. Now you need to place a buy stop order and not an ordinary limit order as beginning traders do. Because the trade gets executed immediately after placing an order to buy above the current market price.

This is not the way to trade with this strategy. We need to get in only if the stock were to breakout once again and make a new high higher than the present high price. This ensures that we will be in the trade only if the stock were to continue the uptrend that it started. If not our stop order will make sure that we never enter that stock. Don’t try to reverse the order thinking the stock might fall. Sometimes stocks just don’t move anywhere all through the day.

Placing Orders for Entry

In your entry order, you should place stop price just a little above the high price of the stock at that time. How much is the ‘little above’ depends on the volatility of the stock? I prefer to consider +0.15% for the stop price for highly volatile stocks. For non-volatile stocks this strategy is not very useful but if tried it is good to try with a +0.1%. Don’t increase this further as the brokerages in Indian markets charge 0.3% as typical rate.

The Limit price in your order should be again 0.1%-0.15% above the stop price. All in all you are betting on the stock making a move higher than a total of 0.6% from current high price to make sure the trade is atleast even. But note that often if the stocks breakout you could be in a ride as long as 10% of the stock.

The reason why we trade stocks at the highest point when common sense tells that we are paying higher price is because the probability of the stock going higher is high when it is trading at its highest point of the day. Otherwise tell me how can stocks move higher? One is by opening with gaps. But we are talking about trading through the day and not overnight. Expecting a gap up at tomorrow opening and buying shares at today’s close is a completely different strategy and is more riskier than the one I am talking about now.

If you want to take advantage of a sudden and surefire movement of the stock then go long on the stocks at intra-day highs and vice versa for going short. You can take any intra-day chart. If you generalize different charts of the same stock on different days or different stocks and different days, the chances of a stock making a sudden up move are higher than the chances of trend reversal when the stocks are at their intra-day highs.

Placing Orders for Exit

Putting the fear to rest, one important thing to mention is the exit strategy. As these stocks make rapid moves once they break out of the high price, they are likely to retrace of their move in the same pace. If you want to move onto another stock that you just found it is good to guess an exit point say 1% or 1.5% above the high price and place a limit order.

If you are a multi-tasker who can switch between observing charts, order books of multiple stocks that you have entered, then instead of placing limit orders try trailing stop orders. As the stock price moves upwards it will keep on making pull backs of small magnitude. Whenever a pull back appear to be larger than a pull back on both sides, take the lowest point in that pull back as the stop price for your trailing stop order.

If the stock were to continue the trend, the trailing stop price too should keep going up. When you change it continuously the profit will be locked when the stock makes a bigger pullback for the day or the hour.

Word of Caution

This strategy entails risk. So it is not a one time thing you should do. If it turned out that the first attempt of the day went bad, then it is natural feeling to not try again. To avoid great risks, use stop loss order compulsorily at just below the high price of the day after making entry into the stock. When a stock makes a high, breaks it and couldn’t find a support at this high, it is likely that it will break down further. Don’t worry too much about closing with a loss including brokerage costs for the potential profit can be much better with this strategy.

All of the time you should note that in intra-day trading all percentages, price differences would be very small. Don’t try this if you cannot digest these small numbers as big for the time during the trade.

Easy to Persist

It is easier to persist with this method in intra-day trading because the sudden move in the stock immediately after entry will get you excited. As much as the excitement if you also close the trade even with little profits and maintain stop loss order just after entry very close to the entry price, you are likely to persist with this strategy.

Another important thing to note is that finding the stocks not very hard. For any given day you can prepare the list of stocks the day before that by finding all stocks that made a white candlestick. In other words on the previous day the stock should have made a close higher than the open. The chances of a bigger move are high if there are atleast two white candlesticks after few black candlesticks till previous day.

You can also sort out stocks that just made 1%-5% gain within the half-an-hour. You can place alerts in your brokerage terminal (if they allow) or write a script to do that on your computer which suddenly pops up a window to tell that a stock just reached close its intra-day high. The ideas to find the candidate stocks are only limited by your imagination.

After some time, I realized that this one is similar to Opening range breakout day trading strategy. In short form, it is written as ORB. ORB strategy is different from this in that we pick stocks to trade from ORB based on range established in the first hour of the day.

The one I am talking about can follow along the line of hourly gainers strategy. One can look for stocks breaking the high made in the previous hour at any time of the day. Though both can be good day trading strategies. For novices, it is better to start with something that is simple to practice to get confidence and understand risk management practically. Then try more strategies.

One can play with options as well with this idea. As options anyway give leverage and increased price swing, start with large caps that do not swing wildly. Instead of the stock buy the option. Then one can play with call or put option depending on which side the price is breaking out.

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Sunday, October 11, 2009

The Three Parameters of Stock Trading: Entry Time, Exit Time and Stock Selection

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If we were to speak strictly, all the things about stock trading boil down to only these three parameters: Entry time into the stock, Exit time out of the stock, and Selection of the stock. If a share trader knows how to find out these three parameters for any given trade, then there is nothing else to do for him/her. It is sufficient to continue doing the same trade after trade.

When stocks were traded two centuries before there were only these three things to care about for a stock trader. Since 20th century stock trading has become a common thing for many people in the United States and there came some experts that generalized principles for successful stock trading. Later some experts or institutional investors or fund managers took these even further and invented many tools like the simple moving average to the complex indicators (directional movement index).

Even when studying so-called fundamental analysis of stocks, there are too many parameters introduced from simple annual returns to complex balance sheets. The more complex tools are created the more bewildered are the stock traders.

Simplicity is the Key to Success

Like in any discipline, simplicity is the best way to succeed in stock trading. Having too many tools and analyzing them for every stock before selecting one or studying a particular stock from all its parameters only bogs you down. It is not the tools that should do the thinking it is you as a stock trader that should do all the data processing.

The simplest data to process is just the price chart of a stock. From this we need to determine the entry point and exit points. By looking at the charts of several stocks we should determine which one is the best to trade for higher chances of success.

Additionally I prefer candle stick charts for delivery based trades and line charts for intra-day trades. A simple moving average of 20 trading days is more than sufficient as an indicator. Volume is considered to be an important technical tool. But I didn’t find it a consistent tool. Sometimes it is counter indicating against the price movement or moving averages.

The simple moving average is found to be the simplest and best of all tools to use in determining the three parameters of stock trading. It is not true only one parameter is sufficient to make a profitable trade. A trade becomes successful only when all the three are right. Even Warren Buffet who is considered to be a hard core follower of fundamental analysis, always made these three parameters right. Most importantly he captured the three longest bull markets of the 20th Century in his life time with the best entry and exit times. Now you understand what it means to capture three long bull markets – it means to be the Richest Person in the world!

Entry Time

Entry time is the most important of all these three parameters. That is why I placed it first. Without a right entry time, the entire journey with the stock will be like a hell.

A good entry time makes the trade comfortable and gives you sufficient margin to place stop loss without really taking a loss in case. It also takes away the mental stress that comes when stocks do not just move as we want them to move.

You need not always make an entry at the lowest point the stock has traded. There perhaps might have been enough volume. The important thing is to make the entry so that the trade becomes profitable whether your timeframe is short term or long term.

Exit Time

Exit time is also important but as it happens only after the entry time, choosing the right entry time relieves a lot of burden in choosing the right exit time.

A good exit time is actually easier to find than a good entry time. This could be because we don’t care what happens to the stock after we quit it. A right exit time also helps cut losses short.

You need not always worry about making an exit at the highest point of the stock movement. A closer price or even a little later after that is good. We need to confirm that the trend has reversed and until then we should sit tight to make big gains.

Selection of Stock

This is the least important parameter. You can trade any stocks with few exceptions and still make good trades provided the entry and exit times are right. But a selection of stock can make all the difference between the amount of gain/loss you make in a given time frame. There are stocks that gain by about 5 times in a single year yet in the same there are others that gain about 20 times. Even during the same time there can be stocks that fall to 1/10th of their value.

Knowing how to find these three parameters can help make best trades consistently. Consistently is what makes a good share trader. If you can trade consistently right even a single bull market can make you a millionaire if not a billionaire (Warren Buffet in three bull markets).

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Thursday, October 8, 2009

What is the Easiest Way to Make Money?

It is one of the simplest topics that can attract huge amount of audience – “What is the easiest way to make money?” Believe, like anything in life, there are easier ways to make money. There are easier ways to making profitable trades, to earn from a business, to earn from a profession etc. The easiest ways to make money from anything share one fundamental aspect.

It need not always be the harder way. Why people choose such paths is entirely upto them for various reasons. Sometimes even those who choose to earn money easiest way do so out of some excitement that drives them. Once the excitement dies down they cannot continue doing it more. It can be because some may not persist without variety.

Cheating is Obvious, but that is Not

The first thing that can come to anyone’s mind is cheating. Of course, that is apparently easiest way to make money. Note that it is only apparently. There are some consequences to it that affect the repeatability of the action.

Then What is it?

All of the easiest ways to make money share one fundamental aspect. It is to find loop holes in a system. Don’t confuse it with cheating. On the outset taking advantage of loop holes in a system might look just like cheating. But it is not. Loop holes are there because of imperfect design or incomplete testing in real time.

This also means that the loop holes may not stay all of the time. They will get closed once discovered. But you can always think of a way to avoid being detected, or find a new loop hole or find a new thing where loop holes aren’t yet discovered. As it is clear by now, we need to be persistent in finding loop holes one after another in a given system and move on to another if one is exhausted.

You may start worrying about competition. Yes there can be competition. But it is your choice to discover loop holes that benefit you most even when you share them with others, instead of getting you a competition. Alternatively finding loop holes itself can be a hard task to many. They may not be interested. If you are in for the money, and like to take challenges, may be you are the right one to feel that it is easier to take this route.

And mind that when I say loop holes I mean the loop holes that allow you do certain things legally till the rules are changed. Some people who work harder won’t like that and hence change the rules.

Some of the stock trading scams (as we see them now) by 20th century trader Jesse Livermore are based on Loop Holes. He used to take advantage of his reputation though he very well can trade stocks the right way. Actually he used to do both, based on what is possible at that time. Once his tactics are discovered in Great Depression 1.0 around 1930, all those activities are banned and considered as illegal. Till then he was the king of the worst bear market of all time in history because he took advantage of loop holes.

Loops Holes Involve Repetition

Though taking advantage of loop holes is easiest way to make money, doing this can be a boring task. Finding loop holes in a system can be challenging but to take advantage of them we need to do some actions repetitively. If you can do that easily then there is nothing stopping till the loop holes are closed.

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Sunday, October 4, 2009

Trading Stocks is All About Taking Chances

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There is a myth about stock trading in those who do not trade and also that bewilders even those who trade stocks. People just think about to make money from stocks we should predict the future price of the stock. Let me say that is a foolish belief. A novice thinks like that because that is what is apparently revealed by the stock market. To learn the fundamental truth about stock trading one should go deep into it.

Predicting the Future to Win is Worse than Gambling

Stock trading is often thought to be about predicting the future price of the stocks and then making bets on them. That is not true. Even professional gamblers do not do that though on the outset gambling looks like it is about betting by predicting.

Whether gambling or trading stocks you do not win by predicting what will be the scene in the future but by taking chances. You study the chances of a certain outcome and bet on that outcome that is most likely to happen. It can happen that your first bet goes wrong. But that is not the end of the world. Atleast that should not be the end of the stock trading. Depending on the chances of an outcome, your second or even third bet might win.

If you are betting on stocks by predicting then you are doing worse than gamblers. Gambling does not share some features that only stocks have. That is the reason why it is foolish to bet on stocks by predicting. It is more like blinding yourself after you make entry in a stock through prediction even when the stock is on the move whether in your anticipated direction or against it.

The Simple Difference Between Gambling and Trading Stocks

The simplest difference between gambling and trading stocks is the time dimension attached to the stock price movements unlike the outcome of a bet in gambling where there is no continuous path from present scene to the outcome in the future. The stock prices generally move continuously from one price to the next and this is what makes trading stocks more exciting than gambling.

To see the present, to know there is a path but not a sudden shift and still make the bet on a certain outcome while on the move is something more exciting than any activity I think of, and more riskier than any risky sport in the world. Hercules should have known it!

You should note that there is also another difference I had explained earlier. That’s not the point we should worry about when talking about this fundamentally incorrect belief about stock trading.

Astrology, Forecasting, Extra-Sensory Perceptions… are all Not Needed

I too though of a stock trading as predicting game back when I started. There were so many things that I thought of to help make an accurate prediction. I studied about astrology, financial forecasting, even extra-sensory perception. Sometimes I used to wonder about time-travel or to attain some mystic yoga Siddhi. All the time I used to come back to one conclusion: If I can have any one of the extra sensory or even physical abilities than an ordinary person, I need not really trade stocks. I need not even earn money for I can find a way to get what I want and do what I want to do.

So I gave up on all these things and concluded that the real thrill is in winning the game with only the abilities of an ordinary man. My confidence to success in stock trading did not come until I succeeded in doubling my capital in RNRL shares.

Even before that I realized that stock trading is not about predicting but it is about taking advantage of whatever the stock market has to offer. During bull markets, stocks just move up at a rate of 4-10% consistently every month. It was simple to think of participating in that ride and gain along with the crowds. But the reality is that we can end up participating in a downside ride as well. To succeed or fail like this was more of a gambling than professional stock trading.

Betting on Stocks with Highest Odds

To trade stocks successfully one should change the fundamental paradigm of prediction to win, to taking chances to win. We should start finding the chances of a certain outcome or a certain price move action on a stock and bet on it. This is possible by studying the stock price movements’ history.

You shouldn’t be worried about history repeating itself but about the hidden patterns that consistently repeat most of the time. In stock trading, unlike some other disciplines, there are no hard and fast rules.

Whether the outcome is going to be profit or loss, a stock trader only takes his/her chances at the trade. If you are not willing to take a chance then it good to avoid wasting time. If you do not yet know, it costs a fortune to waste time on the stock market.

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Saturday, October 3, 2009

Stocks vs. Gains: How Much can You Expect to Gain from the Stock Market?

stocks vs. gains in 2007 on NSE : Gaussian Plot
This is going to blow your mind out. Even if you are well versed in news about stock market related activities or a stock trader, still it will amaze you. It will give a glimpse of what stock market trading can hold for an individual investor. The above picture should speak better than words.

It is a Gaussian statistical curve, isn’t it? You might have known about this curve already. But did you ever stop to think that this curve, which can be found in so many things in nature, can also be found in the stock market? Now I am showing just that.

I thought that if I were to plot a curve showing the number of stocks on one axis and the number of times those stocks appreciated in a given time duration on the other it is likely to be a Gaussian. I had set out to get this data and plot, thanks to nseindia.com which has generously and easily made it available.

I myself was astounded to not only find this to be true but that the picture can show more things that are otherwise hidden. It took me considerable effort for 1.5 hours to clean out lot of mess in the data (some stocks changed names during the year).

The above chart shown is for the year 2007. It plots the no. of stocks for a given appreciation of the share price, all within the same year. We should note that this data is for stocks on NSE (about a 1000 stocks) but it can still hold good for BSE as well (which has 2500 stocks) and even for NYSE and so on.

We can make interesting conclusions from this picture. But let me show a glimpse of the actual data that even mentions the name of the stocks on the National Stock Exchange.

stocks vs. gains in 2007 on NSE : List of stocks
The highest gain a stock made in 2007 on NSE was 17 times gain in other words 1600% in 12 months time by JINDALSWHL. The next stocks made gains in descending order as 14, 12, 11, 9, 8, 7, 6, 5, 4, 3, 2, 1, and down into losses. The most number of stocks made a gain of around 2 times that is 100%, in sync with the general market index called SENSEX and NIFTY.

The colored stock RNRL is the one I had found and betted during the last quarter of the year. Though it gained by 700% from 22 to 180, I could capture its move from 93 to 237 during a quarter of year’s time. Nevertheless that was good as I had bet as much as I could with my courage.

All these stocks at the extreme right can be found using one market statistic. The first one is simply known by JSW holdings and did not go out of my notice. I had always seen it in the list of stocks making 52-week highs. I started tracking this market statistic since April 2007. I couldn’t enter into this stock because I couldn’t believe its trend, as the price was too high. (Now the price is adjusted after splits).

You can look at this chart again and again and take print out to get motivated for trading stocks. Do whatever you want to do with it. I leave all the conclusions on the table. And I don’t fear any sort of loss in revealing the truth. But let me tell you one important thing: "this is only a glimpse of the peak of the powerful bull market" that Indian markets have ever seen since inception. This shows what the stock market can hold even for individual traders that can trade with right principles consistently and persistently.

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