Sunday, July 1, 2012

My First Quarter Trading (Q1FY12-13) and 12 Lessons from It

I had a modest stock trading experience in the last quarter (Q1Fy12-13). It had been a long time since I had such number of trades in a quarter. Overall from 1st April till 30-June I have traded in 16 stocks (including few stocks for intra-day trading experience in the previous post) and an option trade which is solely meant as a test to determine the brokerage rate and see how options expire worthless. That was painful though, especially because I was trading on a small capital and few hundreds of loss for option testing is equivalent to few percentage points loss on the total capital. But nothing beats the practical experience as it would give you the perspective you need for your own method of trading.

I have ended the quarter with a realized loss of 142 rupees and unrealized gain of 1879 rupees. I have discounted option trading loss and few brokerage and nsdl charges which probably would take it to another 700 or 800 rupees of loss. I have discounted these as they would be negligible for a larger trading capital of 5 or more times the current capital used. Nevertheless net gain is definitely affected. Based on difference of balances (in and out flow of money), the net gain stands at 989 only :)

Anyway that’s not bad considering the quarter itself. Below picture shows the detail of performance in 16 individual stocks traded and the one after that shows the values of NIFTY (stock index) and the 16 stocks as on 1-April and 30-June to get an idea of the change in them during the quarter.

Relative to the Stock Index which is a good indicator of most of the market wealth, my performance is much better. I have started with 10k in April and kept adding 10k in subsequent months. On average it is 20k. So the average gain in my portfolio is like 4.9% compared to NIFTY’s -0.3%.

The average of the changes in individuals stocks together during the same period is -12.4%. This value is highly dependent on the stocks being picked. As you see there are 3 stocks that did extremely well during the quarter while there were 5 stocks that did extremely bad. I made losses in 2 of those good 3 stocks and major gain was from one of those bad 5.

An interesting picture emerges when we look at distribution of profits and losses through the whole quarter of trading. As can be seen from below, profits are skewed to the right with one of them being the odd one at the far right. While the most of them are like noise around zero canceling each other, the odd ones at the right are the ones that determine our net gains. By hindsight, it can sound like so many stocks being traded when just one could’ve been enough to make the same amount of gain as the net gain. But it is not so straight-forward like in engineering. What looks like a good stock (Bergepaint, BataIndia etc.) gave me losses, while the bad one (Varun, SUZLON) gave me profits.

Although I have deterred from my arbitrarily set plan for trading, I feel that I am getting to the mindset required for trading as well as investing into stocks for varying time periods. Sitting through painful periods in some stocks like VARUN and ARSSINFRA and then sitting tight through their momentous rises reminded the good old days of 2007/8. The difference is the experience of cyclical market trends.

For the upcoming quarters, I am taking below lessons for trading:
  1. Trade only through discount brokerage firm so that stop loss can practically be applied to minimize losses early on.
  2. Don’t hold stocks for too many days when daily lows are falling consecutively. Bergepaint was a silly loss.
  3. Don’t swing between expectations of the trade. While experiencing more than 5% loss in Bergepaint, I was fluctuating between taking stop loss vs. surviving the pain as the capital is anyway small.
  4. Take profits for atleast a fraction of the holdings when expected target is met. I should’ve done this on Varun to sell 100 when it crossed 40. At 42, I almost went up to place the sell order but then I changed mind as if I was trading a fundamentally strong stock which will bounce back quickly if it falls off its highest price.
  5. Study charts of atleast those stocks which are recently traded or held in portfolio and those in watchlist. I missed the momentous move in Ajantpharm because I wasn’t looking at charts.
  6. Position management is the most important part of the trading process. Once we enter a trade, all that matters to us is the result of the trade when we exit it. We close our mind for everything else. This is a hard to overcome survival instinct and requires discipline and can be learned through practice. I can say that most of my trading performance is attributable to position management than stock selection or timing.
  7. DOT – Do not OverTrade. Overtrading is trading on margin (excessive margin) or trading leveraged through debt or derivatives. Most of the trading careers end because of overtrading. While it always feels good to recalculate what would be the potential gains if I had used 20x times the capital, the expiry dates, margin calls and other factors would not allow us to do effective position management under monetary pressures.
  8. I wouldn’t like to diversify. But the reason I have not used my full capital on any single trade is because it is akin to overtrading especially when I have just started first time after a long time. Though it appears to be diversification, all I have done is capital allocation per trade based on risk I am willing to take. I sure can take huge risk if the reward is good (like in Varun) but still I didn’t. Because I may not be comfortable handling the same kind of percentages if my capital were 100x of the present.
  9. Be more active in trading. I am coming to the conclusion that though there are plenty of opportunities in the stock market (stock market is the amalgamation of all kinds of businesses), there are practical limitations to realizing or squeezing most of the potential returns. One of those is the activity rate of the individual trader. Alternatively one would think of overtrading on few stocks infrequently. But the risk involved and the lost time in waiting before entering the trades is not worth the alternative. With 7 & 8 applied, the potential returns from the market are greatly reduced. Though it still looks better than saving in surefire markets like debt/FDs/Bonds (depending on trading distribution), it is still not the best of what the market can give. Hence one should get active in trading, which of course leads to next lesson.
  10. Find next good bets. Of late, I do not like the term bet. However, one should always be on the lookout for next good entries into stocks already being traded, held or prospected or yet to be discovered. This also means one should track market statistics, explore economy and industry news (I am not there yet), use proprietary scanning programs, etc.
  11. Avoid stocks with large spreads and low floats. I used to like stocks like Varun that give 100% kind of returns just from a dead cat bounce trade. But I was able to learn about how volume plays in these stocks because of the large spreads and low floats. Low float implies less number of market participants. A single institutional investor would move the stock all the time. So whatever he/she decides to trade the stock at, will be the best price we can enter or exit. Rest of the time these stocks will be difficult to enter or exit as they get to the circuit limits without matching orders. Also large spread stocks are difficult to exit on stop loss if the trade fails. That results in more loss than anticipate. On a rapid fall, the stop loss may be triggered but may get skipped past. This requires little more effort than looking at market statistics and stock charts. That which is finding out their float percentage (can be done after-hours) and finding spread gaps between orders in Level 2 quotes which can be done only during market hours. Make a list of your chosen stocks in all MidCap and good part of SmallCap segment and keep checking their spreads during market hours and sort them. Also note that spreads can vary with time just as volume does.
  12. Trade on momentum. A trader with good position management skills will most often ensure that he/she trades a stock through atleast one momentum period, it is not enough to patiently sit through tough times if one wants to make the most out of the stock market opportunities. Hence one should constantly look for momentum trading opportunities. Those high percentage trading opportunities that last from few days to few weeks. Don’t be patient when trading on momentum. Exit on the signs of fading momentum or lack of momentum.

That’s all for this quarter. I don’t think I will be able to share so much of data in the coming quarters as I won’t find time nor comfort as the capital increases and trading activity reduces free time to make this much detailed posts.

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