TRADING
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TRADING IN OPTIONS WAS LAUNCHED IN NSE IN THE YEAR 2001. THAT TIME, OPTION DID NOT HAVE SATISFACTORY VOLUMES, BUT TODAY, MOST OF THE DAY TRADERS HAVE MIGRATED FROM INTRADAY TRADING TO OPTIONS TRADING. IF YOU TAKE CALLPUT POSITION IN OPTIONS, YOUR RISKS ARE LIMITED, I.E., THE MAXIMUM THAT YOU MAY LOSE IN THE PREMIUM OF THAT CALL OR PUT.
IF YOU ARE USING TRADING IN OPTIONS, YOU GET MORE LEVERAGE AT LOWER PRICES. BY THE WAY, IT IS NOT THE SUBJECT MATTER OF THIS BOOK TO PROVIDE FULL INFORMATION ON OPTIONS TRADING, AS THE SAME IS NOT POSSIBLE IN THIS SMALL CHAPTER. IN CASE YOU ARE NOT CONVERSANT WITH OPTIONS TRADING YOU MAY GO THROUGH SOME BOOK ON THIS SUBJECT BY ANOTHER WRITER OR WAIT FOR MY FORTHCOMING OPTIONS-SPECIAL BOOK.
THE PURPOSE OF THIS TIP IS ONLY TO TELL YOU THAT IF YOU WANT TO TRADE IN A SPECIFIC STOCK, YOU SHOULD GO FOR OPTIONS TRADING INSTEAD OF INTRADAY TRADING.
HOWEVER, OPTIONS TRADING IS NOT MEANT FOR SMALL INVESTORS. YOU SHOULD TAKE UP THIS ONLY IF YOU HAVE A LARGE CAPITAL. AS AN EXAMPLE, IF RAMESH BUYS $3,500 STOCKS OF HINDALCO @ $200 IN INTRADAY, HE HAS TO PAY A MAXIMUM MARGIN OF $1,50,000 ON HIS TRADE VALUE OF $ 7,00,000. WHEREAS HITESH CAN BUY A CALL OPON OF $200 OF HINDALCO FOR $9 ONLY, AND AS ITS LOT SIZE IS 3,500, HE HAS TO PAY $31,500 ONLY AS OPTIONS PREMIUM.
IF HITESH IS FOLLOWING THE 4-STOCKE METHOD EXPLAINED EARLIER FOR HIS TRADE, HE WOULD BUY THE CALL OF $200 WHEN THE SAME GOES ABOVE THE PREVIOUS DAY'S HIGH, AND IF HE IS ABLE TO BUY AT $9 AND SELL THE SAME AT $10, HE MAY EARN $3,500 IN THIS TRADE. BUT, DO REMEMBER, OPTIONS TRADING IS ALSO RISKY JUST LIKE INTRADAY TRADING. HENCE, YOU HAVE BEEN ADVISED IN THE PREVIOUS TIP THAT A NEW TRADE SHOULD START PRACTICE WITH ONLY A SINGLE LOT OF BANK NIFTY. LOT SIZE OF BANK NIFTY IS 20 ONLY AND, HENCE, IF YOU TRADE IN THE SAME IN INTRADAY FOR 15-20 RUPEES AS PER THE PREVIOUS TIP, NOT ONLY YOU WOULD NOT HAVE ANY RISK OF A BIG LOSS, BUT YOU ALSO WOULD GET A PRACTICE IN OPTIONS TRADING.
HERE, LET ME REPEAT THAT, IN MY OPTIO, SWING TRADE IS THE BEST METHOD. THIS WOULD KEEP SATISFYING YOUR PURSUITS OF BOTH INVESTMENT AND TRADING AND IF YOU FOLLOW THE PROCESS EXPLAINED EARLIER, YOUR RISK WOULD BE VIRTUALLY NIL.
THE SECOND BEST METHOD IS OPTIONS TRADING IN BANK NIFTY AND NIFTY USING 4- STROKE PROCESS.
INTRADAY TRADING IN STOCKS COMES AT THE THIRD POSITION.
YOU WOULD BE ADVISED ABOUT THE MAXIMUM HOLDING PERIOD FOR OPTIONS IN THE NEXT TIP.
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SMALL TRADE METHOD FOR STOP-LOSS
A TRADER ENTERS INTO A TRADE OF $25000, AND SETS A STOP-LOSS OF $250, I.E, 1% TRADE AMOUNT. HIS PROFIT TARGET IS $500.
IF 4 SUCH CASES OF STOP-LOSS ARE HIT, HE INCURS A LOSS OF $1,000.
NOW, LET'S SEE OUT SMALL TRADE METHOS FOR STOP-LOSS FOR A COMPARATIVE STUDY.
INSTEAD OF A POSITION OF $25,000 HE MAY GO FOR MARGIN TRADE WITH $500 AND FOCUS ON EXIT WITH 1 % PROFIT WITHOUT APPLYING ANY STOP-LOSS. WITH HIS MARGIN OF $500, HE MAY TAKE A POSITION OF $2,500 AND THEN USE VWAP BREAKOUT METHOD DETAILED UNDER TIP NO. 15, TO MAKE A PROFIT OF 1 % I.E, $25. WHAT COULD BE THE MAXIMUM LOSS THAT HE MAY INCUR IN THIS CASE? ASSUMING THAT HE DID NOT SET ANY STOP-LOSS, HED MAY INCUR A LOSS OF UP TO $500 I.E, HIS MARGIN MONEY, ONLY IF THE STOCK PRICE FALLS BY 20 %.
FIRSTLY, IF YOU ARE TRADING IN STOCKS BELONGING TO INDEXES LIKE NIFTY, THE CHANCES OF THEIR PRICES FALLING TOGETHER BY 20% IN A SINGLE SESSION IS ALMOST NIL. SECONDLY, EVEN IF THE PRICE DOES GO DOWN, THE MAXIMUM LOSS OF $500 IS , IN A WAY, STOP-LOSS ONLY.
THIRDLY, YOU SHOULD APPLY A TIME-BOUND STOP-LOSS INSTEAD OF APPLYING THE SAME IN PERCENTAGE. THUS, IF YOU ARE TAKING A POSITION ON VOLUME WEIGHTED AVERAGE PRICE (VWAP) BREAKOUT, YOU SHOULD KEEP THE POSITION SMALL AND DECIDE IN YOUR MIND THAT YOU WOULD WAIF FOR A MAXIMUM PERIOD OF 20 MINUTES TO TAKE PROFIT AND IF YOU DO NOT GET THE SAME, YOU WOULD EXIT WITH WHATEVER LOSS IT RESULTS INTO.
HERE, THE LOSS ON ACCOUNT OF 20 MINUTES' ,LIMIT IS YOUR STOP-LOSS, AND IF THE BREAKOUT IS REAL, AN APPROPRIATE PROFIT IS MOST LIKELY TO BE ACHIEVED WITHIN THOSE 20 MINUTES.
AS HAS BEEN EXPLAINED EARLIER, IT'S NOT BAD TO LOSE IN SOME OF YOUR INTRADAY TRADES. YOU HAVE TO JUST ENSURE THAT YOUR PROFITS ALWAYS EXCEED YOUR LOSSES.
PRACTICAL EXERCISE
BEFORE GOING FOR REAL TRADES, YOU SHOULD TRY TO MAKE IMAGINARY TRADES ON THE ABOVE METHOD AND KEEP RECORD OF THE SAME ON PAPER. IF YOU SEE PROFIT WITHIN 20 MINUTES, JUST MAKE A NOTE OF THE SAME. IF THE TRADE IS GOING IN LOSS, KEEP RECORD OF THE LOSS INCURRED. TRY THIS EXERCISE FOR AT LEAST 5 DAYS AND THEN REVIEW THE RESULTS. PLEASE DO LET ME KNOW ABOUT YOUR RESULTS THROUGH COMMENTS ON MY YOUTUBE CHANNEL OR BLOG.
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