How to Determine Where to Set a Stop Loss

Many investors struggle with the task of determining where to set their stop loss levels. Investors don’t want to set their stop loss levels too far away and lose too much money if the stock moves in the wrong direction. On the other hand, investors don’t want to set their stop loss levels too close and lose money by being taken out of their trades too early.

So where should you set your stop losses?

Let’s take a look at the following three methods you can use to determine where to set your stop losses:

Whether you should go for future trading or option trading and what is the difference?

Future trading in the Indian stock market refers to the buying and selling of the stock futures of individual stock. If you have to buy one future of nifty (one future of nifty equals 200 nifty), you need to pay a margin between 25-50% depending upon the volatility of the index. For example, if you wish to buy future of DLF, then you need to buy 2000 DLF's, which is one lot size of DLF future. Any price movement (up or down) you either get profit or loss. The profits and losses are unlimited while buying or selling a future. When we buy an option i.e., a call or a put we only need to pay the premium and  that is the only risk we have. Options can be on the index as well as the stocks. Stock options are option on individual index. The buyer of an option pays the premium to the seller of the option. The buyer of an option is under no obligation to exercise his option but the seller of the option has to fulfill his obligation if the buyer demands For example, If you buy an index call option at a premium of Rs.20, then at the end of the month the maximum loss you can have is Rs.20, but the profit is unlimited where as the seller of the option will have maximum profit of Rs.20 only and his loss is unlimited. The seller of an option is also called an option writer. New investors and traders should not indulge in option writing or selling. An investor can buy a put option if he thinks that the market is going to go down. He has to pay only premium to the writer. The investors buys the put option which gives the investor the right but not the obligation to sell the stock at a later stage. The date specified at which the option has to mature is called the expiration date i.e.,  the last Thursday of the month. The price specified in the option contract is called the strike price. So a new investor is advised to buy call or put options rather than selling options or trading in future.

HOW DERIVATIVES USE IN STOCK MARKET

CALLS GIVEN ON 1^ST MAY

WOCKPHARMA CALL ROCKS..!!!!! ACHIEVED TGT AND MADE A HIGH OF 1471

AMTEKAUTO CALL ALMOST HIT THE TGT MADE A HIGH OF 163

1. What are derivatives? Derivatives, such as futures or options, are financial contracts which derive their value from a spot price, which is called the “underlying”. For example, wheat farmers may wish to enter into a contract to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction would take place through a forward or futures market. This market is the “derivatives market”, and the prices of this market would be driven by the spot market price of wheat which is the “underlying”. The term “contracts” is often applied to denote the specific traded instrument, whether it is a derivative contract in wheat, gold or equity shares. The world over, derivatives are a key part of the financial system. The most important contract types are futures and options, and the most important underlying markets are equity, treasury bills, foreign exchange, real estate etc.

2. What is a forward contract? In a forward contract, two parties agree to do a trade at some future date, at a stated price and quantity. No money changes hands at the time the deal is signed.

3. Why is forward contracting useful? Forward contracting is very valuable in hedging and speculation. The classic hedging application would be that of a wheat farmer forward -selling his harvest at a known price in order to eliminate price risk. Conversely, a bread factory may want to buy bread forward in order to assist production planning without the risk of price fluctuations. If a speculator has information or analysis which forecasts an upturn in a price, then he can go long on the forward market instead of the cash market. The speculator would go long on the forward, wait for the price to raise, and then take a reversing transaction making a profit.

How does a stock market crash? What are the after effects?

FUTURE:

"SELL SKSMICRO BELOW 465 TGT 450.00 SL 472.00"

"BUY AMTEKAUTO ABOVE 160.00 TGT 165.00 SL 157.00"

CASH:

"SELL VGUARD BELOW 990 TGT 965.00 SL 1015.00"

" BUY WOCKPHARMA  ABOVE 1300.00 TGT 1340.00 SL 1290.00"

A stock market crash is whenever the stock market loses more than 10% in a day or two. This differentiates it from a stock market correction, which is usually a loss of 10% or less over many days. You can measure the percentage losses in a stock market crash with any of the major stock market indices: the Dow Jones Industrial Average, the S&P 500 or the NASDAQ. Crashes are dangerous. They can lead to a bear market, which is an extended stock market decline that typically lasts 18 months.

Recognize the Warning Signs  

The market usually crashes after an extended bull market, which is an upswing in stock prices. Greed drives stock prices above the underlying worth of the company, as measured by earnings. Stock prices that aren't supported by earnings or underlying economic reality is how you can tell when the stock market is about to crash. There's a feeling of "I've got to get in now or I'll miss the profits," which leads to panicked buying. Usually, the individual investor will buy right at the market peak. The stock market crash is the reverse, panicked selling. That's when the individual investor, if driven by fear, usually sells. When investors are driven by emotion, not financials, then that emotion can reverse quickly, turning into panicked selling. That's the symptom of a stock market crash.

What Not to Do

Buying high and selling low is a sure-fire way to lose money in the stock market. That's why it's extremely difficult to time the market. By the time you get the information to make a move, institutional investors and traders have moved on.

What's the solution? Keep a well-diversified portfolio of stocks, bonds Rebalance it as market conditions change. During a stock market crash, stocks will make up less of your portfolio, while stocks will make up more. Sell some of the bonds to buy more stocks, now that the prices are down. When they go up again and they always do you will profit from the upswing in stock prices. You've sold some of your bonds, so you won't lose as much when those prices fall during the bull market. Even the most sophisticated investor finds it difficult to recognize a stock market crash until it is too late.

Trending & Sideways market Trading

Every trader needs a trend to make money. If you think about it, no matter what the technique, if there is not a trend after you buy, then you will not be able to sell at higher prices..."Following" is the next part of the term. We use this word because trend followers always wait for the trend to shift first, then "follow" it. One of the first rules of trend following is that price is the main concern. Traders may use other indicators showing where price may go next or what it should be but as a general rule these should be given less weightage. A trader need only be worried about what the market is doing, not what the market might do. The current price and only the price tell you what the market is doing.

Money Management: Another decisive factor of trend following is not the timing of the trade or the indicator, but rather the decision of how much to trade over the course of the trend.

Risk Control: Cut losses is the rule. This means that during periods of higher market volatility, the trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more positive price trends reappear.Rules: Trend following should be systematic. Price and time are pivotal at all times.
The markets are said to be trending sideways most of the time. During this time they can be quite volatile. It is for that reason that many traders have come to loath them. However some traders actually prefer sideways trending markets over trending markets. The bulls and the bears are in this together, scratching their heads and wondering what’s going to happen next. Up and down, down and up. As soon as you think you know where the stock market is going, it doesn't An increasing amount of money has been flowing into fast-trading (and often short-selling) hedge funds that may be whipsawing the market with their staccato trading patterns.What’s a small-time investor to do? Perhaps it sounds facile, but the best thing to do with a sideways trending market is “not much.”
Sideways trends can be found inside support and resistance levels that are near each other. Inside the trading trend line the price still fluctuates, but with rather small ups and downs. A sideways trend is said to be broken when the price goes outside the previous limitations of the trend line. You might like to make sure that the price goes outside the barrier of the trend line twice before being sure the sideways trend is broken.

A Predictive market trading algorithm or Trading System is defined as a calculable set of trading rules that uses either technical analysis and/or Elliott wave analysis and results in entry, exit and stop loss trade price points. Trading algorithms are not exclusive to swing trading and are also used for day trading and long term trading. Trading algorithms/systems may lose their profit potential when their strategies obtain enough of a mass following to curtail their effectiveness: "Now it's an arms race. Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits,"

What is the difference between book value per share and market value per share for common stock

Understanding the difference between book value and market value is a simple yet fundamentally critical component of any attempt to analyze a company for investment. After all, when you invest in a share of stock or an entire business, you want to know you are paying a sensible price. Both book value and market value can be important tools for investors hoping to build strong portfolios. While the market price of each stock provides clues to a company's financial strength and future prospects, book value reveals the current state of the company and ignores future growth potential. Combining these two figures can help you determine whether a stock is valued correctly, which can help you get the most out of your investment.

Book Value literally means the value of the business according to its "books" or financial statements. In this case, book value is calculated from the balance sheet, and it is the difference between a company's total assets and total liabilities. Note that this is also the term for shareholders' equity. The book value of a company represents how much a company is worth based strictly on its balance sheet. To find book value, add up everything the company owns in terms of assets, then subtract everything the company owes, such as debts and other liabilities. Book value reveals how much the company is worth if it were liquidated and all assets were sold for cash. By dividing book value by the total number of shares outstanding, you can find book value per share.

Market Value is the value of a company according to the stock market. Market value is calculated by multiplying a company's shares outstanding by its current market price. Market value per share is a much easier figure to derive. The market value per share is simply the price of each share on the open market or how much it would cost to buy a share of stock at any given point. While book value represents how much the company's assets are worth, market value reveals what investors think the company is worth and how much they will pay to buy stock in the firm.

Implications of Each

Book value simply implies the value of the company on its books, often referred to as accounting value. It's the accounting value once assets and liabilities have been accounted for by a company's auditors. Whether book value is an accurate assessment of a company's value is determined by stock market investors who buy and sell the stock. Market value has a more meaningful implication in the sense that it is the price you have to pay to own a part of the business regardless of what book value is stated:

1. Book Value Greater Than Market Value: The financial market values the company for less than its stated value or net worth. When this is the case, it's usually because the market has lost confidence in the ability of the company's assets to generate future profits and cash flows. In other words, the market doesn't believe that the company is worth the value on its books. Value investors often like to seek out companies in this category in hopes that the market perception turns out to be incorrect. After all, the market is giving you the opportunity to buy a business for less than its stated net worth.
2. Market Value Greater Than Book Value: The market assigns a higher value to the company due to the earnings power of the company's assets. Nearly all consistently profitable companies will have market values greater than book values.
3. Book Value Equals Market Value: The market sees no compelling reason to believe the company's assets are better or worse than what is stated on the balance sheet.

It's important to note that on any given day, a company's market value will fluctuate in relation to book value. The metric that tells this is known as the price-to-book ratio, or the P/B ratio:

P/B Ratio = Share Price/Book Value Per Share

(where Book Value Per Share equals shareholders' equity divided by number of shares outstanding)

Risk Management Techniques For Active Traders

"SELL SUNTV BELOW 345.50 TGT 340.00 SL 351.00" 

"BUY IDEA ABOVE 181.00 TGT 186.00 SL 176.00"

Risk management is an essential but often overlooked prerequisite to successful active trading. After all, a trader who has generated substantial profits over his or her lifetime can lose it all in just one or two bad trades if proper risk management isn't employed. This article will discuss some simple strategies that can be used to protect your trading profits.

Planning Your Trades:

Successful traders commonly quote the phrase: "Plan the trade and trade the plan." Just like in war, planning ahead can often mean the difference between success and failure. Stop-loss (S/L) and take-profit (T/P) points represent two key ways in which traders can plan ahead when trading. Successful traders know what price they are willing to pay and at what price they are willing to sell, and they measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high enough, then they execute the trade. Conversely, unsuccessful traders often enter a trade without having any idea of the points at which they will sell at a profit or a loss. Like gamblers on a lucky or unlucky streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits often entice traders to imprudently hold on for even more gains.

Stop-Loss and Take-Profit Points
A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. Often this happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the "it will come back" mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible. On the other side of the table, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. Often this is when additional upside is limited given the risks. For example, if a stock is approaching a key resistance level after a large move upward, traders may want to sell before a period of consolidation takes place.

How to Effectively Set Stop-Loss Points
Setting stop-loss and take-profit points is often done using technical analysis, but fundamental analysis can also play a key role in timing. For example, if a trader is holding a stock ahead of earnings as excitement builds, he or she may want to sell before the news hits the market if expectations have become too high, regardless of whether the take-profit price was hit.

Moving averages represent the most popular way to set these points, as they are easy to calculate and widely tracked by the market. Key moving averages include the five-, nine-, 20-, 50-, 100- and 200-day averages. These are best set by applying them to a stock's chart and determining whether the stock price has reacted to them in the past as either a support or resistance level. Another great way to place stop-loss or take-profit levels is on support or resistance trendlines. These can be drawn by connecting previous highs or lows that occurred on significant, above-average volume. Just like moving averages, the key is determining levels at which the price reacts to the trendlines, and of course, with high volume.

When setting these points, here are some key considerations:

• Use longer-term moving averages for more volatile stocks to reduce the chance that a meaningless price swing will trigger a stop-loss order to be executed.
• Adjust the moving averages to match target price ranges; for example, longer targets should use larger moving averages to reduce the number of signals generated.
• Stop losses should not be closer than 1.5-times the current high-to-low range (volatility), as it is too likely to get executed without reason.
• Adjust the stop loss according to the market's volatility; if the stock price isn't moving too much, then the stop-loss points can be tightened.
• Use known fundamental events, such as earnings releases, as key time periods to be in or out of a trade as volatility and uncertainty can rise.

Calculating Expected Return
Setting stop-loss and take-profit points is also necessary to calculate expected return. The importance of this calculation cannot be overstated, as it forces traders to think through their trades and rationalize them. As well, it gives them a systematic way to compare various trades and select only the most profitable ones.

This can be calculated using the following formula:

[ (Probability of Gain) x (Take Profit % Gain) ] + [ (Probability of Loss) x (Stop Loss % Loss) ]

The result of this calculation is an expected return for the active trader, who will then measure it against other opportunities to determine which stocks to trade. The probability of gain or loss can be calculated by using historical breakouts and breakdowns from the support or resistance levels; or for experienced traders, by making an educated guess.

The Bottom Line
Traders should always know when they plan to enter or exit a trade before they execute. By using stop losses effectively, a trader can minimize not only losses, but also the number of times a trade is exited needlessly. Make your battle plan ahead of time so you'll already know you've won the war.

why stock market traders lose money

Many people think trading is the simplest way of making money in the stock market. Far from it; I believe it is the easiest way of losing money. I discuss below eight ways of undisciplined trading which lead to losses. Guard against them, or the market will wipe you out.

1. Trading during the first half-hour of the session

The first half-hour of the trading day is driven by emotion, affected by overnight movements in the global markets, and hangover of the previous day's trading. Also, this is the period used by the market to entice novice traders into taking a position which might be contrary to the real trend which emerges only later in the day. Most experienced traders simply watch the markets for the first half of the day for intraday patterns and any subsequent trading breakouts.

2. Failing to hear the market's message

Personally, I try to hear the message of the markets and then try to confirm it with the charts. During the trading day, I like to watch if the market is able to hold certain levels or not. I like to go long around the end of the day if supported by patterns, and if the prices are consistently holding on to higher levels. I like to go short if the market is giving up higher levels, unable to sustain them and the patterns support a down move of the market. This technique is called tape watching and all full-time traders practice it in some shape or form. If the markets are choppy and oscillate within a small range, then the market's message is to keep out.If the charts say that the market is acting in a certain way, go ahead and accept it. The market is right all the time. This is probably even truer than the more common wisdom about the customer being the king. If you can accept the market as king, you will end up as a very rich trader, indeed. Herein lies one reason why people who think they are very educated and smart often get trashed by the market because this market doesn't care who you are and it's certainly not there to help you. So expect no mercy from it; in fact, think of it as something that is there to take away your money, unless you take steps to protect yourself.

3. Ignoring which phase the market is in

It is important to know what phase the market is in whether it's in a trending or a trading phase. In a trending phase, you go and buy/sell breakouts, but in a trading phase you buy weakness and sell strength. Traders who do not understand the mood of the market often end up using the wrong indicators in the wrong market conditions. This is an area where humility comes in. Trading in the market is like blind man walking with the help of a stick. You need to be extremely flexible in changing positions and in trying to develop a feel for the market. This feel is then backed by the various technical indicators in confirming the phase of the market. 

4. Failing to reduce position size when warranted

Traders should be flexible in reducing their position size whenever the market is not giving clear signals. For example, if you take an average position of 3,000 shares in Nifty futures, you should be ready to reduce it to 1,000 shares. This can happen either when trading counter trend or when the market is not displaying a strong trend. Your exposure to the market should depend on the market's mood at any given point in the market. You should book partial profits as soon as the trade starts earning two to three times the average risk taken.

5. Failing to treat every trade as just another trade

Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times their normal level. This can lead to a heavy drawdown as such situations often do not work out. Every trade is just another trade and only normal profits should be expected every time. Supernormal profits are a bonus when they -- rarely! -- occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.

6. Over-eagerness in booking profits

Profits in any trading account are often skewed to only a few trades. Traders should not be over-eager to book profits so long the market is acting right. Most traders tend to book profits too early in order to enjoy the winning feeling, thereby letting go substantial trends even when they have got a good entry into the market. If at all, profit booking should be done in stages, always keeping some position open to take advantage of the rest of the move. Remember trading should consist of small profits, small losses, and big profits. Big losses are what must be avoided. The purpose of trading should be to get a position substantially into money, and then maintain trailing stop losses to protect profits. Most trading is breakeven trading. Accounts sizes and income from trading are enhanced only when you make eight to ten times your risk. If you can make this happens once a month or even once in two months, you would be fine. The important point here is to not get shaken by the daily noise of the market and to see the market through to its logical target. Remember, most money is made not by brilliant entries but by sitting on profitable positions long enough. It's boring to do nothing once a position is taken but the maturity of a trader is known not by the number of trades he makes but the amount of time he sits on profitable trades and hence the quantum of profits that he generates.

7. Trading for emotional highs

Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. Traders need to keep a high degree of emotional balance to trade successfully. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress.

8. Failing to realize that trading decisions are not about consensus building

Our training since childhood often hampers the behaviour necessary for successful trading. We are always taught that whenever we take a decision, we should consult a number of people, and then do what the majority thinks is right. The truth of this market is that it never does what the majority thinks it will do. Trading is a loner's job. Traders should not talk to a lot of people during trading hours. They can talk to experienced traders after market hours but more on methodology than on what the other trader thinks about the market. If a trader has to ask someone else about his trade then he should not be in it. Traders should constantly try to improve their trading skills and by trading skills I mean not only charting skills but also position sizing and money management skills. Successful traders recognize that money cannot be made equally easily all the time in the market. They back off for a while if the market is too volatile or choppy.