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.
|
Tuesday, May 5, 2015
Whether you should go for future trading or option trading and what is the difference?
Monday, May 4, 2015
HOW DERIVATIVES USE IN STOCK MARKET
CALLS GIVEN ON 1ST
MAY
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.
Saturday, May 2, 2015
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.
Friday, May 1, 2015
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,"
Thursday, April 30, 2015
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:
- 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.
- 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.
- 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)
Wednesday, April 29, 2015
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.
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.
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.
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.
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.
Monday, April 27, 2015
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.
Saturday, April 25, 2015
FEARS OF TRADING AND HOW TO OVERCOME THEM
While some traders are more likely to fall
victim to greed ("How much could I make?!"), others have experienced
loss in the market to the point where all they can see is the fear and anxiety
("How much could I lose?" or "How much could the market take
away from me?").
Let's look at some resources to help us cope
with these fears.
I recommend beginning with article " Fears
of Trading" which lists and explains each type of fear - it's more
than just being afraid to lose money. lists the fears as the following:
1.Fear of Losing Money
2.Fear of Missing Out (on a Move)
3.Profit Turn into a Loss
4.Fear of Being Wrong (or not being right)
Subscribe to:
Posts (Atom)