Forward Thinking

July 22, 2022 by Learningsharks

Psychology and Risk Management

• What to expect
• Risks
• Position sizing
• illusion of control
• Accepting critisism
• Paralyzed by fear
• Loss is a feedback, not a failure
• The flexible trader
• Focusing on the positive
• Short straddle
• The dynamics of greed
• The herd mentality
• Notes

Forward Thinking

According to a great psychoanalyst named Fritz Perls, when people dwell on and consider their past transgressions or worry about the future, they experience anxiety and terror. When someone has a peak performance mindset, they concentrate on the ongoing action and the present moment. The more present-focused you can be and the less you focus on the past or the future, the more successful your trading will be.

The sensible person takes lessons from their errors. We’ve repeatedly heard this wise counsel. There is some validity to it.

It would be stupid to repeatedly touch a hot stove or to not study for your driver’s exam and end up failing. It is also sage to plan your trades thoroughly and control your risk when trading. There are some general rules of thumb that are wise to abide by; if you must learn them for yourself, do so only a few times, and then do as is advised. In fact, there are times in life when it is beneficial to take a lesson from a mistake or from the faults of others. But sometimes there isn’t a lesson to be learned, and we over-analyze the situation and keep thinking about it endlessly, trying to figure out what it all means.

If every situation we encountered were exactly the same, it would be good to analyse all previous occurrences in-depth and determine what went wrong in order to prevent making the same error in the future. However, two events are rarely alike. There is no one right method to ask a possible romantic partner out on a date, for instance. Due to individual differences, what works for one person may not be effective for another. There is no ideal approach, thus there is no point in looking for one.

The same holds true for trading. The state of the market is never the same. The most you can do is try to guess what is happening, put a trading plan in place, and see whether it works. You’ll benefit if the correct circumstances just so happen to exist. If the prerequisites weren’t met, there was nothing you could have done to change the situation. Simply acknowledge that nothing is certain, accept the result, and go on. But if you think about it, you won’t learn much. Simply put, you’ll feel horrible about yourself and can begin to develop inhibitions and self-doubt, which will ultimately undermine your efforts.

It is preferable to consider the future when trading. Think kindly, pick up as much experience as you can, and advance. Avoid dwelling on the past and searching for mistakes. Worrying will only waste your time when you could be trading and developing the abilities you need to regularly and profitably trade.

Following your Passion

July 22, 2022July 22, 2022 by Learningsharks

Psychology and Risk Management

Following your Passion

People who are successful are passionate about what they do. They are more interested in the method involved in reaching the goal than the final result. It would be lovely to not worry about results, but not many of us have the privilege. I suppose it’s a little too optimistic. Unfortunately, the majority of us must work to support our families, thus the possibility of losing a lot of money when trading is constantly on our minds. Unless one is independently affluent, making money or losing it is always on our minds and influences our behaviour, whether we trade full-time or part-time. This worry drains mental resources. Every trade we make causes us a little amount of anxiety.

But if we could simply temporarily, even occasionally, forget about the money, we would be liberated and inventive. For its own reason, we would appreciate what we were doing. Even if it could be challenging, it is worthwhile to strive to develop such a viewpoint. You may trade in an ideal, peak performance mentality to a greater extent the more you can concentrate on the trading procedure.

Expert traders claim that they think of trading as a game or a competition. Like in any game, you falter under pressure when you concentrate on the result rather than the play. The same is true of trading. You’ll feel more satisfaction and trade more successfully if you can just concentrate on the delightful and fun parts of trading. Therefore, keep in mind what you find enjoyable about trading whenever you feel bored or frustrated when trading. For instance, some traders take pleasure in creating trading techniques.

They see creating a trading strategy as a difficult intellectual task. These traders view a trade’s outcome only as a measure of how effectively their strategy is performing. When things don’t go exactly like they expect, they don’t get upset or frustrated. Whether a deal is doing well or poorly has no bearing. In fact, many traders are content to close out their position and further analyse their strategy when a trade is performing poorly. They put a lot of effort into figuring out what is going wrong and how to adjust their plans to make them more successful. Not the prize, but the intellectual challenge is what counts.

Others who trade take pleasure in the thrill and excitement it provides. Some traders enjoy the rush of placing a transaction, notwithstanding the benefits of trading with an objective, unemotional perspective. They have an explorer’s temperament. They eagerly anticipate what will happen after a trade is completed. It excites them and provides them a buzz. They do enjoy this stimulating aspect of trading, but they are not necessarily pathological gamblers in the sense that they seek thrills merely to increase their adrenaline levels. They are motivated to work toward mastery because they are aware that the act of trading itself will soon be profitable.

Investing is entertaining and fun whether you are a long-term investor or a day trader. The more you can concentrate on the process and its underlying benefits, the more content you will feel over time. So, try to concentrate on the aspects of trading that you enjoy the most. Regardless of the outcome, you will find trading to be lucrative and pleasant.

Knowing when to Fold

July 22, 2022 by Learningsharks

Psychology and Risk Management

The most challenging aspect of trading is finding a trading strategy that will work reliably. The possible strategies are endless. Some traders carefully backtest historical data and try to find a strategy that worked in the past, and bet that it will work in the future. Other traders intuitively feel that there are some points during the trading day that the markets are overbought and try to capitalize on a reversal. Regardless of the strategy, one uses, though, one must have faith in the strategy when it comes time to execute the trade. There’s only so much that can be done before a trade is executed, but once you’ve done all the preparation you can do, you must decisively put on the trade and trade your plan.

Often, it is simpler to say than to do. When a tactic consistently produces positive results, it is simple to put your belief in it. A approach, though, occasionally seems to work more intermittently. One may begin to question the plan at these points. So what do you do? It is tempting to just give up on the plan and try something fresh. But if one switches back and forth between approaches, one cannot trade consistently. It is vital to persist with a strategy for long enough to see if it works in order for the law of averages to operate in one’s favour.

Make sure you profit from a successful plan when you find one. There are times when you experience a run of favourable circumstances. The probabilities are definitely in your favour, but to take advantage of chance, you must force yourself to make trade after trade. Such a move may appear random and haphazard to the investor with a scientific bent, but studies of probability show that there are instances in which heads appears repeatedly in a long string in a hypothetical coin toss. A run of successes might happen similarly in the markets. It would be prudent to capitalise on a winning streak if you found one.

However, if you make trading mistakes or your confidence is low, you won’t be able to profit from it. This is when having developed trading abilities is beneficial. The more abilities you possess, the easier it will be for you to execute trades correctly and profit from market circumstances that will help your approach produce a winning streak.

Similar to winning streaks that occur when a strategy consistently works, poor luck runs can also occur. Even though it makes sense, a plan doesn’t actually work. There isn’t much you can do in these circumstances.

The psychological challenge is in knowing when to change course and when to continue with a course of action. There isn’t a straightforward answer. On the one hand, you don’t want to stick with it and blow out your account, but you also don’t want to give up on it too soon. Choosing how much of your account you will allocate to a specific strategy in advance is one option.

Let’s take an example where your technique is predicted to be successful 80% of the time based on previous data analysis. You might choose to use the method for a dozen trades and risk around 25% of your capital. In other words, you would be willing to lose 25% of your capital in the worst-case situation.

Unfortunately, there isn’t a secure, guaranteed technique to choose whether to continue with or abandon a strategy. Ultimately, you must make a decision, and it can just be a matter of making an educated guess based on your prior experiences. Because of this, trading is primarily psychological in nature. Being a successful trader ultimately comes down to having the capacity to make the proper choice when it matters most.

Concentrate On the Trade

July 22, 2022 by Learningsharks

Psychology and Risk Management

Concentrate On the Trade

It’s important to focus on the trade when you’re trading the markets. You cannot allow your focus to waver. You cannot act rashly and make a mistake. But we frequently become sidetracked, and when we do, we behave hastily and make mistakes.

Studies have demonstrated that people struggle to resist temptation when their psychological resources are fully strained. When playing games of chance, for instance, individuals are more inclined to choose an immediate, smaller payoff than waiting for a larger one. It’s as if your subconscious mind is telling you to hurry up, take what you can get, and avoid waiting.

It’s crucial to pay attention right now rather than allowing oneself to become sidetracked. Keep your attention on the trading procedure right now. Your chances of achieving “the zone,” a high performance mental state when everything seems to come together smoothly, rise when you are fully immersed in trading and focused on your ongoing experience. You are not preoccupied with past blunders or projected gains when you are in this top performance mental state. Your whole focus and effort are on the current trade. Your instincts are more in tune with you. You have a clearer view of the markets and are acutely conscious of your emotions, sensibilities, and judgments.

Throughout the trading day, you may not always need to be fully concentrated on your transactions, but there are some moments when it is crucial. It’s critical to trade effectively and make quick decisions during these moments. You cannot flinch. You are not allowed to think twice or make a mistake. For instance, you must be prepared to focus all of your mental concentration on the trade at the time you enter or quit it. Don’t disregard it. It’s simple to become sidetracked and make a trading mistake.

How can you enhance the likelihood that you will adopt a focused, peak performance mindset? First, increase the likelihood that you’ll be awake and focused. Don’t trade while you’re famished or worn out. Although it might not be apparent, you could feel a little on edge and find it harder to focus when you are sleepy or hungry. There are limitations to the mind; no one has a limitless amount of psychic resources. You don’t have many resources left when you’re hungry or exhausted to completely focus.

Don’t undervalue the impact of background stress, second. Family issues, unfinished chores, and other tensions that lurk in the background of your mind may sap psychological reserves without you even realising it. Reduce your stress levels as much as you can. Third, trading modestly can be beneficial. As you silently fret about what you will do if you lose money that you just cannot afford to lose, it becomes easier to lose focus the more you risk. In sometimes subtle ways, risk management frees up psychological resources. It’s just one more approach to ease mental stress and enable more creative and unrestricted trading.

It’s important to maintain your attention on the trade you have placed. You must be ready to quickly take action to protect yourself when you can clearly see the signals that the market is moving against you. However, you could become distracted if you’re exhausted or under stress. You can struggle to manage your trades, carry out your trading plan with ease, or leave at the ideal moment. Make sure your head is in peak mental form by taking measures. Your chances of trading successfully rise when you are well-rested, unburdened, and prepared for the market action.

Focused on the Trade

July 22, 2022 by Learningsharks

Psychology and Risk Management

It’s important to maintain your attention on the trade you have placed. You must be ready to quickly take action to protect yourself when you can clearly see the signals that the market is moving against you. However, psychological problems like self-doubt, shaky confidence, or a lack of dedication might divert you. They might affect your capacity to easily carry out your trading strategy and handle a trade. It’s helpful to try to resolve as many psychological conflicts as you can, even though it’s practically impossible to eradicate all psychological conflicts from your psyche. This will prevent psychological conflicts from penetrating your consciousness and interfering with your ability to concentrate on your trade.

It’s best to deal with psychological conflicts as soon as possible because if you don’t, they just linger in the background of your mind and consume precious, finite psychological energy. You can lessen the likelihood that psychological problems will enter your consciousness when you least expect them by identifying them before the trading day. Do you harbour any unsolved disputes in the back of your head? It’s challenging to simply ignore these disagreements entirely and carry on as if nothing ever happened. Ironically, the more psychological energy you expend trying to deny that these problems really exist. It’s better to acknowledge and deal with disputes than to try to ignore them.

There are some issues that all merchants must deal with at some point, even if you are not the type of person who has a lot of old disputes to settle. There are several trading myths that have some basis in reality but are challenging to embrace. For instance, new traders need to be aware of and prepare for the potential that a string of profitable deals may have been the consequence of luck rather than trading talent. Even if it feeds our egos to believe we are amazing traders, it is preferable to admit that we might not be as talented as we would want to be than to act as though we are something we are not.

Since it requires more mental effort to pretend that you have trading skills that you don’t, it is preferable to just acknowledge the problem and take steps to address it. For instance, one can improve their talents, gain more trading knowledge and experience, and become a top trader.

Some traders might be reluctant to accept similar thoughts, but they should. Perhaps I was a good trader once, but the market conditions have changed, and I may not be able to live up to my expectations of trading profitably, for instance, a trader might think. This scenario could arise at any time for traders. It might be true or it might be untrue, but regardless of its veracity, holding onto a belief like that requires mental effort. It’s preferable to be aware of the possibility, and if it’s true, take the required actions to disprove it. If it’s false, remind yourself that it’s absurd.

There are still a lot of psychological issues lingering in your thoughts. They are there, underneath your consciousness, waiting to pounce. When you are feeling weak, as when you are afraid or dissatisfied, these beliefs may come to the fore. Ignoring these potentially disruptive psychological problems is not helpful. It’s preferable to acknowledge them right away. When you do, you will probably be better able to tell yourself, “That might be true, but it doesn’t matter right now.” Then you had better spend some time handling it during your “off hours.” Your capacity to concentrate on your trade can be severely impacted by internal conflicts.

The Fly and the Tree

July 22, 2022 by Learningsharks

Psychology and Risk Management

Being flexible is essential for traders. One must be able to approach a trade issue from various angles in a collected, logical, and perceptive manner. Have you ever noticed that you struggle to think properly when you are under a lot of pressure? Your focus could become limited and entrenched, making it challenging to consider alternate viewpoints. It’s helpful to assess your level of flexibility; if you discover that you lack it, recognise it and make changes to your surroundings to foster a more adaptable approach to problem-solving.

For traders, flexibility is key. A trade issue needs to be approached from a variety of perspectives in a calm, logical, and insightful way. Have you ever observed that when you are under a lot of strain, it is difficult for you to think clearly? Your concentration could narrow and harden, making it difficult to examine alternative points of view. It’s useful to evaluate your level of flexibility. If you find that you don’t have enough of it, acknowledge it and take steps to alter your environment. This will help you develop a more flexible approach to problem-solving.

Although it is clear in hindsight, it might have been challenging to understand if you didn’t already know the solution. Actually, only the most brilliant people can correctly answer such a discriminating question.

It requires intellectual adaptability to respond to the question regarding the fly and the tree. It’s fascinating to watch extremely smart, adaptable individuals respond to the question. It seems as if they don’t give a damn. They exude tremendous confidence and appear to be circling the question, “What might it be?” They then appear to shrug their shoulders and speculate, “They are both living creatures,” before continuing. When it is revealed that they arrived at the right solution, they are taken aback.

Flexible people approach puzzle solving in a very casual and unhurried manner. They don’t put themselves under undue pressure or risk their self-esteem. They simply consider all of the possibilities, unwind, and come up with any response as long as it is at least partly logical. When necessary, they know how to simplify, and they also know when to explore for sophisticated solutions.

It’s crucial that you traders find flexible solutions to trading issues. You may create an environment that encourages a flexible way of thinking. Don’t put too much strain on yourself, for instance.

If you need to make a difficult choice, wait until you can do so while being composed and objective. (If doing so requires closing out the position, go ahead.) Find a tranquil and soothing location to do your thinking since pressure or stress can make you more rigid. (This could entail much planning ahead of time since the markets can be highly tense after the opening bell.) Don’t overburden yourself, as well. Don’t convince yourself you have to get the answer correct or it will show you are a bad trader, putting your self-esteem at risk.

Flexibility does not thrive under pressure like that.

The secret to successful trading is flexibility. You can be more adaptable and find solutions to important trading issues by choosing the suitable surroundings and adopting the appropriate mentality.

Peak Performance Trading

July 22, 2022 by Learningsharks

Psychology and Risk Management

Experienced traders usually talk about times when they are performing at their best. Trading in the zone or “flowing with the markets” are two names for it. But the defining traits are a careless, emotionless demeanour and a concentrated, determined concentration on the markets. In this perfect mental state, traders almost completely forget about themselves. They are simply paying attention to the current process as it is happening. They do not feel self-conscious, worry about how they are performing, or fear performing poorly. Everything just seems to “click” as they float along with the market’s ups and downs. The majority of traders concur that in order to trade profitably, one must be in a peak performance mental state.

resolve interpersonal disputes. Not everyone who trades has issues at home that need to be resolved. However, if you have a tendency to carry “unfinished business” around with you, it will constantly be on your mind, preventing you from achieving your top performance. The need for self-esteem, the need to validate one’s worth, the drive to be correct, or the urge to feel superior to others are a few examples of common psychological problems.

Many traders ignore these problems, believing they are nothing more than psychobabble. That doesn’t apply to me, they reason. It could not apply, but individuals with these kinds of problems are frequently lured to trading. Ironically, it is these conflicts that motivate them to seek a demanding trading career in which they must overcome huge difficulties to join the elite group of people who earn large salaries in comparison to the great majority. Make sure you don’t actually have psychological conflicts that prevent you from reaching your top performance condition before you decide to ignore these problems.

Consider probabilities when thinking. Mark Douglas writes about a “thinking strategy” he calls “thinking in terms of probability” in his book “Trading in the Zone.” In other words, a trader shouldn’t concentrate on the result of a particular trade. Instead, he or she should concentrate exclusively on the whole picture, the result as it relates to all traders. When it comes to trading, you should enter the market with the expectation that you will lose more transactions than you will win. However, mathematically, with the use of effective risk management, it is still feasible to turn a profit across a number of trades, even if most of them are losers. It’s a good idea to not overreact to defeats. Put things in their correct context.

According to Douglas, it’s helpful to think of trading in the same manner that a successful professional gambler thinks of gambling. Professional gamblers approach the game with objectivity; they lay wager after wager in the belief that, if they make enough trades, the law of big numbers will favour them. A similar “thinking style” should be used by traders. A trading strategy with a track record of success is a crucial requirement. However, once you have it, you must use it often to benefit from this successful track record. Giving the trading method a chance to succeed over a number of trades can help you repeat the past odds of success even if it does fail a few times.

Implement sound risk management. A crucial element of trading at optimal efficiency is careful risk management. You will experience tension whether you are aware of it or not if there is a genuine threat that you will lose substantial sums of money or money that you just cannot afford to lose. However, if you set a risk limit for each deal, you will subconsciously understand that you have little to lose. And when you are confident that even the worst-case situation poses little risk, you will feel less emotional and have an easier time reaching your peak performance condition.

Trade according to a very specific trading plan. The most important factor in reaching optimal performance is probably having a meticulously thought-out trading strategy. Completely describe the strategy, including the particular entry and departure locations as well as the market circumstances that must exist for it to be used. There will always be room for indecision if every element of the plan isn’t laid out, which will keep you from operating at your best. Make your preparations ahead of time, not when you are trading. When you are attempting to make unneeded last-minute judgments, it is too difficult to maintain objectivity. You can maintain focus and trade at the top of your game if you plan out your approach as much as you can.

Many traders think that being mentally at your best while trading is essential to doing so profitably. Not everyone has a natural predisposition for this ideal state of mind, but with the correct preparation and practise, anyone may achieve it. The time spent learning how to do it is worthwhile.

Be Flexible Enough to Stand Aside

July 22, 2022 by Learningsharks

Psychology and Risk Management

Be Flexible Enough

The ability to recognise when to avoid the markets is essential for survival. Sometimes it’s best to step back and wait for the appropriate opportunity. Both the financial environment and your psychological attitude are subject to change. It is a good idea to steer clear of traditions that are profitable when the market isn’t favourable for them. Even seasoned experts frequently need to take a step back and reconsider their strategies. Accepting your limitations, taking a break, and returning to the markets when you’re ready are not to be feared. There are numerous useful justifications for reserving judgement.

There are psychological justifications for refraining from trading. You may experience fatigue, depression, or general malaise on some days. You could find it difficult to retain the optimistic, detached mindset required for trading during these periods. Your psychological reserves may be drained, causing you to respond emotionally or impulsively. Some people can be tempted to place trades while they are going through a slump, but doing so could result in placing poor deal after bad transaction.

Your ego will suffer, in addition to your account balance. When you check your account balance the following day, when you are feeling better, you can still notice the effects of the slump. And on a day when you ordinarily feel relaxed, upbeat, and prepared to engage the markets in earnest, that can lead to emotions of worry. Generally speaking, it’s preferable to step back when you’re feeling low and start fresh when you’re feeling at your best.

When your trading strategy appears to be losing its competitive advantage, that’s another strong reason to avoid the markets. Any trading strategy has its limitations. Even a “foolproof” strategy can fail when market conditions shift. By carrying on with their trading, many inexperienced traders make the issue worse. When a technique fails, it can actually fail. With each trade, your account balance will decrease. Another error is losing your temper when your approach fails. It’s best to consider such circumstances as an intellectual challenge rather than a time for fear and self-doubt.

Experienced experts frequently claim that when their tried-and-true approach begins to fail and they must come up with a new one, they perform at their best. They see the predicament as a riddle that needs to be solved. They take a step back from the marketplace and carefully examine their procedures. They hunt for the method’s flaws and strive to fix it until it functions properly once more. When they believe they have found the answer, they do a few modest transactions to test out their new, updated strategy after looking for market factors that may have altered.

Therefore, discontinue trading at the same pace when your approach stops functioning. Remain outside, assess the situation, and wait until the circumstances are ideal before entering.

Monitoring both your psychological and market moods is necessary for profitable trading. It is recommended to avoid either one if trading is not possible and wait for the conditions to improve. Do not fall into the trap of believing that you should trade despite these potentially crippling conditions. You can continue trading another day when you’re in a top performance state and the market conditions are ideal by avoiding the markets today.

Flexible and Open to Possibilities

July 22, 2022 by Learningsharks

Psychology and Risk Management

Flexible and Open to Possibilities

Successful traders are adaptable. They approach a transaction from various perspectives and aren’t hesitant to consider all of the options. They are aware that they can be mistaken, but it doesn’t concern them. Yes, they frequently anticipate being mistaken. Being adaptable is essential when weighing your options. You might experience losses if you tenaciously stick to one line of action. Be as adaptable as you can to increase your revenues.

When creating a trading strategy, fear might occasionally come into play. The strict trader may be hiding a fear that his or her strategy has little chance of success. The scared and inflexible trader concentrates solely on one possibility rather than carefully weighing all potential bad conditions, and does not come up with a backup plan of attack in case an unwelcome or unplanned incident throws off his or her trading strategy.

For instance, a stock may be expected to rise during the coming week, but one may secretly have doubts about whether the increase will be successful. Fear may cause the inflexible trader to avoid taking into account and accounting for any negative occurrences, such as earnings announcements, a potential increase in interest rates, or a rapid shift in market sentiment. The flexible trader, on the other hand, is unafraid to consider each of these options and decide which are more likely. The adaptable trader can adapt his or her ideas as needed and bounce back from a potential setback by remaining open to all options.

The best remedy for rigidity is to lessen fear since people are at their most rigid when they are terrified. One can think freely and flexibly to the extent that they can trade in a relaxed emotional state. Risk management can help to lessen fear. You’ll feel at ease and at ease if you know that you can withstand the worst-case scenario. Similar to this, if you trade with money you can afford to lose, you won’t have as much to worry and will be better able to consider all of the potential alternative elements that could affect your trading strategy. You might become less fearful and more open to considering all the options by developing a relaxed mindset. And the more adaptable you are, the more successful your trading will be.

Margin Calculator

July 26, 2022July 22, 2022 by Bala gumber

Forward Market

• Forwards market
• Futures contract
• Future trades
• Leverage & payoff
• Margin & M2M
• Margin calculator
• Open interest

• How to short
• Nifty futures
• Nifty futures
• Futures pricing
• Hedging with futures
• Notes

The trade Information

This chapter will begin with me asking the same old question once more: Why do you think margins are charged? Let me post the solution before you become irritated and chase after me.

From the standpoint of risk management, margins are charged. It aids in avoiding any unfavourable counterparty default. The whole risk management is supervised by the broker’s risk management system, also known as the RMS system.

You might find it interesting to know that the RMS is a computer programme. All customer orders only reach the exchange when this software approves them (which takes a split second), and people are watching to see if everything is done correctly or incorrectly.

The agreement you want to purchase (like TCS futures, IDEA futures etc.)
The amount you want to purchase ( number of lots)
The cost at which you wish to purchase (market or limit)

The RMS system checks the margin requirement after you make the order and approves the deal (provided you have the required margin amount).

However, the following details are those that you typically avoid giving the RMS system:

The number of days you want to keep your transaction open—is it intraday or do you want to keep it open for a few days?
The stoploss point is the price at which you would like to book a loss and close the position if the trade were to go against you.

What would happen if you gave the RMS system these extra details now? Obviously, your risk appetite would be better defined with the additional information streaming to the RMS system.

The algorithm may learn how much volatility you are exposed to, for instance, by providing information on the deal duration. You are only vulnerable to 1-day volatility if you trade intraday. However, if your deal lasts for several days, you have exposed to both the “overnight risk” and volatility over a number of days.

The risk of holding the investment overnight is known as overnight risk. For illustration, let’s say I overnight held a long position in BPCL futures, a significant oil marketing company in India. BPCL is quite susceptible to changes in the price of crude oil.

Assume that the crude oil market surges by 5% overnight while I own the BPCL futures. It is apparent that this will hurt BPCL the following day as it will become more expensive for BPCL to purchase crude oil from the global markets. As a result, if I hold a BPCL position overnight, I will lose money. thus, an M2M cut. This is known as an “overnight risk.” Regardless, the argument I’m trying to make is simple: from the standpoint of the RMS system, the longer you want to hold the trade, the more the risk you are exposed to.

Therefore, both the term and the stop loss of the trade provide the RMS system with more information about your risk tolerance. So, as a trader, what does this mean?

Consider this: The RMS method creates greater clarity the more information you supply about the risk you face. Less margin is needed the more clarity it has!

Consider this to be somewhat like purchasing a television from a consumer electronics store. Although the following analogy may not be particularly appropriate, I believe it conveys the intended meaning.

He will drop both his jaws and the pricing even further if you tell him you have the cash on hand and are ready to complete the sale right immediately. The key point is that the price becomes more appealing as and when the shopkeeper learns more details about the transaction.

Product types

One thing is certain at this point: the less margin is necessary, the more risk information you are willing to provide with the RMS system. It goes without saying that you can accomplish more with your capital the lower the required margins are. What is the best way for a trader to provide this data to the RMS system? Well, there are particular product categories designed for this use. You can select the product type when submitting an order (to buy or sell). There are many different Product kinds, and they are different from one another primarily in terms of their functionality and the data they provide to the RMS system. Although the basic operation of these product types is the same across all brokers.

NRML – NRML is a common product category. Use this if you want to buy a futures trade and hold it.

Keep in mind that when you utilize NRML, the risk management system has no further knowledge of your trade length (because you can hold the contract until it expires) or the stop loss. You experience losses (and therefore continue to pump in the required margins). As a result, the broker’s RMS system charges you the entire margins due to the lack of transparency (i.e. SPAN and Exposure).

When buying futures with the intention of holding the position for several days, use NRML. But keep in mind that you can also utilize the NRML product type for intraday trading.

Margin Intraday Square off (MIS) is a pure intraday product offered by Zerodha, which means that any trades entered into using this product type will be for a single day only. You cannot choose MIS as an order type and anticipate the position being kept for the following day. By 3:20 PM, you are required to cut the position; if you don’t, the RMS system will do the same.

The RMS system clearly recognises that it is an intraday deal now that the product type is MIS, making it a step beyond NRML in terms of information flow. Keep in mind that the trader is only exposed to one day’s volatility while trading intraday. As a result, the margin need is lower than NRML margins.

Cover order (CO): The idea behind cover order is straightforward. First, the cover order (CO), like MIS, is an intraday product. However, the CO provides extra stop-loss information. This means that you must also indicate the stop loss when placing a CO. As a result, CO transmits both of the essential details:

The trade’s duration, which is one day
The utmost loss you will tolerate in the event that the trade goes against you is known as the stop loss.

The buy CO form is depicted in the image below.

The stop loss must be specified in the section that is highlighted in black.

Obviously, I won’t get into the logistics part and describe how to place a CO from the trading terminal because we have covered that in a z-connect article.

I want you to be aware of the fact that when you place a CO, you are also communicating the maximum loss you are willing to accept in addition to the fact that your trade is intraday. Therefore, under this, the margins should decrease significantly (even lower than MIS).

Bracket Order (BO): This format is very flexible. Think of the BO as a cover order improvisation. A BO is obviously an intraday order, which means that by 3:20 PM on the same day, all BO orders must be settled. You will also need to include the following information when placing a BO:

The stop loss is the point at which you want to exit a trade in the event that it goes against you.
Trailing stop loss: You can optionally track your stop loss with this function. The topic of “The Trailing Stop Loss” has not yet been covered. At the conclusion of this chapter, we will talk about the same. But for the time being, keep in mind that a BO allows you the option to trail your stop-loss; in fact, this is one of a BO’s most well-liked characteristics.
Target – The BO also asks you to pick the price at which you want to book the profits if the trade turns out well.

Your order is sent to the exchange by the BO, where you may also set a target price and a stop loss. For active traders, this is a tremendous comfort as it benefits them in numerous ways.

Of course, if you’re interested in the specifics of how to place a BO, you can read this post, which outlines what needs to be done in great detail.

The green box highlights the SL placements in the image below, which shows the BO buy order form.

If you consider a bracket order, the trader transmits to the RMS system the identical data that a CO transmits. Additionally, the trader is communicating the goal price through the BO. What impact does the target price information have on the RMS system, then? From the perspective of risk management, it practically makes no difference. Keep in mind that the RMS is only concerned with your risk, not your return. The margin charged for BO and CO is therefore the same as a result of this.

Now that the previous conversation has been put into context, let’s explore some of the other possibilities offered by Zerodha’s margin calculator.

Back to the Margin Calculator

A short recap: we presented Zerodha’s margin calculator in the last chapter. The margin calculator’s goal is simple to understand. It aids the trader in determining the amount of margin needed for the contract he wants to trade. We also gained an understanding of the terms expiry, rollover, and spread margins in our endeavour to comprehend the same. We can now understand how information flows into the RMS system and how it affects the relevant margins thanks to the guidance provided in this chapter. Keep these in context as we examine the other two choices in the margin calculator, “Equity Futures” and “BO&CO,” which are indicated in red. Here is a picture emphasising these aspects. –

Equity Futures – The margin calculator’s equity futures component is a ready reckoner because it enables traders to comprehend the following:

1. The margin in NRML needed for a specific contract

2. The minimum MIS margin necessary for a specific contract

3. How many lots a trader can purchase with a certain quantity of money in his trading account

Nearly 475 futures are included in the Equity Futures area (as of January 2015). Let’s complete a few tasks in order to better comprehend this. Using the margin calculator’s Equity Futures section, we will complete these tasks. In the process, ideally, you will gain a better understanding of how to use the section.

A trader has Rs. 80,000 in his trading account for Task 1. He want to purchase and hold for three trading sessions ACC Cements Limited Futures with an expiration date of February 26, 2015. the margin needed for this deal; find out what it is. What margin is necessary for him to trade Infosys January futures on an intraday basis? Does he own enough margin to open both trades?

Solution: Let’s start by taking care of the ACC futures. We must search for NRML margins because the trader expects to hold the futures contract for three working days. Be aware that the SPAN calculator can also be used to complete this operation. This was covered in the prior chapter. The Equity Futures calculator, however, offers a few more benefits than a SPAN calculator.

Visit the Equity Futures section, and you can see all the contacts listed here; scroll till you find the desired contract. I have highlighted the same in green. Do notice; that the calculator is also listing the contract’s expiry date, lot size, and the price at which the contract is trading.

The black vertical box highlights the NRML margin for each contract.

From the table, it is clear that the ACC Feb 2015 requires a margin of Rs.48,686/-.

To determine the margin requirement for Infosys, I need to scroll down till I spot Infosys January contracts or type “Infy” in the search box provided.

As we can see, Infy’s NRML margin is Rs.67,698/-(highlighted in the black arrow), and MIS margin is Rs.27,079/-(highlighted in the red arrow). Do note the MIS margin amount is drastically lower compared to the NRML margin,

Since the deal is intraday, it is obvious that the trader can select the MIS product type and take advantage of the lower margin requirement of Rs. 27,079/-. Please take note that the trader may choose the NRML product type even for intraday; doing so poses no risk. However, doing so results in a blockage of the NRML margin amount. It makes sense to choose MIS and utilize the available cash effectively if one is certain about intraday trading.

Anyhow, the total margin needed by the dealer would be –

48,686 in payment for the ACC contract (NRML margin as the trader wishes to hold the position for 3 days)
toward the Infosys contract: $27,079 (MIS margins as it is a pure intraday product).
Margin total of Rs. 75,765 (48,686 + 27079)

Obviously, the trader can start both deals because he has Rs. 80,000 in his account.

A trader has Rs. 120,000 in his trading account for Task 2. On both an intraday and multiple-day basis, how many Wipro January Futures may he purchase?

Solution: Use the given search bar to look up Wipro. There is a “Calculate” button next to the MIS margin column (highlighted in a green arrow). Press the same button.

When you click on it, a form-like window appears, and you must enter –

The quantity of money in your trading account, which is by default set to Rs. 100,000 but can be changed to suit your needs.
The contract’s current market price (in fact, this is pre-populated)

Given that NRML margin is Rs. 36,806 per lot, the calculator implies that I can trade up to 3 lots of Wipro futures under the NRML product type. I can trade up to 8 lots using the MIS product type because the margin required is only Rs. 14,722 per lot.

And with that, we are familiar with all the features of the margin calculator’s Equity Futures section. The BO&CO calculator is now our next stop.

BO&CO Margin Calculator

For the reasons we mentioned before, the margin requirements for bracket order and cover order are comparable. The BO&CO calculator is very similar to the SPAN calculator in that it is easy to use. I’m attempting to determine the margin need for Biocon Futures that expire in February 2015 in the following screen shot. You’ll see that I’ve chosen everything I needed to choose besides the stop loss.

I go and click the “compute” button without selecting the stop-loss. When I do this, the calculator determines the default stop loss one can use as well as the necessary margin. The calculator now computes the amount as indicated below once I mention the stop loss.

One may select Rs. 403 as the stop-loss using the BO&CO calculation. Naturally, the margins will alter depending on where you set the stop loss. However, the needed margin of Rs. 9,062 is significantly less than the NRML margin of Rs. 26,135 and the MIS margin of Rs. 11,545.

The trailing stoploss

Let’s briefly explore the “trailing stop-loss” before we wrap up this chapter. In bracket orders, the idea of a trailing stop loss is used, and it is fundamental to trading in general. So, I suppose it’s crucial to understand how to trace your stop-loss. Consider the following scenario, which most of us would have been in: You purchase a stock at Rs. 250 with the hope that it will eventually reach Rs. 270. You hope for the best and set your stop loss at Rs. 240 (just in case the deal goes against you).

Things go as planned; the stock advances all the way from Rs. 250 to Rs. 265 (just a few Rupees short of your target of Rs. 270), but because of market instability, it begins to retrace back, reaching your stop loss at Rs. 240. In other words, you briefly saw revenues coming in before being compelled to record a loss.

How do you handle such a circumstance? We are frequently placed in situations where we are correct about the general trend but are “stopped out” by market volatility.

Well, you can avoid being in this predicament by using the method known as “trailing your stop loss.” In fact, trailing stop loss occasionally provides you the possibility of earning more money than you anticipated.

Using a trailing stop loss is an easy idea. All that is required is a simple stop-loss adjustment based on stock movement. Let me give you an illustration of this. Here is an example of a trading setup:

It is obvious that the plan is to buy at Rs. 2175 and maintain a stop loss at Rs. 2150. As and when the price moves in the desired direction of the trade, the stop loss is to be adjusted. The SL can be changed precisely for every 15 points of price movement in the trading direction. Any level can be chosen for the SL with the intention of locking in the earnings. “Trailing Stop Loss” refers to the process of adjusting the SL with the goal of locking in earnings.

I was hoping you would take note of the fact that, although I chose at random a 15-point move for this example, it could actually be any price move. Please review the following table; as the pricing fluctuates fact, it might be any price movement, as it is in this example. Please take a look at the following table. I trail my stop loss to lock in a particular amount of profit whenever the price moves 15 points in favor of the trade.

Please take note that even while the trailing stop loss approach allows me to ride the momentum and close in on a greater profit, the original price goal was Rs. 2220.

CONCLUSION

The RMS system will require less margin the more information one provides regarding trade duration and stop losses.
When you wish to start a trade and carry it overnight, use the NRML product type.
The highest margins (SPAN + Exposure) are for NRML.
A pure intraday trade is MIS. The MIS margin is, therefore, smaller than the NRML margin.
Only time information (intraday) and not stop-loss information is communicated in a MIS trade.
An additional intraday product is a cover order (CO), where the stop loss must be specified.
Both the time and the SL information are communicated by a CO. Margin is, therefore, lower than MIS.
A CO’s margins are comparable to a Bracket Order’s (BO) margins.
One can simultaneously set the SL and target price for a BO product type. Additionally, one can trace the stop loss.
A trailing SL approach necessitates adjusting the SL as the script shifts in the trader’s favor.
A trailing SL is a fantastic method to capitalize on a script’s momentum.
There are no set trailing guidelines; the trailing SL can be chosen dependent on the state of the market.

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