Loss is Feedback, Not Failure

September 27, 2022July 21, 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

Loss is Feedback, Not Failure

Trading demands “thick skin,” just like any difficult activity. Criticism cannot readily injure a person. Being entirely open to criticism of any kind is necessary so that adjustments to one’s trading strategy can be addressed right away before losses accumulate. It takes the right mentality to be able to view criticism, which typically manifests as losses, from the appropriate angle. Instead of viewing criticism as a sign of personal failure, one must view it as unbiased input.

Most people start to establish their perspective on criticism at a young age. When kids are initially obliged to control their needs and impulses, such as when they are potty trained, according to Sigmund Freud, it may begin to develop.

However, other psychoanalysts contend that children’s ability to deal with the difficulties they face in school has a significant impact on how they learn to manage criticism.

Either a sense of superiority or inferiority develops in children. No matter when it occurs, there are huge variations in how people respond to criticism. Some people are particularly sensitive to criticism, whereas others like it.

Some people have extremely thin skin. They have spent their entire lives trying to find ways to shield themselves from punishment and broken feelings. Since they were frequently severely disciplined as children, they now have a tendency to anticipate punishment when they do anything wrong. They constantly search for what is “right” and what is “bad,” and they make every effort to avoid doing the latter. But this tendency has drawbacks as well.

One learns to view situations as either right or wrong, in black-and-white terms. One anticipates either being praised or penalised. One tends to avoid taking chances when they place too much emphasis on determining if their activities are right or bad.

One is prone to be cautious. One doesn’t learn how to make costly errors or how to bounce back from them since opportunities aren’t taken. When one has a setback, it is perceived as a terrifying event rather than as an opportunity to advance and find new approaches. Events, such as trading losses, are perceived as failures on a human level rather than as purely objective feedback that needs to be swiftly assessed so that adjustments may be made.

It’s imperative that you learn to evaluate a setback more objectively if you have problems seeing it as nothing more than honest feedback. Keep in mind that no one is watching you from behind.

Feel free to engage in any activity you like. Consider your trade with the same objectivity and dispassion that you do routine activities like driving a car.

Most people, for the most part, concentrate on the act of driving a car in a very detached and objective manner. You don’t think about how well you make a turn when you’re driving (in good weather on your typical route).

You just concentrate on the subsequent action, or the next item. There isn’t any self-criticism. You’re at ease. You are prepared to see the ensuing events.

Trading can be approached objectively in a similar way. Consider it in the same way as you would a driving lesson.

If you devote enough time and energy to developing your trading talents, you will eventually turn into a successful trader.

But you must maintain objectivity while doing so. Think about the procedure. Get as much feedback as you can and treat it as unbiased knowledge that will help you improve your trading abilities.

Profitable trading requires a particular talent. You’ll need to have the ability to view setbacks in the correct context if you want to master it.

Do not interpret setbacks as failures on your part. Do not at anyway personalise them. They only provide you with factual information that helps you gauge how well you are doing. Embrace the criticism.

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Paralyzed by a Fear of Failure

September 27, 2022July 21, 2022 by Learningsharks

Psychology and Risk Management

Fear of Failure

Paralyzed by a Fear of Failure Atychiphobia is an intense fear of failure. Recently, Rohan made five consecutive losing trades. He is now hesitant to make another trade because his confidence has been damaged. Why should I try again? he asks himself. I’ll just lose one again. I don’t believe I can handle losing one more time. How we approach trading is influenced by our mindset and expectations. Rohan’s attitude has shifted as a result of recent failures, which have been numerous. He is shocked, and he expects to lose rather than succeed. His fear of failing has now rendered him helpless. He is having difficulty putting on a different trade. But in order to trade well, you must make the law of averages work in your favour.

Finding the fundamental presumptions that underpin this anxiety and disputing them is the most effective strategy to eliminate fear of failure. A fear of failure frequently has to do with a person’s propensity to avoid dealing with issues head-on. We have a tendency to think that it is easier to reject the presence of our worries than to face them. Thankfully, we can frequently overcome this fear by learning that facing our anxieties isn’t as challenging as we anticipate it to be.

The idea that one must be supremely competent, adequate, and successful is another fundamental tenet that underpins the fear of failure. Such a belief causes anxiety and fear, which in traders frequently results in hesitancy and self-doubt. It’s clear how we came to hold this belief.

If we have the mindset that we must always be successful, we will use all of our limited mental capacity worrying about the negative effects Paralyzed by a Fear of Failure, rather than concentrating on what we are doing right now to carry out our present trading strategy. The majority of the time, traders who think they must be really proficient worry about what they did incorrectly, what could go wrong, and how they will recover if they fail. These ideas detract from the present experience and make it difficult to accurately and consistently interpret current market behaviour. Realizing that these ideas underlie your fear of failing and the emotional repercussions of maintaining them are crucial.

You can overcome your worries by rejecting them and neutralising them.

Let go of your fear of failure if you want to succeed in trading. You don’t need to be flawless. One is destined to make mistakes every now and again, as any seasoned trader will tell you, and if you are concerned with avoiding them, you’ll be so anxious and afraid that you will make even more blunders. Therefore, keep in mind that it is not helpful to think that you must be fully competent, adequate, and successful. No trader can meet that bar, and ironically, if you do, you’ll struggle to regularly and profitably trade.

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Accepting Criticism

September 27, 2022July 21, 2022 by Learningsharks

Psychology and Risk Management

1. Accepting Criticism.

The drive to be correct is a common trait among new traders. Because of how strong this innate human propensity is, inexperienced traders make poor trading decisions in an effort to avoid having to accept that they are mistaken. For example, they might continue holding onto a lost trade in order to record losses. In an effort to Accepting Criticism, avoid dealing with the repercussions of a poor trading concept, they could delay or postpone completing a trade. A compulsion to be correct can be oppressive in many ways. A trader who has to be right may hold back during crucial times in the middle of a trade rather than feeling free and innovative.

Why is it so difficult to receive feedback, whether it comes from a person or the markets? The fact that we connect criticism with emotions of inadequacy is one of the key causes. We have a tendency to attach a lot of psychological weight to any form of negative feedback or criticism. It feels like our parents or professors are chastising us for acting immorally. But this is erroneously assumed. Criticism need not be motivated by feelings. It’s important to accept criticism and feedback kindly. It’s just feedback; it’s not personal. You can use this knowledge to better your trading skills if you can learn to downplay its emotional value and see it as cold, objective data.

We have an illogical drive to be perfect, which is another reason why it’s challenging to accept criticism. We frequently believe that if we are not always correct, we will not succeed. This notion is something we pick up in school. We were typically only given one opportunity to submit a term paper or take a test in school. You can’t learn to polish your talents in most educational settings since you can’t repeat tests or write term papers. This mentality is one that many people bring to trading. But it’s not necessary that it do. You can make a transaction, learn from your mistakes, and make another trade if you do little practise trades, for instance.

There is no justification for refusing to take criticism. In fact, you should look for success in trading, either by placing trades and watching what happens or talking to a trading coach. The more knowledge you acquire about yourself, the more likely it is that you can improve your abilities. So, seek out feedback. Accept your limitations without fear. You’ll develop your abilities to the point where you can trade the markets profitably and skillfully if you can endure all the criticism you can discover.

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illusion of control

September 27, 2022July 21, 2022 by Learningsharks

Psychology and Risk Management

1.– Illusion of Control bias

Every stock market in the globe is very large. It has a large number of members who frequently buy and sell assets. None of the buyers or sellers has complete control over what happens in the market because there are so many of them and the money is divided among them. The reality is that probabilities form the foundation of the investment markets. Anyone who asserts they can anticipate the result of financial markets with 100 percent accuracy is unquestionably mentally biassed. An illusion of control bias is the name given to this bias. This essay will explain what this bias is and how it impacts a typical investor’s decision-making.

Illusion of Control Bias: What is it?

Investors sometimes have a tendency to think they have some degree of control over the results of the stock market, which is known as illusion of control bias. Some investors don’t think they have total control. Many of them do, however, think they have some sway on the market. Due to the size of the investment markets, where trillions of dollars are traded each week, this is typically not the case. Therefore, it’s possible that an individual investor or even a small to mid-sized organisation is mistaken in thinking that they have control over the market.

It’s possible that some of the investor’s short-term projections will come true.

On the other hand, it can just be a coincidence and not ultimately prove anything. Because they use strategies like limit orders, etc., to purchase and sell shares, investors frequently feel in control of their portfolios. However, because prices fluctuate within a certain range, it frequently only results in pointless buying and selling. The perception of overconfidence is directly related to the delusion of control bias.

How Can Investor Illusion of Control Hurt Them?

The portfolio of investors may suffer significantly from a mistaken sense of control. The following are some examples:

Investors buy penny stocks due to the illusion of control. This is due to the fact that they think that because the company is small, they can use their wealth to buy a sizable interest in it, giving them power over the outcome. However, because to the nature of their respective industries, many of these penny stocks are inherently dangerous. Investors only lose more money as a result of this control illusion!

Investors that have a sense of control frequently think of themselves as industry gurus. As a result, they focus the majority of their portfolio on just one particular area or business. Given that the portfolio is not diversified, here is where the issue first arises. If a negative event occurs, an undiversified portfolio is likely to see significant value swings.

Investors who have a false sense of control miss opportunities when they present themselves. They might have missed advantageous entry and exit points in a specific stock as a result of a delusion of control.

How might this illusion be avoided?

Since we’ve established that this kind of illusion is terrible for investors, it’s important to learn how to identify it and eliminate it from our thinking in order to make wise judgments.

Realizing there is no assurance when it comes to investing is the first and most important step. The return on investment serves as compensation for taking on risk. So, ideally, there wouldn’t be a need for a reward either if there was no danger!

Investors need to be aware that all forms of investment include the use of probability, thus a variety of outcomes are possible but impossible to control. Investors should strive to compile a list of all the variables that might affect a stock’s price in order to fully drill home this concept. They would discover that there are factors at the level of the government, of the competitors, of the macroeconomy, of the market, and so forth. It is nearly hard to govern this complex system because of the large number of different factors at play.

Position sizing

September 27, 2022July 21, 2022 by Learningsharks

Psychology and Risk Management

1.– Gambler’s fallacy

Let’s assume you Position sizing, are looking at the nifty chart. Let us just assume that these are some valid points for now.

Nifty is reached its highest point ever at 10K.
Given that it is a psychological level, many market participants may book profits at this moment.
All-time high suggests there are no points of resistance
Over the past few weeks, Nifty has been on a strong rising trend.
Maybe around these levels, Nifty might consolidate.
Maybe a 2% to 3% correction before the rally keeps going?

Indicates that taking a short position or perhaps buying puts is appropriate. You may do an analysis that is as basic as this or as complex as reviewing time series data and modelling it using cutting-edge statistical or machine learning methods.

Whatever you do, there is no assurance in the markets. You cannot predict the outcome with a single strategy. It’s suggests that the draws in question are reasonably random. Your chances of winning can certainly increase depending on how insightful your analysis is, but there is no guarantee and you must accept that markets are indeed random.

Imagine that you have performed a cutting-edge analysis and that you have just placed a bet on Nifty when the stop loss triggers. You persist and place another transaction, only to be stopped out once more to your dismay. Say the next four deals are repeated in this cycle.

You are confident in the accuracy of your analysis, yet your stop-loss is consistently being hit. What should you do given that you still have funds in your account to place bets, are adamant that your analysis is accurate and the markets will turn around, and still have a healthy appetite for risk?

Which option are you likely to take?

Traders frequently think that when they enter the “next” trade, long streaks will terminate. For instance, although the trader in this instance has suffered 6 losses in a row, his confidence that the 7th deal will be profitable is now very strong. This is referred to as the “Gambler’s fallacy.”

When dealing with random drawings, the likelihood of losing on the seventh transaction is actually the same as it was when you first placed your wager. The likelihood that you will succeed on your subsequent trade does not increase just because you have a string of losses.

Due to the “Gamblers Fallacy,” traders frequently increase their bet quantities without fully understanding the chances. In actuality, the gamblers fallacy destroys your position sizing philosophy and is the main cause of trading account erasure.

Also, this functions on the other side. Imagine being given the opportunity to see six or ten straight wins. Regardless of what you bet, the exchange is in your favour.

Which of the following are you most likely to do now that you are on your eleventh trade?

If you had enough money to stop trading, would you do so?
Would you take a similar amount of risk again?
Would you increase the amount you bet?
Will you play it safe, perhaps safeguard your winnings, and thus place a smaller wager?

It’s likely that you’ll select the fourth choice. You obviously want to keep your gains and avoid giving up everything you have made in the markets, but you would also want to make a trade given your impressive winning streak.

Another instance of the “gamblers fallacy.” You are essentially reducing your position size for the eleventh trade because the results of the first ten trades have such a significant impact on you. In actuality, the chances of this new trade winning or losing are the same as those of the prior 10 wagers.

This may explain why some traders end up generating very little money, despite entering winning trading cycles.

Position sizing is the cure for the “Gambler’s Fallacy.“

2. Overcoming trauma

The money we bring to the table is the raw material in the trading industry. How can you make money if you don’t have enough money to trade with? Therefore, in addition to protecting our cash, we must also preserve the earnings we make.

By extending this idea, we may say that if you put too much money at risk on a single deal, you run the risk of losing it all and being left with very little money.

Now, if you are trading with a small amount of capital, each trade you make will seem to be overly risky.

The climb back to where you started will be Herculean task (in terms of capital).

Lets look at this table.


Starting Capital		1,000

Drawdown	Starting Capital	Efforts
5%	950	5.3%
10%	900	11.1%
15%	850	17.6%
20%	800	25%
25%	750	33%
30%	700	43%
35%	650	54%
40%	600	67%
45%	550	82%
50%	500	100%
55%	450	122%
60%	400	150%
65%	350	186%
70%	300	233%
75%	250	300%
80%	200	400%
85%	150	567%
90%	100	900%
95%	50	1900%

What do you then? You typically take higher risks in the hopes of earning bigger gains, and if the transaction fails, you effectively succumb to the “recovery trauma” phenomenon.

The precise reason you shouldn’t put too much money at risk in any one deal, especially if you have little capital. Remember that if you can manage to stay in the game for a longer period of time, your chances of making good money in the markets increase. In order to stay for a longer period of time, you need to have enough capital, and in order to have enough capital, you need to risk the right amount of money on each trade.

It ultimately comes down to trying to achieve longer-term “consistency” in the markets, and in order to achieve consistency, you must position sizing your trades really effectively.

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Risks

September 27, 2022July 21, 2022 by Learningsharks

Psychology and Risk Management

2.1 – Acclimating to risk

A trader must also lose every rupee for every rupee they make in profits.

This leads us to the conclusion that there must be another group of traders that constantly lose money. What is Risk Management If one group of traders continuously makes money.

As opposed to the group of traders that consistently lose money, this group of traders making money is typically small.

Their approaches to money management and their perceptions of risk distinguish these two groups. According to Mark Douglas’ book, “The Disciplined Trader,” money management and strategy account for 80% of a trader’s performance.

Similarly, Risk assessment plays a big part in money management and related areas. So in this way, understanding risk and its many forms become vital at this stage. For this reason, let’s simplify risk to its most basic level in order to comprehend it better.

The likelihood of losing money is the typical layperson definition of risk in the context of the stock market. You run the risk of losing money when you trade in the markets, so be aware of this. For instance, whether you like it or not, when you purchase a company’s shares, you are taking a risk. Additionally, risk can be divided into two categories at a very high level: systemic risk and unsystematic risk.

Why do you stand to lose money, if you think about it? Or otherwise, what may cause the stock price to decline? There are a lot of reasons, as you can imagine, but here are a few:

Declining business outlook
decreasing profit margins
management incompetence
Margin reduction due to competition

Each of these has some level of risk. In fact, there may be a number of additional, related reasons, and the list is endless. You’ll notice that each of these hazards has one thing in common: they are all risks that are particular to the company.

The simple fact is that the events involving the corporation are solely to blame for the decline in stock price. The price decline is unaffected by any further outside causes. The decline in stock price at that time can only be attributed to internal or company-specific issues, which is a better way to phrase it. Unsystematic risk is the word used frequently to describe the danger of financial loss brought on by company-specific (or internal) factors.

You can diversify unsystematic risk by investing in a few different businesses rather than putting all of your money in one (preferably from different sectors). This is referred to as “diversification.” Investment diversification significantly lowers unsystematic risk.

Stock Market Internship Learning is not all that you do at Learning sharks. Of course, there is no proof that you can swim unless you dive and survive in water. Trading and investing in the market is not as easy as you might think it is. It requires a lot of discipline and practice. We will provide Stock Market Internship make you put hundred trades in the market before you stake your money in it.

Learning sharks start programme assures what you have been taught during the course goes into action.

Systemic risk is the riskthat all stocks on the markets face. Systemic risk is caused by common market factors including the macroeconomic environment, current politics, geographic stability, monetary system, etc. The following are a few key systemic issues that can cause stock prices to decline:

decline in GDP
increases in interest rates
Inflation
fiscal shortfall
Geographical danger

Systemic risk, however, can be “hedged.” Hedging is a skill, a method one would do to eliminate systemic risk. Hedging might be compared to holding an umbrella on a gloomy day. You pull out your umbrella as soon as it starts to rain, covering your head right away.

Therefore, keep in mind that diversification and hedging are not the same thing when we discuss hedging.

Many market players mistake hedging for diversification. They are distinct from one another. Keep in mind that we diversify to reduce unsystemic risk. We utilise hedging to reduce systemic risk; nonetheless, it is important to note that no investment or trade in the market should ever be regarded as safe.

Expected Return (2.2)

Before, we return to the subject of risk, we’ll quickly discuss the idea of “Expected Return.” Everyone naturally wants to see a return on their investments. The expected return on investment is simple to understand; it is the return you would anticipate.

If you put money into Infosys with the expectation of getting a 20% return in a year, then 20% is all you can expect to get back.

Why is this significant, especially considering that it seems obvious? In finance, the concept of “anticipated return” is very important. This is the value we enter into a number of formulas, such as portfolio optimization or a straightforward assessment of the equity curve.

The expected return of a portfolio can be calculated with the following formula –

E(R_P) = W₁R₁ + W₂R₂ + W₃R₃ + ———– + W_nR_n

Where,

E(R_P) = Expected return of the portfolio

W = Weight of investment

R = Expected return of the individual asset

In the above example, the invested is Rs.25,000/- in each, hence the weight is 50% each. Expected return is 20% and 15% across both the investment. Hence –

E(R_P) = 50% * 20% + 50% * 15%

= 10% + 7.5%

= 17.5%

Conclusion

Lessons to be learned from this chapter
You are exposed to both unsystemic and systemic risk when you purchase a stock.
The risk that exists within the corporation is the unsystemic risk with respect to a stock.
Unsystemic risk only affects the stock, not its competitors.
Simple diversification can reduce unsystematic risk.
The danger that permeates the system is called systemic risk.
Systemic risk permeates all stock markets.
To lessen systemic risk, one can use hedging.
Since no hedge is perfect, there is always some risk involved with trading in the markets.
The probabilistic anticipation of a return is known as the anticipated return.
The anticipated return does not ensure that it will occur.
The expected return for the portfolio can be estimated using the formula E(RP) = W1R1 + W2R2 + W3R3 + ———- + WnRn.

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What to expect in stock market psychology

September 27, 2022July 21, 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

1.1 – An exceptional possibility

We are eager to explore two significant and connected market subjects.What to expect in stock market psychology, “Risk Management and Trading Psychology.” Risk management may appear simple, but “psychology” may be uninteresting. I assure you that both of these subjects have the potential to expand trade opportunities. For instance, risk management goes beyond the typical subjects of position sizing, stop loss, and leverage.

It is not what you are thinking. While trading psychology is a mirror of your activities in the markets, it also enables you to evaluate and determine why and how you made a specific trade or investment profitable or unsuccessful.

What to expect?

We can give you a basic overview of What to expect in stock market psychology, but as we go through, I reserve the right to make minor, if any, changes to the learning technique.

Consequently, we are focusing on two primary issues here:

Risk management
Trading psychology

The methods you use to control risk depend on where you stand in the market. When you have a single position in the market, for instance, your risk management strategy is quite different from that of numerous positions, which is again very different from that of a portfolio, which is different still.

I shall discuss the following subjects as I try to explain the aforementioned:

Risk and all of its guises
Position sizing: I suppose this one must be covered.
individual position risk
Hedging and multiple position risk
Using options to hedging
Portfolio characteristics and risk assessment
Worth at Risk
The effect of asset allocation on risk (and returns)
The portfolio equity curve’s insights

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Trading get started

September 29, 2022July 21, 2022 by Deepanshu

Technical analysis

• Technical analysis
• Introduction
• Types of charts
• Candlesticks
• Candle sticks patterns
• Multiple candlestick Patterns
• Trading – get started
• Trading view

• Support & resistance
• Volume trading
• News and Events
• Moving averages
• Indicators
• Fibonacci Retracements
• Notes

The Charting Software

We’ve learned a lot about Technical Analysis during the last chapters. If you’ve read through all of the chapters and understand what’s discussed, you’re almost ready to start trading with Technical Analysis. This chapter’s goal is to get you started by finding technical trading opportunities.

Please keep in mind that the recommendations in this chapter found in my trading expertise.

To begin, you will require chart visualisation software, also known as ‘Charting Software.’ The charting programme allows you to examine and evaluate various stock charts. Needless to say, charting software is a must-have for every technical analyst.

There is various charting software program available. ‘Metastock’ and ‘Amibroker’ are the two most popular. The majority of technical analysts employ one of the two charting software packages. Needless to mention, these paid applications, and you must obtain a software license before utilizing them.

You may utilize a few free charting tools online, which are available on Yahoo Finance, Google Finance, and pretty much all business media websites. However, if you want to be a technical analyst, you should invest in good charting software.

Consider the charting software to be a DVD player; once installed, you will still need to rent DVDs to view movies. Similarly, once you’ve installed charting software, you’ll still need to give it data in order to see the charts. The required data feed provides by the data vendors.

There are numerous data suppliers in India who provide data feeds. I would recommend that you search the internet for reputable vendors. You must notify the data vendor of your charting software, and he will provide you with data feeds in a format compatible with your charting software. Of course, the data feeds are not free.

When you sign up with a data vendor, he will first provide you with all of the historical data, after which you will need to update the data from his server on a regular basis in order to stay current.

According to my experience, purchasing the current version of a reputable charting software (Metastock or Amibroker) can cost you somewhere between Rs.25,000/- and Rs.30,000/-. Add an additional Rs.15,000/- to Rs.25,000/- for data feeds. Of course, while the software costs only once, the expense of data feeds is recurring every year. Please keep in mind that previous versions of the charting software may be substantially less expensive.

If you don’t want to spend so much money on charting software and data feeds, there is another option. And that would be Zerodha’s Pi.

As you may be aware, Zerodha has its own trading terminal known as ‘Pi.’ Pi can help you in a variety of ways; I’d like to highlight a few of them in the context of Technical Analysis:

It is bundles:- Pi is a charts programme and a data feed package rolled into one.

Great Visualization:-Pi helps you visualize charts across multiple time frames, including intraday charts.

Advanced Feature:-Pi offers advanced charting capabilities, as well as 80 built-in technical indicators and more than 30 sketching tools.

Scripting your strategy:-Pi features a scripting language that can practice to code technological strategies and backtest them on historical data. Please keep in mind that we will soon be adding a module on developing trading strategies and scripts to Varsity.

Easy opportunity recognition:-The Raspberry Pi contains a pattern recognition feature that allows you to draw a screen pattern. After you’ve drawn, tell Pi to scout for that pattern across the market, and it’ll do it for you.

Trade form PI:- Pi also allows you to trade directly from the chart (a huge plus point for a technical trader)

Data dump:– Because Pi has a large historical data dump (over 50,000 candles), backtesting your technique will be more efficient.

Your personal trading assistant:-Pi’s ‘Expert Advisor’ brings you up to date on the trends emerging in live markets.

Super Advanced feature:- Pi equip with Artificial Intelligence and Genetic Algorithms. These are optimization tools that assist you in optimizing your trading algorithms.

It is free:– Zerodha is providing it at no cost to all of its active traders.

The list is lengthy, ranging from basic to advanced functions. I strongly advise you to try Pi before investing on a charting package and data feed bundle.

Which timeframe to choose

We talked about ‘Timeframes.’ I’d like you to go over it again to refresh your memory.

One of the most perplexing issues for a beginner technical analyst is deciding on a timeframe to scan for trading possibilities. There are other timeframes to choose from, including 1 minute, 5 minutes, 10 minutes, 15 minutes, EOD, Weekly, Monthly, and Yearly. It is very easy to become perplexed about this.

The higher the timeframe, as a rule of thumb, the more dependable the trading indication. A ‘Bullish Engulfing’ pattern on the 15-minute timeframe, for example, is significantly more trustworthy than one on the 5-minute timeframe. Keeping this in mind, one must select a timeframe dependent on the length of the deal.

So, how do you determine the length of your trade?

I recommend avoiding day trading if you are new to trading or are not a seasoned trader. Begin with trades that can hold for a few days. This refers to as ‘Positional Trading’ or ‘Swing Trading.’ An avid swing trader will often hold his trading position for a few days. A swing trader’s best lookback period is 6 months to a year.

A scalper, on the other hand, is an experienced day trader who often uses a 1 minute or 5 minute period.

When you’re comfortable holding deals for several days, go on to ‘Day Trading.’ My guess is that your shift from positional to day trading will take some time. Needless to say, the changeover period is far shorter for a determined and disciplined trader.

Lookback period

The number of candles you want to see before making a trading choice is simply the look back period. A lookback time of three months, for example, means you’re looking at today’s candle against the backdrop of at least the previous three months’ data. This will help you establish a perspective on today’s price action in relation to the previous three months’ price action.

What is the ideal look back period for swing trading opportunities? In my experience, a swing trader should search for at least 6 months to a year of data. Similarly, a scalper should look at the last 5 days of data.

When plotting the S&R levels, however, you need lengthen the look back period to at least 2 years.

The opportunity universe

The Bombay Stock Exchange (BSE) has over 6000 listed stocks and the National Stock Exchange (NSE) has approximately 2000 listed stocks (NSE). Does it make sense for you to scour these thousands of stocks every day for opportunities? Clearly not. You must choose a portfolio of equities that you are comfortable trading over time. This group of stocks would be your “Opportunity Universe.” You search your opportunity universe every day for trade chances.

Here are some tips for choosing equities to develop your opportunity universe:

Ascertain if the stock has adequate liquidity. Examining the bid-ask spread is one technique to ensure enough liquidity. The wider the spread, the less liquid the stock.

You might also have’minimum volume criteria.’ For example, you can only evaluate stocks with a daily volume of at least 500000.

Check that the stock is in the ‘EQ’ category. This is mostly due to the fact that equities in the ‘EQ’ segment can be day traded. I agree, I discouraged day trading for a beginner, but if you started a positional trade and the target encounters the same day, there is no damage in closing the position intraday.

This is a bit tough, however make sure the stock is not driven by the operator. Unfortunately, no measurable mechanism exists to detect operator-driven stocks. This comes from personal experience.

If you are having difficulty finding stocks that meet the criteria outlined above, I recommend sticking to the Nifty 50 or the Sensex 30. These are all known as index stocks. The exchanges carefully choose index stocks; this procedure guarantees that they meet several criteria, including those indicated above.

For both swing traders and scalpers, keeping the Nifty 50 as your opportunity universe is definitely a good idea.

The scout

Let us now look at how one should go about selecting equities for trading. In other words, we will strive to identify a procedure that will allow us to search for trading chances. The method is best suited for swing traders.

We have finally determined the four most important factors-

I suggest using Zerodha’s Pi charting programme.

Data at the end of the day

Opportunity Nifty 50 stocks – Universe

Positional transactions with the option to square off intraday if the target encounters on the same day.

Look back period – 6 months to a year While charting the S&R level, increase to 2 years.

After I’ve addressed these critical practical issues, I’ll disclose my trade opportunity scanning process. I’ve separated the procedure into two parts:

Part 1 The shortlisting process

I examine the chart of all of the equities in my opportunity universe.

When I look at the chart, I simply pay attention to the last three or four candles.

When I check the last three candles, I search for any discernible candlestick pattern.

If I come across an intriguing pattern, I mark it down for further examination and continue the scouting process. I always double-check all 50 charts.

Part 2 The evolution process

At this point, I usually have 4-5 shortlisted companies (of of the 50 stocks in my opportunity universe) that have a discernible candlestick pattern. I then proceed to thoroughly evaluate these 4-5 charts. I usually spend 15 to 20 minutes on each chart. When I look at the shortlisted chart, I do the following:

I generally consider how strong the pattern is; I’m particularly interested in determining whether I need to be more adaptable.For example, if a Bullish Marubuzo has a shadow, I consider the length of the shadow in relation to the range.

Following that, I examine the ‘previous trend.’ The preceding trend for all bullish formations should be a downtrend, while the prior trend for all bearish patterns should be an upswing. I do pay close attention to previous trends.

If everything appears to be in order (i.e., I have recognised an identifiable pattern with a well-defined prior trend), I proceed to analyse the chart further.

Following that, I examine the volumes. The volume must be equal to or greater than the 10-day average volume.

If both the candlestick pattern and the volume confirm, I check the support (for a long trade) and resistance (for a short trade) levels.

The S&R level should (as much as feasible) coincide with the trade’s stoploss (as defined by the candlestick pattern)

If the S&R level is more than 4% away from the stoploss, I stop studying the chart and move on to the next one.

I then search for Dow patterns, notably double and triple top and bottom formations, flag formations, and the probability of a range breakout.

Needless to add, I also establish the trend in the primary and secondary markets.

If steps 1 through 5 are satisfactory, I calculate the risk to benefit ratio (RRR)

To compute RRR, I first define the target by graphing the support or resistance level.

The RRR should be at least 1.5.

Finally, I check the MACD and RSI indicators to see if they confirm, and if I have extra money, I raise my trade size.

Typically, only one or two of the 4-5 nominated equities will qualify for a trade. There are days when no trade possibilities exist. Making the decision not to trade is a significant trading decision in and of itself. Keep in mind that this is a highly strict checklist; if a stock confirms the checklist, my conviction to trade is very high.

I’ve said it many times in this module, and I’ll say it again: once you place a trade, do nothing until your objective encounters or your stoploss is trigger. Of course, you can trail your stop-loss, which is a good idea. Otherwise, do nothing if your trade meets the checklist, and keep in mind that the deal is very limited, so your chances of success are high. So staying put with conviction makes sense.

The Scalper

A scalper is a concentrated trader with a keen sense of price. To make trading judgments, he uses specific charts such as 1 minute and 5-minute timeframes. A successful scalper executes numerous such deals throughout the day. His goal is straightforward: a huge quantity deal that he intends to hold for a few minutes. He aims to profit on minor fluctuations in the stock. Remember the checklist we mentioned, but don’t anticipate all of the checklist requirements to fulfill because the transaction time is relatively short.

If you want to be a scalper, here are some guidelines:

Remember the checklist we mentioned, but don’t anticipate all of the checklist requirements to fulfill because the transaction time is relatively short.

If I had to choose just one or two items from the scalping checklist, it would be candlestick pattern and volume.

While scalping, a risk-reward ratio of even 0.5 to 0.75 is acceptable.

Scalping should only done with liquid equities.

Have an effective risk management strategy in place, and be quick to book a loss if necessary.

Keep an eye on the bid-ask spread to see how volumes are developing.

Keep an eye on worldwide markets; for example, a decrease in the Hang Seng (Hong Kong stock exchange) generally leads to a drop in local markets.

Choose a low-cost broker to keep your spending under control.

Use margins wisely and avoid overleveraging.

Use dependable intraday charting software.

Stop trading and go away from your terminal if you suspect the day is going wrong.

Scalping is a day trading practise that needs mental fortitude and a machine-like mentality. A successful scalper enjoys volatility and is unconcern with market movements.

Conclusion

If you wan to be a technical trader, you should invest in good charting software. Zerodha’s Pi is my favourite.

Choose the EOD chart for both day and swing trading.

If you enjoy scalping the markets, look at intraday charts.

For swing trading, the lookback period should be at least 6 months to 1 year.

To begin with, the Nifty 50 is a fantastic opportunity universe.

The opportunity scanning process can divide into two stages.

Part 1 entails scanning the charts of all the stocks in the opportunity universe and shortlisting those that show a recognizable candlestick pattern.

Part 2 is investigating the shortlisted charts to see if they meet the checklist.

Scalping recommend for experienced swing traders

IPOs

September 27, 2022July 21, 2022 by Rohansharma

IPOs

Basics of stock market

• Why invest?
• who regulates
• financial interdependence
• IPOs
• Stock Market returns
• Trading system

• Day end settlements
• Corporate actions
• News and Events
• Getting started
• Rights, ofs,fpo and more
• Notes

4.1 Overview

Firstly, The first three chapters have provided background information on some of the fundamental market ideas you should understand. At this point, answering the fundamental question of why companies go public becomes crucial.

Secondly, A thorough understanding of this subject lays the groundwork for all subsequent subjects. Throughout this chapter, new financial ideas will be introduced to us.

4.2 Origin of a Business

Definitely, Let’s spend some time understanding a more fundamental idea first: the beginnings of a typical business before moving on to try to find an explanation for why companies go public. Especially we will create a concrete story around this idea in order to better comprehend it. For a better understanding of how the business and the funding environment develop, let’s divide this story into several scenes.

Scene 1 – The Angels

firstly we try to find an explanation for why companies go public, let’s first spend some time understanding a more fundamental concept: the beginnings of a typical business. To better understand this concept, we will particularly build a concrete story around it. Let’s break this story down into different scenes to better understand how the business and the funding environment develop.

He would likely face the typical problem faced by entrepreneurs: where would he get the money to finance the idea? If the entrepreneur has no prior business experience, he won’t initially be able to draw in any serious investors. Most likely, he would solicit support for the idea from his loved ones and close friends. Also could have asked the bank for a loan, but that wasn’t the best course of action.

For Example 4.1

Assume he gathers his own funds and convinces two of his close friends to contribute to his business. These two friends are placing a blind wager on the entrepreneur importantly known as the Angel investors and investing in the pre-revenue stage. Please be aware that the money provided by the angels is an investment rather than a loan.

Whereas, let’s imagine that the promoter and the angel investors raise INR 5 Crore in the capital. The “Seed Fund” is the name given to the initial funding someone receives to start his business. It is significant to note that the seed money will reside in the business’ bank account rather than the promoter’s (also known as the entrepreneur’s) personal account. Once the seed money has been transferred into the business’s bank account, the monies are referred to as the original share capital of the company.

For Example 4.1.1

Moreover, The promoter and the two angel investors will receive share certificates that entitle them to the company in exchange for their initial seed investment.

Furthermore, The original three (the promoter and two angels) will receive share certificates from the company as payment for their initial seed investment, entitling them to ownership of the business.

Especially, The process of issuing shares is quite straightforward. The company assumes that each share is worth Rs. 10, and since there must be 50 lakh shares with an Rs. 5 crore share capital, each share must be worth Rs. 10. In this context, The share’s “Face Value” is 10 dollars (FV). Certainly, Any number could be the face value. The number of shares would be 1 crore if the FV was Rs. 5, and so on.

Surely, The authorized shares of the company are 50 lakh in number. The Promoter, two Angel Investors, and the Company shall each get a portion of the Shares and the Company shall retain the balance of the Shares for future issuance.

Assume, for the time being, that the promoter keeps 40% of the shares, the two angel investors receive 5% each, and the firm keeps 50% of the shares. This portion is referred to as “issued shares” because the promoter and two angel investors own 50% of the shares.

1	Promoter	20,00,000	40%
2	Angel 1	2,50,000	5%
3	Angel 2	2,50,000	5%
Total		25,00,000	50%

It should be emphasized that the firm owns 2,500,000 equity shares or the remaining 50% of the shares. Despite being authorized, these shares have not yet been distributed.

Without a doubt, The promoter now launches his company operations with the support of a solid corporate structure and a sizable seed fund. He wants to proceed with caution. Therefore, he decides to only open one store to sell his product and one small manufacturing facility.

Scene 2 – The Venture Capitalist

His perseverance pays off, and business begins to increase. The business begins to break even after its first two years of operation. The promoter is no longer a start-up company owner. Instead, he has more in-depth knowledge of his own company and, obviously, more confidence.

Without a doubt, of his confidence, the promoter now wants to grow his company by opening a few more retail stores and one more manufacturing unit in the city. Never, He develops the strategy and decides that a new investment of INR 7 Cr is necessary for the growth of his business.

Also, Comparing where he is now to where he was two years ago, he is in a better place. The main distinction is that his company is bringing in money. The consistent influx of income validates the company and its goods. He is now in a position where he can access investors who are reasonably well-informed about his industry. Let’s assume he runs into one such experienced investor who is willing to give him 7 Cr. in exchange for a 14.4% stake in his business.

. Series A funding is the name of the finance the company receives at this point, and a venture capitalist is a person who often invests in a company at this early stage (VC).

After the company agrees to allot 14% to the VC from the authorized capital, the shareholding pattern looks like this:

Sl No	Name of Share Holder	No of Shares	%Holding
1	Promoter	20,00,000	40%
2	Angel 1	2,50,000	5%
3	Venture Capitalist	7,00,000	14%
4	Angel 2	2,50,000	5%
Total		32,00,000	64%

Notably, the remaining 36% of the shares, which have not been allocated, are still owned by the company.

With the VC’s money coming into the business, an exciting development has taken place. The VC values the entire business at INR 50 Crs by valuing his 14% stake in the company at INR 7Crs. With the initial valuation of 5Crs, there is a 10-fold increase in the company’s valuation. This is what a good business plan, validated by a healthy revenue stream, can do to businesses. It works as a perfect recipe for wealth creation.

Scene 3 – The Banker

Apart from this after three more years, the business achieves incredible success. The business decides to open stores in at least three more cities. The company also intends to boost its production capacity and hire more personnel to support the retail presence it has established in three cities. The term “Capital Expenditure” or simply “CAPEX” refers to any expenditure a company plans to make to enhance its overall operations.

The management predicts 40Crs in CAPEX expenditures. How does the business obtain this funding, or how does it manage to meet its CAPEX needs?

The corporation has few choices for raising the money needed for their CAPEX:

The company’s recent profits, which have enabled it to turn a profit, can be used to cover a portion of the CAPEX requirement.
By allocating shares from the authorized capital, the company can approach a different venture capitalist (VC) and raise Series B funding.
The business may approach a bank to ask for a loan. The company has been doing reasonably well, so the bank would be happy to offer this loan. Another name for the loan is “Debt.”

To raise money for Capex, the company decides to use all three of its available options. It invests 15 crores from internal accruals, plans a series B, sells 5 crores of equity to another VC for 10 crores, and obtains 15 crores of debt from the banker.

Note, with 10Crs coming in for 5%, the company’s valuation now stands at 200 Crs. Of course, this may seem a bit exaggerated, but then the whole purpose of this story is to drive across the concept!

Scene 4 – The Private Equity

A few years go by, and the business’ success is still evident. The ambitions of this eight-year-old, $200 million company are rising along with its success. The business makes the decision to raise the bar and expand across the nation. Additionally, they choose to diversify the business by producing and selling designer cosmetics, perfumes, and fashion accessories.

The CAPEX budget for the new target is presently 60 Cr. Because the finance charges, also known as interest rates, would reduce the company’s profits, the company does not want to raise money through debt.

From the authorized capital, they choose to distribute shares for a Series C funding. Since typical VC funding is typically modest and only amounts to a few crores, they are unable to approach one. A private equity (PE) investor enters the picture at this point.

PE investors are very intelligent. They are extremely skilled and come from a strong professional background. They put their own people on the board of the investee company to make sure the business is steering in the right directions and invest sizable sums of money to provide the capital for useful use.

Scene 5 – The IPO

Not only but also after the PE investment, the company has made great progress five years later. They have a presence in all of the major cities across the nation and have successfully diversified its product line. Revenues and profitability are both robust, and the investors are happy. The promoter, however, is not content to stop there.

The promoter now has international ambitions! He wants at least two outlets in every significant city around the world, ensuring that his brand is present in all major international cities.

This means the business must spend money on market research to learn what other people want, invest in its workforce, and expand its manufacturing capabilities. In addition, they also need to invest in the global real estate space.

This time, there is a significant CAPEX requirement that the management anticipates will cost $200 Cr. The company’s options for funding the necessary CAPEX are limited.

From internal accruals, finance Capex
Raise Series D through a different PE fund.
borrow more money from banks
Bond flotation (this is another form of raising debt)
Publish an Initial Public Offering (IPO) by distributing shares from the authorized capital.

For convenience, let us assume the company decides to fund the CAPEX partly through internal accruals and files for an IPO. When a company files for an IPO, they have to offer its shares to the general public. The general public will subscribe to the shares (i.e. if they want to) by paying a certain price. Due to the fact that the corporation is presenting the shares to the public for the first time, it is now known as the “Initial Public Offer.”

4.3 Overview of The IPO Markets

In the last topic, we learnt how a company develops from the point at which ideas are conceived to the point at which it decides to file for an IPO. The hypothetical scenario in the previous chapter was designed to give you an idea of how a business evolves through time. Clearly, the focus was on the various business stages and the funding options available at each stage. You can see what a company would have gone through before going public and offering its shares in the previous chapter.

This is crucial information to understand because the primary market, also known as the IPO market, occasionally attracts businesses that offer their shares to the public without actually having gone through a robust round of funding in the past. Credible VC and PE firms have validated the quality of the company and its promoters through a few rounds of funding. Although you should take this with a grain of salt, it nonetheless serves as a sign of well-run businesses.

4.4 What drives a company's IPO?

We came to some important conclusions in the previous chapter. One of which is: Why did the business choose to file for an IPO, and generally speaking, why do businesses go public?

Firstly primary motivation for a company to file for an IPO is almost always to raise money to support their CAPEX requirement. Third benefits flow to the promoter from making his business public:

He is raising funds to meet CAPEX requirement
By avoiding the need to raise debt, he will avoid finance charges, which will increase his profitability.
You essentially assume the same level of risk when you purchase stock in a company as the promoter does. It goes without saying that the risk’s percentage and its effect will depend on how many shares you own.
Nevertheless, whether you like it or not, purchasing shares involves taking on risk. Secondly promoter is actually distributing his risk among a large number of people when the company goes public.

There are other advantages as well in going for an IPO

Reward employees- As a reward for their work, the company would assign shares to its employees. The term “Employee Stock Option” refers to this type of agreement between the company and the employee. The employees receive the shares at a reduced price. When the business goes public, the staff members may benefit from share price growth. Google, Infosys, Twitter, Facebook, and other companies are a few instances where employees have benefited from ESOPs.
Provide an exit for early investors – Once the company goes public, the shares of the company start trading publicly. Any existing shareholder of the company – could be promoters, angel investors, venture capitalists, or PE funds; can use this opportunity to sell their shares in the open market. By selling their shares, they get an exit on their initial investment in the company. They can also choose to sell their shares in smaller chunks if they wish.
Increased visibility – The company’s visibility is unquestionably increased by the status of being publicly held and traded that comes with becoming public.

4.5 – Merchant Bankers

Firstly the business must now take a number of actions to ensure a successful initial public offering after deciding to go public. Choosing a merchant banker would be the first and most important step. whereas other names for merchant bankers include Book Running Lead Managers (BRLM) and Lead Manager (LM). A merchant banker’s responsibility is to help the company with various IPO-related tasks, such as:

Conduct due diligence on the company filing for an IPO, ensure their legal compliance and also issue a due diligence certificate
should closely collaborate with the business to create their listing materials, such as a draught Red Herring Prospectus (DRHP). Later on, we will go into more detail about this.
Underwrite shares – When a merchant banker underwrites shares, they essentially agree to purchase all or a portion of the IPO shares and resell them to the general public.
assist the company in determining the IPO price range. A price band is a range between which a company will list its shares on the stock exchange. In our example, the price range will be between Rs. 1661 and Rs. 1871.-
Assist the company with its roadshows – For example, a marketing or advertising campaign for the company’s IPO

4.6 Sequence of events during an IPO

It should be noted to say, each and every step involved in the IPO sequence has to happen under the SEBI guidelines. In general, the following are the sequence of steps involved.

Appoint a merchant banker. In case of a large public issue, the company can appoint more than 1 merchant banker
Apply to SEBI with a registration statement – The registration statement contains details on what the company does, why the company plans to go public and the financial health of the company
Getting a nod from SEBI – Once SEBI receives the registration statement, SEBI takes a call on whether to issue a go-ahead or a ‘no go’ to the IPO
DRHP – If the company gets the initial SEBI nod, then the company needs to prepare the DRHP. A DRHP is a document that gets circulated to the public. The following information should be included in DRHP along with a lot of other information:

Size of the planned IPO
The projected number of shares that will be made public.
It is stated clearly that the company wants to go public, what it intends to do with the proceeds, and when it anticipates using them.
Description of the business, including the revenue model and financial information
Discussion and analysis of management: how the company anticipates future business operations to develop

4.7 What happens after the IPO?

Investors may offer to purchase shares during the bidding process (also known as the date of issue) within the predetermined price range. The Primary Market is the term used to describe the entire system where buyers and sellers compete for shares around the issue date. Public trading of the stock starts as soon as it is listed and makes its debut on the stock exchange. The term “secondary market” refers to this.

Once the stock transitions from primary markets to secondary markets, it is traded every day on the stock exchange. People begin regularly buying and selling stocks.

As to why people trade, Why does the price of the stock change? Well, in the following chapters, we’ll address all of these inquiries and more.

4.8 Few key IPO jargons

Under subscription – Let’s say the company wants to sell 100,000 shares to the general public under subscription. The issue is considered under-subscribed when it is revealed throughout the book-building process that only 90,000 bids were received. This situation is not ideal because it reflects unfavorable attitudes among the general public.
Oversubscription – If 200,000 bids are received for every 100,000 shares offered, the issue is considered to be two times oversubscribed (2x)
In the case of an oversubscription, the Green Shoe Option provision in the underwriting agreement allows the issuer to distribute additional shares, often 15% more. The overallotment option is another name for this.
Price Band and Cut off price – The price band is a price range between which the stock gets listed. For example, if the price band is between Rs.100 and Rs.130, then the issue can list within the range. If it is advertised at $125, that amount is referred to as the cutoff price.

4.9 – Recent IPO’s in India*

Margin & M2M

September 27, 2022July 21, 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

5. Margin & M2M

5.1 Things you should be aware of by now

Margins undoubtedly play a significant part in futures trading because they provide for leverage. Margin is actually what provides a “Futures Agreement” the necessary financial twist (as compared to the spot market transaction). Therefore, it is crucial to comprehend margins and all of their varied aspects.

However, before we continue, let’s make a list of items you should be aware of by this point. These are ideas that we have learned during the previous four chapters; repeating these key points will help us integrate all we have learned. You must go back to the earlier chapters and review them if you are unclear about any of the following things.

Over the Forwards is an improvisation called Future.
The forwards market’s transactional framework is over into futures agreements.
You can gain financially from a futures agreement if you have a precise sense of where the asset price is going.
The comparable underlying in the spot market provides the futures agreement with its value.
In the spot market, the underlying price is by the futures price.
The lot size and expiration date of a futures contract, which is a standardised contract, have already been decided upon.

The minimum quantity stipulated in the futures contract as the lot size.
Value of the Contract = Futures Price * Lot Size
Expiry is the final day on which a futures contract may be held.

7. One must deposit a margin amount equal to a specified percentage of the contract value in order to enter into a futures agreement.

1. Through the use of margins, we can leverage a transaction by making a little initial deposit and taking exposure to a transaction with a high value.

8. We digitally sign the contract with the counterparty when we transact in a futures transaction, obliging us to honor the deal at expiration.

9. The futures contract can be . Therefore, you are not to keep the agreement until it expires.

If your opinion of the asset’s direction changes, you can cancel the futures contract. You can retain the futures contract until you are of it.
If the price changes in your favour, you can even hold the futures agreement for a short period of time and profit financially.
Buying Infosys Futures at 9:15 AM for 1951 and selling them by 9:17 AM for 1953 would be an illustration of the aforementioned point. Given that the Infosys lot size is 250, one might earn Rs. 500 (2 * 250) in under two minutes.
Even better, you can decide to keep it till it expires or cling onto it overnight for a few days.

10. Equity futures contracts settle in cash.

11. A modest change in the underlying has a significant impact on the P&L when there is leverage.

12. The buyer’s earnings are comparable to the seller’s losses, and vice versa.

13. Transferring money from one pocket to another is possible using futures instruments. As a result, it is as a “Zero Sum Game.”
14. The risk increases as leverage increases.

15. A futures instrument’s payout structure is linear.

16. The Securities and Exchange Board of India regulates the futures market (SEBI). . There haven’t been any instances of counterparty default in the futures market because SEBI is keeping a close eye on things.

If you can clearly comprehend the previously given things, I’d say you’re currently headed in the right direction. You should go back and read the first four chapters again if you have any queries about any of the aforementioned things.

Anyway, if you understand up to this point, let’s concentrate more on the ideas of margins and mark to market.

5.2 – Why are Margins charged?

Let’s go back to the forward market scenario we used earlier (chapter 1). In the cited example, ABC Jewelers agrees to purchase 15 kg of gold from XYZ Gold Dealers for Rs. 2450 per gram in three months.

Now it is obvious that any change in the price of gold will negatively impact either ABC or XYZ. If the price of gold rises, ABC will profit and XYZ will lose money. Likewise, if the price of gold drops, ABC loses money while XYZ profits.

A forward agreement also relies on a gentleman’s word, as we all know. Imagine that the price of gold has significantly increased, putting XYZ Gold Dealers in a terrible position. Obviously, XYZ has the option to claim they are unable to pay the amount and renege on the agreement. Obviously, what comes next will be a protracted and difficult judicial battle, but that is not the area of our concern.The important thing to remember is that a forward agreement has a very large scope and incentive to default.

Given that the futures market is an evolution of the forwards market, the default perspective is handled carefully and strategically. The margins come into play in this situation.

There is no regulation in the forwards market. There is essentially no third party overseeing the transaction between the two parties when they come to an agreement. In contrast, all trades in the futures market go through an exchange. In exchange, the exchange assumes responsibility for ensuring the settlement of all trades. When I say “onus of guaranteeing,” I mean that the exchange is responsible for ensuring that you receive your money if you are eligible. This also means that they make sure to collect the funds from the responsible party.

How does the exchange ensure that everything runs well then? They accomplish this by using –

1, Taking notes on the margins

2, putting a market price on daily gains or losses (also called M2M)

In the preceding chapter, we only skimmed the topic of margin. To completely understand the dynamics of futures trading, it is necessary to have a parallel understanding of the concepts of margin and M2M. I would like to pause briefly on margins and go on to M2M, though, because it is challenging to describe both concepts at once. We’ll fully comprehend M2M before returning to margins. Then, while keeping M2M in mind, we will revisit margins. However, before we go on to M2M, I want you to keep the following things in mind:

Margin in your trading account is when you start a futures position.
The “Initial Margin” is another name for the margins that are.
The SPAN margin and the Exposure Margin are the two parts that make up the initial margin.
SPAN Margin + Exposure Margin = Initial Margin
Your trading account’s initial margin will be frozen for the number of days you decide to keep the futures trade open.

1. The initial margin’s value changes every day because it is on the futures price.

2. Keep in mind that the initial margin equals a percentage of the contract value.

3. Futures price times lot size equals contract value.

4. Although the lot size is set, the futures price changes daily. This implies that the margins change daily as well.

So, for now, focus on these few ideas. We’ll move on to understanding M2M before returning to the margins to finish this chapter.

5.3 – Mark to Market (M2M)

As we all are aware, the futures price changes every day, and depending on the circumstances, you could earn or lose money. Marking to market, often known as M2M, is a straightforward accounting process that entails modifying your daily profit or loss and granting you the same. M2M is effective while the futures contract is still in your possession. Let’s use a clear example to illustrate this.

Let’s say you decide to purchase Hindalco Futures on December 1st, 2014, at a price of Rs. 165. The Lot is 2000 square feet. You choose to square off the position at 2:15 PM on December 4, 2014, for Rs. 170.10/-, 4 days later. The formula below clearly demonstrates that this is a profitable trade.

Buy Price = Rs.165

Sell Price = Rs.170.1

Profit per share = (170.1 – 165) = Rs.5.1/-

Total Profit = 2000 * 5.1

= Rs.10,200/-

But the transaction was for four working days. The profit or loss on the futures contract is to market every day it is held. The prior day’s closing price is as a benchmark when marking to market in order to determine gains or losses.

The price movement of futures over the four days the contract was in force is in the table above. Let’s examine daily events to better grasp how M2M functions.

The futures contract was on Day 1 at 11:30 AM for Rs.165. It is obvious that the price increased after the contract was because it closed that day at Rs.168.3. Thus, the daily profit is 168.3 minus 165, or Rs. 3.3 per share. The lot size is 2000, hence the daily net profit is equal to 3.3 * 2000, or Rs. 6600.

Therefore, the exchange makes sure that Rs. 6,600 is to your trading account at the end of the day (via the broker).

But from where does this money come?

1. It is without a doubt originating from the counterparty. It follows that the exchange is also making sure the counterparty pays Rs. 6,600 toward his loss.

2. But how does the transaction make sure they receive payment from the obligated party?

Obviously, through the margin deposits made at the moment the deal is. But more on that in a moment.

Another crucial point that you should be aware of is that the futures buy price will no longer be treated as Rs. 165 but rather as Rs. 168.3/- from an accounting standpoint (closing price of the day). You may wonder why that is the case. You have already received the day’s profit by crediting your trading account. As a result, you are to be in the right for the day, and tomorrow is as a new day. As a result, the buy price is now set at Rs. 168.3, the day’s closing price.

The futures finished at Rs. 172.4/- on day 2, indicating another profitable day. The net profit for the day would be Rs. 8,200, or Rs. 4.1 per share, less the day’s profit of Rs. 172.4. Your trading account will be with the earnings you are to, and the buy price will be changed to the previous day’s closing price of 172.4/-.

Day 3‘s closing price of Rs. 171.6 indicates that there was a loss of Rs. 1600 compared to day 2’s close price (172.4 – 171.6 * 2000). Your trading account will be automatically debited for the lost amount. Additionally, the buy price has been changed to Rs. 171.6.

On day 4, the trader chose to close the position at 2:15 PM, or midday, at a price of Rs. 170.10 instead of holding it throughout the day. As a result, he suffered a loss for the day’s close. This would result in a loss of Rs. 171.6/- less Rs. 170.1/-, or Rs. 1.5/- per share, and a net loss of Rs. 3000/- (1.5 * 2000). Naturally, since the trader has squared off his position, it makes no difference where the futures price goes after the square off. By the conclusion of the day, Rs. 3000 is also debited from the trading account.

The amount we initially calculated, which is -, will remain the same if you add up all the M2M cash flow.

Purchase Price: Rs. 165

Sell Price = 170.1 rupees

Profit per share is (170.1 – 165), which equals Rs.5.1.

Profit total = 2000 * 5.1

= Rs.10,200/-

Therefore, a daily accounting adjustment where –

Depending on how the futures price responds, money is either or debited (also as the daily obligation).
The current M2M is by taking into account the previous day’s close price.

Why, in your opinion, is M2M necessary in the first place? Consider the fact that M2M is a daily cash adjustment through which the exchange significantly lowers the risk of counterparty default. The exchange by the M2M ensures both parties are daily fair and square as long as a trader keeps the contract.

Let’s go back and revisit margins while keeping in mind the fundamentals of M2M to see how the deal changes over the course of its existence.

5.4 – Margins, the bigger perspective

Let’s take another look at margins while keeping M2M in mind. The margins needed to start a futures trade are known as “Initial Margin (IM),” as was previously noted. A specific percentage of the contract value is the first margin. Additionally, we are aware of

Initial Margin (IM) = SPAN Margin + Exposure Margin

Few financial intermediaries operate behind the scenes each time a trader initiates a futures deal (or any trade, for that matter). They make sure the trade goes through without a hitch. The broker and the exchange are the two important financial intermediaries.

Of course, the broker and the exchange will suffer financially if the client breaches a contract. Therefore, proper coverage utilising a margin deposit is required if both financial intermediaries are to be against a potential customer default.

In actuality, this is exactly how it operates: “SPAN Margin” refers to the minimum required margins in accordance with the mandate of the exchange, and “Exposure Margin” refers to the margin above and above the SPAN to protect against potential MTM losses. Keep in mind that the exchange specifies SPAN and Exposure margin. Therefore, the client must abide by the first margin requirement while starting a futures trade. The full initial margin (SPAN + Exposure) is by the exchange.

Between the two margins, SPAN Margin is more crucial because failure to have it in your account would result in a penalty from the exchange. To carry a position overnight or the following day, the trader must adhere strictly to the SPAN margin requirement. The “Maintenance Margin” is another name for SPAN margin that is sometimes used.

How does the exchange determine what the SPAN margin requirement for a specific futures contract should be ? The SPAN margins are each day using an advanced algorithm. The ‘Volatility’ of the stock is one of the important inputs that this algorithm takes into account. Volatility is a highly important subject, and we shall go into great detail about it in the following module. Just keep in mind this for the moment: if volatility is anticipated to increase, the SPAN margin required increases as well.

The additional margin known as exposure margin ranges from 4% to 5% of the contract value.

You may already be aware if you trade with Zerodha that the SPAN and exposure margin requirements are clearly in our margin calculator. Of course, we’ll go into more depth about the usefulness of this handy tool later on. However, you may look at this margin estimator for the time being.

Keeping the aforementioned transaction specifics in mind, let’s examine how margins and M2M interact concurrently during the course of the trade. The table below illustrates how the dynamics alter daily.

I hope the table above doesn’t overwhelm you; in reality, it is pretty simple to understand. Let’s go through everything day by day in order.

10th Dec 2014

The HDFC Bank futures contract was for Rs. 938.7 at some point in the day. There are 250 square feet on the land. The contract’s value is therefore Rs. 234,675/-.

As we can see from the box on the right, SPAN makes up 7.5 percent of CV while Exposure makes up 5 percent. As a result, 12.5 percent of the CV is set aside for margins (SPAN + Exposure), which comes to a total margin of Rs. 29,334/-. The first margin is sometimes regarded as the initial sum of money the broker has .

HDFC will now close for the day at 940. The CV has increased to Rs. 235,000 at 940, making the total margin needed Rs. 29,375, a slight increase of Rs. 41 above the margin needed at the time the transaction was ]. The client is not to add this money to his account because he would have an M2M profit of Rs. 325 that will cover his needs.

Cash Balance + M2M equals the total amount of cash in the trading account.

= Rs.29,334 + Rs.325

= Rs.29,659/-

There is no issue because the cash amount clearly exceeds the whole margin requirement of Rs. 29,375. Additionally, the reference rate for the M2M for the following day is now set at Rs. 940.

11th Dec 2014

The M2M was negatively affected by Rs. 250 the day after HDFC Bank’s share price dropped by Rs. 1 to Rs. 939. This sum is from the available cash (and will be to the person making this money). The new cash balance will therefore be –

= 29659 – 250

= Rs.29,409/-

Additionally, a new margin need of Rs. 29,344 is . There is no need to worry because the cash balance is bigger than the necessary margin.

Additionally, the reference rate for the M2M for the following day is reset to Rs.939.

12th Dec 2014

It’s a fascinating day today. The futures price decreased by Rs. 9 to become Rs. 930 per share. The margin needed also decreases at Rs.930/- to Rs.29,063/-. The cash balance falls to Rs. 27,159/- (29409 – 2250), which is less than the whole margin need, due to an M2M loss of Rs. 2,250. Is the client compelled to put up the extra cash because the cash balance is less than the overall margin requirement? Actually, no.

Keep in mind that the SPAN margin is the more revered of the two margins, followed by the Exposure margin. As long as you have the SPAN Margin, most brokers will let you keep your holdings (or maintenance margin). When the cash balance is lower than the maintenance margin,You will receive a call from them requesting additional funding. If not, they will compel the positions to shut on their own. This call from the broker asking you to deposit the necessary margin funds is also known as the “Margin Call.” Your cash balance is too low to maintain the trade if your broker is sending you a margin call.

Returning to the example, there is no issue because the cash balance of Rs. 27,159 is greater than the SPAN margin of Rs. 17,438. The M2M loss is deducted from the trading account, and the reference rate is then reset to Rs. 930 for the M2M transaction the next day.

Well, I hope you now have a better understanding of how margins and M2M interact. I also hope you can see how effectively the exchange can deal with a potential default threat thanks to the margins and M2M. The margin plus M2M combination is essentially a surefire way to prevent defaults.

I’ll take the liberty of skipping the next days and going straight to the last trading day in the event that you’re beginning to understand how margins and M2M calculations work.

19th Dec 2014

The trader makes the decision to cash out and settle the contract at 955. The closing rate from the day before, which is Rs. 938, serves as the M2M reference rate. Therefore, the M2M profit would be Rs. 4250, which is added to the cash amount of Rs. 29,159 from the previous day. When the trader squares off the trade, the broker will release the remaining cash amount of Rs. 33,409 (Rs. 29,159 + Rs.

What about the trade’s overall P&L? Well, there are numerous methods for calculating this:

Method 1: Add up all M2Ms.

P&L = the total of all M2Ms

= 325 – 250 – 2250 + 4750 – 4000 – 2000 + 3250 + 4250

= Rs.4,075/-

Second Approach: Cash Release

P&L = Total Cash Flow (released by broker) – Cash Was Initially (initial margin)

= 33409 – 29334

= Rs.4,075/-

Procedure 3: Contract Value

P&L is equal to Final Contract Value less Initial Contract Value.

= Rs.238,750 – Rs.234,675

=Rs.4,075/-

Fourth Approach: Futures Price

P&L is (difference between the futures buy price and sale price) * Lot Size.

Buy at $938.7, sell at 955, and have a 250-piece lot.

= 16.3 * 250

= Rs. 4,075/-

As you can see, using either method of calculation results in the same P&L value.

5.5 – An interesting case of ‘Margin Call.’

Let’s pretend for a second that the trade was not closed on December 19 and was instead carried over to December 20. Let’s further say that HDFC Bank experiences a significant decline on December 20 — perhaps an 8 percent decline that causes the price to drop from 955 to 880. What do you anticipate happening? Can you actually respond to these inquiries?

What is the P&L for M2M?
How does it affect the cash balance?
What SPAN and exposure margin is necessary?
How does the broker proceed?

I hope you can figure these out on your own, but if not, I’ll give you the answers:

The M2M loss is calculated as (955 – 880)*250 or Rs. 18,750. The cash balance as of December 19 was Rs. 33,409; the M2M loss would be subtracted from this amount to leave a cash balance of Rs. 14,659 (Rs. 33,409 – Rs. 18,750).

Because the cost has decreased, the new contract value is Rs. 220,000 (250 x 880).
SPAN equals 7.5 percent times 220000, or Rs. 16,500.

1. Exposure equals $11,000.

2. Total Margin = 27,500 rupees

3. The broker will obviously issue a margin call to the client because the cash balance (Rs. 14,659) is less than the SPAN Margin (Rs. 16,500), and some brokers will actually close the transaction as soon as the cash balance falls below the SPAN requirement.

CONCLUSION

As long as the futures trade is active, a margin payment is necessary (which your broker will prohibit).
The initial margin refers to the margin that the broker stopped when the futures trade was first initiated.
The initial margin deposit will be required from both the buyer and the seller of the futures contract.
The amount of margin obtained serves as leverage by enabling you to deposit a modest sum of money and participate in a transaction with a high value.
The M2M method, which entails crediting or debiting the daily obligation funds in your trading account depending on how the futures price behaves, is a straightforward accounting adjustment.
The closing price from the day before is used to determine the M2M for the current day.
Exposure Margin is collected in accordance with the broker’s requirements, while SPAN Margin is collected in accordance with the exchange’s instructions.
The SPAN and Exposure Margin are calculated in accordance with exchange standards.
The Maintenance Margin is the common name for the SPAN Margin.
If the investor wants to continue forward the future position, he must deposit more money into his account if the margin account falls below the SPAN.
When the cash balance falls below the necessary level, the broker will issue a “margin call” and ask the trader to inject the necessary margin money.

Psychology and Risk Management

Loss is Feedback, Not Failure

You just concentrate on the subsequent action, or the next item. There isn’t any self-criticism. You’re at ease. You are prepared to see the ensuing events.

Psychology and Risk Management

Fear of Failure

Psychology and Risk Management

1. Accepting Criticism.

Psychology and Risk Management

1.– Illusion of Control bias

Illusion of Control Bias: What is it?

How Can Investor Illusion of Control Hurt Them?

How might this illusion be avoided?

Psychology and Risk Management

1.– Gambler’s fallacy

Indicates that taking a short position or perhaps buying puts is appropriate. You may do an analysis that is as basic as this or as complex as reviewing time series data and modelling it using cutting-edge statistical or machine learning methods.

Which option are you likely to take?

Which of the following are you most likely to do now that you are on your eleventh trade?

2. Overcoming trauma

What do you then? You typically take higher risks in the hopes of earning bigger gains, and if the transaction fails, you effectively succumb to the “recovery trauma” phenomenon.

Psychology and Risk Management

2.1 – Acclimating to risk

Why do you stand to lose money, if you think about it? Or otherwise, what may cause the stock price to decline? There are a lot of reasons, as you can imagine, but here are a few:

Learning sharks start programme assures what you have been taught during the course goes into action.

Systemic risk is the riskthat all stocks on the markets face. Systemic risk is caused by common market factors including the macroeconomic environment, current politics, geographic stability, monetary system, etc. The following are a few key systemic issues that can cause stock prices to decline:

Expected Return (2.2)

Conclusion

Psychology and Risk Management

1.1 – An exceptional possibility

What to expect?

Technical analysis

The Charting Software

Which timeframe to choose

Lookback period

The scout

The Scalper

Basics of stock market

4.1 Overview

4.2 Origin of a Business

For Example 4.1

For Example 4.1.1

Scene 2 – The Venture Capitalist

. Series A funding is the name of the finance the company receives at this point, and a venture capitalist is a person who often invests in a company at this early stage (VC).

Scene 3 – The Banker

The corporation has few choices for raising the money needed for their CAPEX:

Scene 4 – The Private Equity

Scene 5 – The IPO

This time, there is a significant CAPEX requirement that the management anticipates will cost $200 Cr. The company’s options for funding the necessary CAPEX are limited.

4.3 Overview of The IPO Markets

4.4 What drives a company's IPO?

We came to some important conclusions in the previous chapter. One of which is: Why did the business choose to file for an IPO, and generally speaking, why do businesses go public?

There are other advantages as well in going for an IPO

4.5 – Merchant Bankers

4.6 Sequence of events during an IPO

Appoint a merchant banker. In case of a large public issue, the company can appoint more than 1 merchant banker

Apply to SEBI with a registration statement – The registration statement contains details on what the company does, why the company plans to go public and the financial health of the company

Getting a nod from SEBI – Once SEBI receives the registration statement, SEBI takes a call on whether to issue a go-ahead or a ‘no go’ to the IPO

DRHP – If the company gets the initial SEBI nod, then the company needs to prepare the DRHP. A DRHP is a document that gets circulated to the public. The following information should be included in DRHP along with a lot of other information:

4.7 What happens after the IPO?

4.8 Few key IPO jargons

4.9 – Recent IPO’s in India*

Forward Market

5. Margin & M2M

5.1 Things you should be aware of by now

5.2 – Why are Margins charged?

5.3 – Mark to Market (M2M)

5.4 – Margins, the bigger perspective

5.5 – An interesting case of ‘Margin Call.’

CONCLUSION

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