Archives February 2020

Trading Rules- Your Life Savior in the Ocean of Trading

For most of your reading this, the conception of rules and its importance to your trading life may be a no brainer and I certainly wish that is the case. But, some of you have some serious issues with following the trading rules that you have established. And you are not alone. Every day, thousands of traders are breaking rule after rule; and in a lot of these cases, they feel completely baffled as to why they keep doing things that a moment ago they were adamant that they would not do, like moving hard stop-loss as the price action is moving toward it. Or on the other hand, failing to do something that they promised that they would; for instance, finishing the “trade plan.”

Some traders are treating their rules as indicators of what they could follow rather than what they must follow. Some traders think that rules are non-compulsory and sometimes they follow them and sometimes they don’t; this type of thinking demolish trading results and wipe out your account. Trading with a weak dedication to your rules is serious.  To really support your trading, rules must be approached with an uncompromising commitment. Rules are your capital protectors and can be considered a life jacket in a turbulent sea because they are designed to inform your decision making when you are in the shark-infested ocean of trading. For that reason, rules are essential to trading. According to one of the world’s investor superstar “There are two rules for trading. Rule no. 1) Don’t lose money. Rule no. 2) Don’t forget rule number one.

Discipline and good habits are built the same way, one trade at a time. Well planned out rules that are followed precisely make the difference between being successful and blowing up your account.

Let’s take a look at the trade taken in FEDERALBNK Feb Futures contract on February 18.

equity futures trade plan

The price reached our pre-determined BUY level in the early trading hours. We bought the contract hoping to reverse this to our pre-determined SELL level which is at 90. We also set up our Stop Loss near the lower portion of the yellow lined box. However, the broader market index like Nifty, Bank Nifty and other sectoral indices had huge selling pressure due to which our trade could not make a move to a higher level as anticipated and we were stopped-out for losses.

If you see in the next chart, the price of the contract we traded moved much lower. Had we not set-up a stop-loss order, we would have incurred much bigger loss than what we’d imagined. This is the reason we must always follow the trading rules. Your rules are there to assist you in keeping-up focus on what matters most in your trade plan and follow-through. As you continue to respect your rules consistently you will develop robust habits surrounding your ability to follow-through and keep commitments. Below the outcome of the trade.

equity futures trading rules
Tough we had incurred loss in this particular trade; we are still profitable because we had some successful trades in the past which had met our Risk to Reward ratio. The key here is not to lose too much money out of your trading capital on a single trade. We can still look for some other trading opportunity another day. And also note that we will likely have more losers than winners. That means the only way you can only become better in this trading world is by learning how to minimize your losses, which we did in the above example.

Remember, whether you are an Intraday or Delivery trader, trading from your highest and best self is all that matters to your trading results. And your trading rules are your true protectors, dedicate yourself to them.

Plan your Trade & Trade your Plan

Plan your Trade and Trade your Plan – BOSCHLTD FEB FUT Contract made this statement true!

Recently I wrote an article in the Chart Review section of my website. There I mentioned the 3 most important aspects of trading and investing. If I repeat, those were Risk, Reward and Probability i.e. RRP. I also did mention that why those aspects are significant in planning your trade. If you had gone through the detailed write-up, you would’ve come to know the difference between winning trade and losing one.

There is a thin line between your success and failure. You need to identify the factors that may impact your performance on screen. I mean you need to have an edge, another important aspect in trading. Because there are too many traders and investors who are looking to be successful just like you. There is someone on the opposite side of your trade who wants to take your money. You must know before making a trading decision that who is seating on the other side of a trade, a Novice or a Professional. After all, trading is a transfer of accounts from the person who doesn’t have an edge to the one who has.

So, how can you come to know that whether he is Novice or Professional? This is something you need to pay attention to. You can easily find them on a price chart. Novice trader qualities include irrational behavior, feels panic while pushing Buy/Sell button, impatient, unable to handle emotions, and most importantly he buys after a period of buying and vice versa. Did you get that? And once you find such type of trader, you must act the opposite of him and quickly too. Because if you miss this Novice, you would miss the trade.

The example (BOSCHLTD FEB FUT Contract) given in Chart Review section depicts this act. This was a nice setup trade in terms of the Risk to Reward ratio. We found the novice traders out there on a price chart and bought the contract when it was presented to us by them. A stop-loss was set and we waited for our Target. Though we achieved our Target the next day, we were confident that a much bigger ratio could be achieved in this trade. We waited for 2 more trading sessions for the price to move higher as the bigger picture Supply was spotted by us. Our trading set-up and patience had paid up and we reached the bigger target within 2 more trading sessions.

Below is the Chart.
Target achieved by following trading plan

See, as URL of this article stated, if you plan your trade and trade your plan precisely and professionally, you could achieve the financial reward much sooner than expected. I have forecast a much prominent financial reward for me on this wonderful trading / investing journey, now it’s up to you to decide on which side of the trade you want to stand. Novice or Professional?

Commodity Futures in India

Commodity Futures
A commodity futures market in India has a prolonged history. Exponential growth is observed in commodity market after setting national level commodity exchanges. At present, there are 3 major national level commodity exchanges offering to trade in commodity futures. They are the Multi Commodity Exchange of India (MCX), National Multi Commodity Exchange of India (NMCE) and National Commodities and Derivatives Exchange (NCDEX). Among these exchanges, MCX is in the primary position with respect to the volume being traded.

Commodities are normally divided as Precious metals – silver and gold, Energy complex – crude oil and natural gas, Base metals – copper, nickel, zinc & zinc mini, lead & lead mini and aluminum and Agriculture commodities. With a number of agri-commodities are available through exchanges, the most active ones are chana, soybean, maize, turmeric, soy oil, rape mustard seed, crude palm oil, guar gum, wheat, cumin (jeera), guar seed, rubber, cotton, and castor.

MCX Commodity market
Trading in Commodity Futures
The commodity market timing commences at 9.00 am and extends till 11.55 pm Monday to Friday. However, trading times of different commodities vary from exchange to exchange.

The trading in commodities happens in either spot markets or futures markets. In spot markets, the commodity trade takes place immediately, in exchange for cash or other commodities. In futures markets, buyers & sellers trade a commodity based on a standardized contract. You don’t need to compulsorily make or accept deliveries of physical goods here. Trade in futures contracts happens electronically and therefore the contracts are often settled in cash.

What is Contract in Commodity Futures?
A commodity derivative instrument is an agreement to buy or sell a particular amount of a commodity at a set date in the future at a predetermined price. This contract specifies further details, just like the quality of the commodity and also the delivery location. An investor/trader can take a long position (buys a contract) or a short position (sells it). If the investor expects the worth of a commodity to rise, he takes an extended position. If he expects the value to fall, he opts for a short position.

What are the risk factors?
Commodity trading is done in the sort of futures which presents an enormous potential for profit and loss because it involves predictions of the future and hence uncertainty and risk. Risk factors in commodity trading are the same as futures trading in equity markets. A major difference between equity and commodity market is that the information available on Demand and Supply cycles in commodity markets isn’t as robust and controlled as the equity market.

Indusind Bank Feb Futures contract achieved the Target

The BUY call given on INDUSIND BANK FEB Futures to Buy @1225 with Stop Loss @1190 has achieved its Target @1330. Below the BUY and SELL chart.

BUY call on 1st Feb

Target achieved on 6th Feb

So you might be wondering how could this trade happened looking at the financial health of the bank.

Let me analyze the situation for you. Remember, the Price is the main indicator we look for when we push the button. Here the Demand/Support price for the bank was in the range of 1250-1191. We had set up the SL @1190 and this is important, always keep in mind. The Target we set was at 1330 which can easily be spotted on the chart.

When the price came to our pre-determined Buy level, we push the button without any hesitation. When we bought, the situation in the market was bearish. I mean the Bank Nifty was crashing over 1000 points, All key indices trading in red, Coronavirus weighing on the broader market. But we remained calm as we already have our Entry & Exit points in our trading plan.

The patience paid out and the price zoomed up from our entry and we’ve achieved our target price of 1330 within 5 trading sessions. We just followed our simple trading plan and kept patience while in the position.

The trading rule which has been applied here can be mirrored in any market, be it currency, commodity or interest rate futures. Following your plan is key. I am enjoying my profits, are YOU?

What is Index Futures in Stock Market?

Live Index Futures

What is an Index? Index also called as Indices consist of a set of multiple stocks. E.g. If we talk about Nifty as an index, it consists of 50 stocks of different companies operating in different sectors. Below the elaboration of the Nifty index.

Nifty
NIFTY 50 Index is understood as the largest single financial product in India, with an ecosystem comprising of exchange-traded funds and options at the NSE in India, and futures and options abroad at the SGX. NIFTY 50 is the world’s most actively traded contract.

List of fifty companies that form a part of the NIFTY 50 Index.

Adani Ports

Asian Paints Ltd 

Axis Bank

Bajaj Auto

Bajaj Finance

Bajaj Finserv

Bharti Airtel

Bharti Infratel

BPCL

Britannia

Cipla

Coal India

Dr Reddys Labs

Eicher Motors

GAIL

Grasim

HCL Tech

HDFC

HDFC Bank

Hero Motocorp

Hindalco

HUL

ICICI Bank

IndusInd Bank

Infosys

IOC

ITC

JSW Steel

Kotak Mahindra

Larsen

M&M

Maruti Suzuki

Nestle

NTPC

ONGC

Power Grid Corp

Reliance

SBI

Sun Pharma

Tata Motors

Tata Steel

TCS

Tech Mahindra

Titan Company

UltraTech Cement

UPL

Vedanta

Wipro

Yes Bank

Zee Entertain

The info mentioned above is about Nifty as an Index, but then what is index futures? It is nothing but a futures contract being traded on the exchange. It is traded in a lot. Nifty futures index consists of 75 quantity. There are also other index exist in the market such as Bank Nifty (banking stocks), Nifty Metal, Nifty Infra, Nifty IT etc.

There are other Indices all over the world. These include Dow Jones, Nasdaq, S&P 500, Nikkei, HangSeng, etc.