Scaling Up Your Trading Business

[Nikhil Dogra]

What differentiates a successful trader from a not so successful one is knowledge and discipline.​

• Knowledge comes from reading and practicing
• Discipline comes from your internal drive to succeed.

In this (thread) journey to become a successful trader you will learn tricks and techniques of the trade. It is also possible that you will make mistakes. Mistakes are good provided you see them as learning opportunities.I am sharing this with you so that you do not have to go through the same cycle of learning and reinventing the wheel. When i started trading i tasted success in bits and pieces. I soon realized that i can do this provided i trade based on rules and avoid getting influenced by emotions of greed and fear.
If you are a new entrant in the trading industry then i suggest that you focus on learning rather than aiming to make huge profits. Profits will surely come provided you stay in the game long enough. The story with most small and beginner level traders is that they make one big loss and their entire trading capital is wiped out. They cannot sustain long enough and hence cannot learn to master this business. How much time it is going to take? It is difficult to say, as it depends on an individual and his learning skills. I have even seen traders becoming successful within a year of starting their trading career. If you are an experienced but not so successful trader then it is important that you read this thread with an open mind. It will help you un-learn and re-learn some of the things. I am sure this thread will be able to teach you some good things about trading and markets. If you are already a successful trader then i would like to congratulate you on your success. People like you are role models for thousands of aspiring traders. I am confident you will still find this thread useful and at least some of the content will manage to positively surprise you.

My objectives -​

1. 14th September 2017 till 28th September 2017 i will share basics which are essential to know before you even think about opening up a trading account.
2. 29th September 2017 till 27th September 2018 i will put myself in the shoes of a typical retail trader with INR 80,000 in the trading account and work my way up showing everyone on this thread how can one scale up 75 shares (1Lot) to 375 shares (5Lots) in 12 months objectively.

 

[Tuna]

Looking forward to the show !! All the Best !!

1. 29th September 2017 till 27th September 2018 i will put myself in the shoes of a typical retail trader with INR 80,000 in the trading account and work my way up showing everyone on this thread how can one scale up 75 shares (1Lot) to 375 shares (5Lots) in 12 months objectively.

75 Qnt/ Lot .So you will trade on NF?

 

[Nikhil Dogra]

It will not be naked future or option rather it will be a combination as per the prevailing market environment but yes it will definately be constructed based on nifty underlying. The positions underlying basis will be grounded in risk control considering the account size is below INR 100,000.

 

[Nikhil Dogra]

My objectives -​

1. 14th September 2017 till 28th September 2017 i will share basics which are essential to know before you even think about opening up a trading account.

Long and Short Positions - Equity Stock Markets

1. Long position means first you buy and then you sell to cover. (Bullish)
   
2. Short position means first you sell and then you buy to cover. (Bearish)

Shorting of stocks for most traders is allowed only on intraday basis. You will have to close your short positions before the market closing. Most brokers have automated systems through which they close the positions automatically before market closing. In the event when the short position of stock is not closed before the market closing then the process becomes a bit complex. Auction market session is a special session of the market where uncovered shorted stocks are settled.

Long and Short Positions - Futures and Options Markets
The rules for going long and short for futures markets are the same as stocks i.e.

1. 'Bullish', you buy future, and sell when you are 'Bearish'.
   
2. The options market is slightly different because for each stock there are 2 option types, Calls and Puts. You long call option and short put option to express a ‘Bullish’ trade. You long put option and short call option to express a ‘Bearish’ trade.

Orders are instructions for a trade given to an exchange by the trader. There are four basic order types – Market, Limit, Stop and Stop Limit. There are other advanced order types like Cover , bracket , basket & spread order. Traders should choose the suitable order type based on their trading strategy. Choice of order type contributes significantly to the net profitability of trading strategy. Along with order type, you can also specify certain order properties like trigger price, disclosed quantity etc.

Ask-Bid - There are patient traders and impatient traders. Patient traders place limit orders whereas impatient traders are continuously placing market orders. Bid Price is the best or maximum price the buyers are willing to pay. Ask Price is the best or minimum sell price the sellers are offering.

Market Trading Sessions-

1. Pre Open Session
2. Block Deal Session
3. Normal Trading Session
   
4. Post Closing Session
5. After Market Session (Some brokers allow NRIs to place order in this session)
6. Auction Session

Futures Pricing and Cost of Carry-
When futures price is more than the underlying stock price, we say futures contract is trading at premium. When the futures price is less than the stock price we say futures are trading at a discount. There is a relationship between futures and its underlying stock prices. This relation can be expressed using two factors, cost of carry and dividend.

Future Price (F) = Stock Price (S) + Cost of Carry (C) – Dividend (D)

Cost of carry can be calculated as:
Cost of Carry (C) = S * R * T / 365 Where S = Stock price R = Risk free rate of interest T = Time to expiry

Futures Open Interest-
Open Interest (OI) is the total number of futures contracts that are not expired or squared off.

Rollover of Futures position-
Futures and options expire on the last Thursday of the month. If this day is a trading holiday then the trading day preceding Thursday is considered as the expiry day. If your futures contract is about to expire in the current month and you wish to continue with your position then you rollover.
Short September Future-> Rollover transaction will be Long September Future & Short October Future
Long September Future -> Rollover transaction will be Short September Future & Long October Future

Spreadliner-
When futures contract is about to expire and you want to carry forward your position you can use spread liner to rollover your position. You only need to specify the price difference between the current and next month’s future prices and not the individual desired prices. This manner of rollover covers the risk of wide fluctuations in future prices.

 

[Nikhil Dogra]

My objectives -​

1. 14th September 2017 till 28th September 2017 i will share basics which are essential to know before you even think about opening up a trading account.

An option is a contract between a buyer and a seller that gives the buyer theright, but not the obligation, to buy or to sell a specified asset (stock or other asset classes) on or before the option's expiration time, at an agreed price (strike price).

Option Basics-
There are two types of options – Call options and Put options.

1. When the underlying stock price goes up, the Call options price rise and the Put options price fall.
   
2. When the underlying stock price goes down, the Call options price fall and the Put options price rise.

Long Call is 'Bullish' [Limited Loss & Unlimited Gain]
Short Put is 'Bullish' [Limited Gain & Unlimited Loss]
Long Put is 'Bearish' [Limited Loss & Unlimited Gain]
Short Call is 'Bearish' [Limited Gain & Unlimited Loss]

Options Expiry-
On expiry date, the settlement is done for the position holders and the profit / loss is adjusted to the position holder’s account. Many traders close out their positions just before the expiry to save on settlement and other related charges.

Option Intrinsic and Extrinsic Value-
The option premium is composed of Intrinsic and Extrinsic Value.

1. Call Options Intrinsic Value = Stock Price – Strike Price
2. Put Options Intrinsic Value = Strike Price – Stock Price

Moneyness-

1. At The Money
2. In The Money
3. Out Of The Money

Volume and Open Interest (OI)
Volume is the number of contracts being traded for a period of time.
OI is the total number of options contracts on an underlying that have not yet been closed or squared off.
Rising OI - Traders are opening fresh positions with an assumption that price will move in their favorable direction.
Falling OI- Traders squaring off their positions. Either they are booking profits or losses.

Put-Call Ratio-
If numbers of Call options traded across all strikes are more than Put options, we can say that in general people are bullish. The observation here is that retail traders are bullish but professional traders have the opposite view on the market direction because it is a known fact that option buyers are not the most successful of traders and in the long run they lose money because time decay works against them moreover Option writers are mostly informed and professional traders with deep pockets
Similarly, if numbers of Put options traded across all strikes are more than Call options, we can say that in general people are bearish.Retail traders are bearish but professional traders (i.e. the writers) are bullish.

Put Call Ratio is of 2 types-

1. Volume PCR
   
2. Open Interest PCR

PCR = Put Options (Volume OR OI) / Call Options (Volume OR OI)

Volatility-
Volatility is actively tracked by option traders because volatility impacts options premium. When stock volatility increase options premium also increase. Historical & Implied Volatility are generally used.

Option Pricing & Greeks-
There are seven factors using which option’s fair value can be calculated.

1. Stock price
2. Strike price
3. Time to expiry
4. Option type (call / put)
5. Historcial volatility
   
6. Interest rate
   
7. Dividend.

Now we know option price is dependent on the above factors and collection of these individual relationships is known as Greeks.
Delta measures the speed of the option’s price movement relative to the underlying stock price.
Gamma measures the amount by which delta changes for 1 point change in the stock price.
Theta is a measure of how time decay affects the options premium.
Vega measures the sensitivity of the options premium relative to the change in the underlying stock’s volatility.
Rho measures sensitivity to the interest rate

Put Call Parity-
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. Support for this pricing relationship is based upon the argument that arbitrage opportunities would materialize if there is a divergence between the value of calls and puts. Arbitrageurs would come in to make profitable, riskless trades (Conrev or triangle arbitrage strategy) until the put-call parity is restored.

 

[Nikhil Dogra]

My objectives -​

1. 14th September 2017 till 28th September 2017 i will share basics which are essential to know before you even think about opening up a trading account.

Market Analysis-
Getting started with Technical Analysis (TA) you require a software based charting tool and market data (price and volume).
It’s important to know the latency of the real-time data the vendor is streaming. An arbitrage trader wants latency no more than few microseconds where as a long term investor is okay even with 24 hour latency (Free EOD Data) . For intraday traders latency should not be more than 10 seconds (even that is pushing it) . Getting into indepth of TA & market psychology is outside the scope of this thread however i would share some resources for those interested in TA & Psychology.

1. Stockcharts Free Educational Resources
2. A Complete Guide to the Futures Market: Technical Analysis, Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles By Jack Schwager
3. Foundations of Trading: Developing Profitable Trading Systems using Scientific Techniques By Howard Bandy
4. Computerized Trading: Maximizing Day Trading and Overnight Profits By Mark Jurik
5. Trading Systems and Methods By Perry J. Kaufman
6. For psychology only one person comes to my mind who is also a active trader Brett Steenbarger.
   

Market Participants-

1. Arbitragers are traders employed by broking house or financial institutions & they mostly trade in market neutral strategies.
2. Market Makers are financed and appointed by companies who own stocks and at times by the stock exchanges to increase the turnover volume and trading activity in specific stocks and markets. They trade in small quantities but enter and exit throughout the day & their performance is measured in terms of the trading volume generated in specific stocks and markets.
3. Quantative Traders use a trading strategy that they have developed after extensive research, experience and back testing. These strategies are designed to predict future stock price movement and trends. They take calculated risks with each trade and expect to make more profits than the risk taken.
4. Foreign Institutional Investors and Domestic Institutional Investors (Mutual Funds) accumulate positions in large quantities and hold for long durations. Their buying and selling is a lengthy process creating trends and while building their portfolios they hedge their positions by using derivatives.
5. Retail Traders trade with their own money and in small quantities. Trading is not their primary business.
   
   
   
   
   
   
   
   
   

 

[Nikhil Dogra]

My market analysis is pretty straight forward. I use average directional index to determine whether the market environment is mean reverting or exhibiting trendy properties, the exponential moving averages i use are 20 day and 50 day and finally i use commodity channel index as a guide to buy low/sell high.

Two ways i analyze the markets-

1. If ADX20 >20 then EMA20 & EMA50 cross determines the trend and CCI5 is used to buy low/sell high within the established trend.
2. If ADX20 <20 then EMA20 & EMA50 cross relevance decreases and CCI20 is used to buy low/sell high within the "potential" mean reverting cyclical environment.

 

[varunkochhar]

Very clear and well defined simple method. All the best to you and your thread.

 

[timepass]

Usually the literatures mention ADX(14), but I see that you are using ADX(20). Any particular reason.

CCI : Your chart shows CCI(5), but the explanation mentions CCI(15) and CCI(20).

Also, I see that you are using EOD charts. No intraday trades for you ?

 

[Nikhil Dogra]

Usually the literatures mention ADX(14), but I see that you are using ADX(20). Any particular reason.

CCI : Your chart shows CCI(5), but the explanation mentions CCI(15) and CCI(20).

Also, I see that you are using EOD charts. No intraday trades for you ?

• I use CCI(5) when ADX(20) > 20 & CCI(20) when ADX(20) < 20
  
• I have rechecked to see if i made a typo & i have not mentioned CCI 15 , perhaps CCI5 gives the impression that its 15 but its not.
• No particular reason to be honest for using ADX20.
• I have highlighted EOD charts as a example for how i do analysis and the same can be replicated on any timeframe.
• I have subscription to Truedata for real time data
• Trades i will implement will be intra day trades only