Short Term Trading Strategies: Possbile Options

Short term traders live in their own world of fantasies. They make their own models, they make their own calculations, they make their own intra-day trading strategies and they make their own assumptions which lead to their trading.

How many of those assumptions are correct, that is proven only when they feel the jitters in the market – not the usual 1% to 3% intraday rise or fall, but massive fallout of say 10% or more.

It’s easy to say that “My observation has been that markets go up or down -1% to 2% everyday, so I’ll try and bet to capitalize on this range. I’ll attempt to buy at the -1% lowest range and attempt to sell at +2% highest ranges. In the process, I’ll make 3% or so profit.”

The assumption looks good and is true also, as long as you can see the historical values of stock prices. However, it is NOT practical and becomes impossible to achieve when you start trading. The reason is that an intraday trader simply has no idea what is the -1% bottom price or what is the +2% upper price. Whether the stock will keep going down today or will it keep going up. More so, they don’t have any idea whether the bottom -1% price will be hit first or the top +2% price will be hit first. So whether they should first short and then go long or they should go long and then short – nothing is certain.

Another thing is that everyone in this world can observe this kind of price range on intraday basis on historical data. Markets are efficient. If it was so easy to follow this well observed price range, then everyone could easily make to 2%-3% profit on intraday basis and become billionaire within no time. Hundreds of books have been written, so many people run websites, so many blogs are now contributed towards short term trading, yet no body is there to guarantee anything.

Now, many other practical-lish assumptions are made. For example, Andy may like to go after the annual bank rate by following the 0.84% net profit per month from his trading activities. Overall, on annual basis, he attempts to make around 10%-11%, slightly higher than the bank rate. The question is, is it possible to achieve that?

Fortunately (or unfortunately), a lot of examples and lessons can be learnt from the recent mayhem that have hit in the Indian stock markets in the last few days. One such important lesson is about withstanding the sudden downfall in the markets.

Let’s take an example. I have a strategy that I want to make 12% per annum from stock trading business. So, if I can make even 1% per month, I can easily beat the bank rate of 10% by 2%. It is easy to make 1% in the stock market in a month, so I don’t see any problems with the strategy. Hence I start with 100,000 capital and at the end of the year I would like to see it translating into 112,000. I made my assumptions and started betting in the market on a monthly basis.

Continue to Part 2: Problems with Short Term Trading Strategies

Problems with Short Term Trading Strategies

This is part 2 of the article: Short Term Trading Strategies: Possbile Options. Please read the first part before continuing with this one.

The market is at 6000 level when I started trading. The first question I need to ask myself is, Out of 100,000 as initial capital, How much should I place on my first trade? I have options:

1) I can put entire 100,000 at 6000 levels of the market. But what will I do if the market falls to 4500 within 3 days? All I’m left with is my 100,000 translating into 75,000 and no further capital left with me to play around. A clear loss of 25% and no money to play around with any further. My strategy of monthly trading and getting 1% per month has failed miserably. I don’t know how many more months it may take for me to even recover my capital.

2) In the above case, I can do one thing as well. Book my losses, get back my 75,000 and start afresh. However, my target will now increase substantially. I need to reach 112,000 from 75,000. This becomes a 49.34% or almost 50% increase in the annual target or 4.2% per month. Compare it to the initial monthly target of 1% - it has quadrupled now. More so, is it really easy to achieve 4%+ monthly profits on your entire capital?

3) Other option is that I can place partial bets – say the first bet can be of only 10,000 and I keep my remaining 90,000 safe. Say instead of just 1%, my buy stock went up 4% in a month and I book my profits. Cool and easy 4% profit. However, this 4% is only on 10,000 not on entire 100,000. On the entire capital, you’ve earned only 0.4%. Annualize it, and it becomes only 4.8%. Even with a 4% monthly profit, that too consistently month after month, did you achieve the target of 12%? No, it’s way short of 12% by 7.2%

4) More options: Increase the bet amount. Come up with an increasing capital investment strategy. But are you sure how much you should bet each time? Whether you should book your monthly profits or should you let you profits run? If booking monthly profits, should you select another stock? If letting your profits run, how much should they go to?

Ultimately, you will see that you are left far behind in this complex market mechanism and stock trading circus. There is no such scheme which can give you consistent returns even of 0.5% each month, year on year in the stock market.

Need proof? Approach a Mutual Fund Manager and tell him that you want him to manage your 1 million dollars which should be invested only in the stock market (not in bank or bonds) and you need a sure shot monthly returns of 1% (12% annually). No fund manager would guarantee that for you.
Relax him a bit further. Tell him that he is free to play around with any stocks (including penny stocks), futures, options other derivatives. Can he still guarantee anything?

Need More proof? Approach your broker offering discretionary services. Ask him the same question giving him full liberty. Is he willing to do it for you?

The fact is that it is not easy to make money consistently in the market – however small your target is. There is a huge level of uncertainty, whether you aim for 1% profit per month or 12% profit per annum. Only long term investment can help, that too with your luck. You never know when you will need money; you never know when you may get completely wiped out. Happy and safe Investing!!!

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Mark to market (MTM) factor & Stock Market Fall Effects

There has been some respite for the traders and investors yesterday. From the lows of 4500, the stock market (Nifty) has again managed to climb back to 5200 levels.

However, in the process of this drastic transition, where the Nifty started declining from the high level of 6200 to the lows of 4500, many investors and traders have lost their capital. Even though the Nifty is again going to climb back, the traders and investors have lost their money because some sell stock orders were executed at the lowest of the low values.

Majority of that has been attributed to the MTM effect or the Mark To Market Factor. In this article, I’ll explain how the MTM effect works. What is Mark to Market and how does that affect a trader’s position. I will also touch upon the associated things – Margin call requirements.

Some brokers like ICICIdirect have a strict requirement that you MUST have the entire money in your trading account, before you can buy any shares through them. So if I want to buy shares worth 10,000 then I must have 10,000 already deposited in my ICICI account and from there I should allocate that 10,000 for trading purpose. Then and only then I will be allowed to buy shares or buy stocks as per my stock picks.

However, majority of the brokers, like IL&FS, etc. do NOT require the entire amount to be deposited with them. Hence, if I have a brokerage account with IL&FS, Motilal Oswal or Angel broking (just for an example), then I can place my buy stocks order even without having a penny in my account. So if I wish to buy shares worth 100,000, I just place a call to my IL&FS broker and he places the order for me in the exchange. If it gets executed, due to T+3 settlement cycle (or T+1 in the US stock markets or T+3 in UK stock markets), I have 3 days time to provide the required money to my broker. Due to T+3 cycle, the shares will come to my demat account only on the 3rd day and the cash should go from my account only on the 3rd day. Hence, that gives me a leveraged position for 3 days.

There can be other brokerage firms which require a percentage of money to be kept with them initially. Say 20%. So if I want to place an order of 100,000, then I should initially have 20,000 with the broker. Ultimately, it depends upon the criteria set by the broker you are dealing with.

So I place the order, I pay the broker in (or within) 3 days time and I get the shares. All fair and good. But there can be a problem.

Remember you will be required to sign at as many as 45 different places on a brokerage account document to open a trading account? There are certain conditions mentioned in that which we obviously ignore and take for granted.

Every brokerage firm has a Risk management division. This division decides the amount of risk they can bear and depending upon that they decide the limit upto which the client’s positions can be leveraged.

However, there is a requirement for the brokers to comply with the MTM or Mark to market factor. The MTM factor means that for all leveraged positions, the broker will be required to have cash, in case the market price of the stock starts falling down.

Let’s take an example. Suppose Microsoft is trading at $20. Due to some problems, the stock price starts to go down. There may be a set limit of providing extra cash to cover for positions if the stock price falls by say 25%. So if the stock price of Microsoft touches $15 (25% below), then the brokers (and ultimately their clients) who are holding positions in Microsoft in this leveraged style (without depositing the entire buy amount), will be required to pay the money to cover their losses in the leveraged positions.

So in the last 2-3 days, the same situation was happening in the Indian markets. Traders and investors had such leveraged positions with their brokers. As the stock prices started to tumble downwards, the brokers were required (as per their risk management divisions) to cover for the losses in the leveraged positions due to stock price meltdown. Remember, a broker is only an intermediary in the trading process. The actual liability lies with the trader or investor or the client who is trading. Hence, the broker, on behalf of the clients, was required to have cash for the leveraged stock positions.

Continue to Part 2: How Margin calls are placed and what is required?

Margin Calls and Requirements for Mark To Market (MTM)

This is part 2 of the article: Mark to market (MTM) factor & Stock Market Fall Effects-1. Please read the first part before continuing with this one.

Usually, when such a thing happens, the brokers call the client on the phone individually and give them a deadline (usually 12 to 24 hours) to furnish the required money for MTM. But unfortunately, due to the regulations, the brokers cannot accept cash. All transactions should happen in paper or electronic form (cheque, demand draft or online transfer). Hence, though the brokers raised to margin calls, though the clients deposited the cheques with the brokers, the clearing time of 24 hrs to 3 days ensured that money did not reach the broker’s account within the given time limit. Hence, with lack of required cash, the brokers were forced to meet up the MTM requirement by selling stocks.

Now cheques can treated as a guarantee. But there is a fear that cheque may bounce due to lack of money in the clients account. Hence, the brokers need the cheque to be really encashed. Ultimately, they were left with no solution but to sell the shares at the lowest of the low prices for their clients.

Finally, it was the clients who lost. They may have bought the shares at a price of 100. The price starts to fall down, reaches 75, the broker raises a MTM margin call. Though the clients may have money to furnish for the margin requirements, the problem with the clearing mechanism forces the broker to cover for the losses by selling stocks. This panic and forceful selling for MTM further deteriorated the stock prices and they went for a tailspin.

So even if the client has sufficient money, he may have to suffer the loss. Even if he had the capacity to withstand the bear hug, he may have been forced to book the losses because of the MTM and margin requirements.

Hence, it becomes extremely important to discipline your trading activities and your leveraged positions. It sounds good when the broker tells you that you don’t need to have money ready when you place the order, and you can furnish the money within 3 days time for T+3 settlement cycle. You feel happy that your money can earn interest in the bank and there is no need to keep it idle with the broker if you don’t trade.

However, all that money management and interest earnings tactics and trading strategies go off the fly in a split second, when the markets tumble, like the way they have in the past 3-4 days. It therefore becomes extremely important to understand the risk management requirements of the brokers. It is better to Select a broker after proper research & keep the money with a quality broker having strict requirements for advance deposit, rather than going for a cheap and lousy brokerage house giving all kinds of leverages to the clients. What you may not save in the interest part, much more than that you can loose in the MTM and Margin calls requirement. Remember, the more regulations and restrictions you face, the better you are shielded when you are hit by a big loss.

Yesterday I saw on CNBC webcast, people fought with the employees at brokerage firms due to their trades being cut-off for margin calls and MTM requirements. They were forced to book losses. Another piece of news took to the jewelry stores or pawn brokers. People were found selling their gold ornaments and gold bars or keeping them on mortgage to get some cash to suffice for the margin requirements. Ignorance, lack of knowledge about regulations (set by market as well as the brokers), and taking things for granted will force you to learn the things in a costly way. Learn it before jumping in and play it safe!

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Should you invest in Infosys now?- 1

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Yesterday there was a mayhem in the market. Going by Nifty statistics, in last few trading sessions, it has come down from 6200 levels to 5200 (even more on intraday basis) – a clear cut loss of more than 20% within just 6-7 trading sessions. Out of the 50 stocks listed in Nifty, not a single one was positive in terms of returns over previous day’s closing stock price.

Infosys or IT companies used to be the flavour of the trading day just one year back. Long term investments, mid term investments, short terms intraday trading, not a single piece or aspect of trading was assumed to be completed without a mention or recommendation of Infosys. Every single trade analyst or so called market experts and advisors would shout at the top of their voice – “Buy Stocks –Buy Infosys –Keep on buying shares of this company”.

After Infosys declared dividend, one of the stock holders was cited saying as “Only the divine Lord Tirupati Balaji gives, and after the divine God Tirupati Balaji, it is only Infosys that gives”.

I watch the webcast of CNBC. Today, not a single “Market Expert” talks about infosys. Yesterday’s closing price of Infosys was 1391. Few months back it used to smoothly sail at 2200-2300 range. A clear cut loss of 33% within less than a year! Other biggies like Wipro and TCS are not far behind.

Let’s look at what has happened:

In the last one year the dollar-rupee forex exchange rate or forex currency rate has become weaker by around 10%-12%. It used to be at 44-45 levels, today it is at 39-40 levels. A loss of 10 to 12% in forex currency trading terms.

However, the other currencies like Euro and Australian Dollars are still at almost the same levels when it comes to comparison with the rupee, in terms of forex exchange rates. The CFO of IT companies proudly claimed that they are diversifying their client base and are now spread across other locations in Europe, Canada and Australia, so that they are not hit by the dollar weakening, or atleast they don’t have that much exposure to dollar.

Another reason that is quoted is that they are using hedging for forex currency trading, so that way they were able to beat the street expectations. That is very true. But something worth giving a thought is why a mere 10%-12% decline in dollar value is translating to 33% decline in stock price of a dollar dependent company?

Continue to Part 2: Should you invest in the markets now?

Should you invest in stock market now?

This is part 2 of the article: Should you invest in Infosys now?- 1. Please read the first part before continuing with this one.

They say that they are looking at other locations and clients and are dealing in other currencies like Euro, still the sharp decline is not justified. If other currencies are stable, why is it that the stock prices are hammered to such a level. If it is due to dollar forex rate weakening, then why a 10-12% decline in dollar translating into 33% decline in stock price of a company that was supposed to be called the future of India.

Then comes the hedging part: Hedging against forex currency price fluctuations. You expect to receive 1 million dollar in 3 months time. The present price of dollar rupee forex rate is 40. Can you find a bank or a counterparty which can give you a forex rate of 44 in 3 months time? Can a counterparty be stupid enough to get into a futures contract that gives you a 10% hike in the future price as compared to the current price of 39-40?

The fact is that in the last few quarters, there was a lot of ambiguity about the dollar rupee value. It was expected that US economy will not go into recession, it was expected that the subprime mortgage crisis will be overcome, it was expected that dollar will again go back to its 43-45 levels, if not, then it was expected that RBI would make policy changes to keep the dollar-Re forex currency exchange rate to be sufficient enough. Hence, there were some banks and counterparties which were of the view that they will benefit from the dollar increase. Unfortunately, it did not happen. Things went from bad to worse.

However, in the speculation process, the IT companies managed to find the counterparties or banks for their future contracts, so as to hedge their positions at high future prices. Unfortunately, the same counterparties and banks have now arisen to the real situation. They are now observing that the dollar is no way going to go up and the currency trading rate may not increase further.

Now this is forcing the IT companies to get into the futures contract with lower future prices. The simple reason is that there are no counterparties willing to offer higher future prices. Hence, no hedging with high future prices and overall, the IT stocks are being hit.

Now comes the big question. In this situation, where are IT stocks are at the lowest of the lows, should you buy them?

They hedge, they diversify, they spread their client base to different currencies and different geographical locations – yet they are being hammered, mercilessly. Has Infosys lost its so called FUNDAMENTALS? Is it now operating on a different model? Has it now changed its attitude towards clients and changed its core values? No, nothing has changed fundamentally. Yet the stock price is sinking. Ask an investor who may have bought Infosys at 2200 levels. What is he upto now?

Irrespective of the risk you can take, irrespective of the fact that you are willing to loose your entire capital in the stock market trading, the market has its own language, direction and performance. The direction is RANDOM. If anyone can identify a pattern in the market WITH CERTAINTY, he should keep quiet and keep making money silently for himself.

The world is becoming more and more interdependent. What happens in one remote part of the world affects the entire globe. Let the analysts say what they wish. Let the markets trade the way they want. You must take the decision and you must know how to make the calculations. At the time of writing this sentence, the market has fallen further 12.5% to the levels of 4500. The trading has been suspended – let’s hope things come to normalcy in a few trading sessions. It is the perfect time to buy ETFs. Traders like Andy willing to beat the bank rate can give a trading shot by buying at these levels. All the best

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25% Price band limit on listing IPO

Some good (or rather bad) news from SEBI for the hungry IPO investors looking to make a quick buck in the IPO application process and making good profit on the very first listing day:

SEBI is proposing to place an UPPER LIMIT on the maximum price a newly floated company can hit on the very first day of listing. The upper limit proposed is 25%

This is just a proposal, what may be implemented and when, is a different issue altogether.
Then, another restriction is that this is proposed only for the relatively smaller companies, not the bigger ones. The proposal from SEBI is for the companies which come out with an IPO which has a total IPO value of less than 250 crores.

The reasoning:
Sebi says that in the past there have been many cases where the listing day price of relatively smaller company IPOs was attempted to be manipulated by a large number of brokers, who made an enormous profit on the listing day, and later eloped.

As an example, in April 2007, SEBI had banned seven brokerage houses from debut trading in newly-listed shares for their alleged role in huge price movements recorded in stocks like Cambridge Technology, Mindtree and Pyramid Saimira Theatre on their first day of trading. Some of these stocks witnessed unprecedented jump in their share prices immediately after the listing.

On one hand, this restriction would mean that for a IPO that is offering shares at 100 Rs. and the entire offer size is less than 250 Crores, then the maximum hike the listing day price can hit is 125 (i.e. 25% higher only). Sebi says that the proposal is justified because it will give enough time for the market to come to its senses regarding the justified price of the newly listed company, and will shield the smaller investors who may end up buying the shares of a newly listed company at a very high price on the listing day, as they may expect further rise in prices in the coming day – all due to euphoria.

However, market participants and analysts differ in view. They say that IPO process runs for a couple of days. People are given chance to bid, that way they themselves take the decision about the price of the share. Secondly, why only the small companies are being hit by this proposal? Why to leave out the biggies, ultimately following the principle of making rich richer and poor poorer.

Sebi’s offer seems justified to me. The euphoria that goes on on the listing day is no good.
Sebi’s proposal is justified on the point that the smaller issue prices are easier to manipulate – especially on the listing day. Hence, at the end of the day, it is the retail investor whose fingers get burnt. Secondly, the proposal is not about IPO price decisions. It is more about controlling the euphoria in the stock market while people buy stocks on the very first day, thinking that it will rise further.

I remember the case of Biocon IPO, which went up on first 1 or 2 days and then went down significantly. It was the retail investors like me who applied for the IPO, did not get any shares, and bought high priced shares on the listing day with an expectation to make a good buck within a few days, but ended up loosing money.

If the stock is good to double or quadruple the price on the listing day itself, then it should not matter if it takes 4 days to reach the double price (4 days * 25% each day) or 8 days to quadruple. I agree with SEBI that instead of letting the price determination done on the very first day, let it be spread over a few days. That will give more stability and control on the prices and things can be easy to regulate.

However, if this proposal is implemented, then it will significantly hit the people who take loans to apply for IPOs. As the listing price will be limited, even if the IPO is good, it will take enough days for them to realize their desired profits - covering the interest of the loan and their expected profits above that interest. Sebi is currently inviting proposals and suggestions from various market participant. Let’s see what lies ahead in the future.

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