what are commodities and What is Commodity Trading?

What is Commodity Trading? Basics of Commodities in India!

Understanding the basics of Commodity Trading in India: Commodity trading had been around in India for hundreds of years. But as history took its course we were victims of invasions, government policies, and their amendments made commodity trading a rarity even though it was flourishing in other countries.

Today with favorable laws being implemented commodity trading is once again being accepted even in rural India. And with the strengthening of our stock markets commodity trading has regained its impotence. Today we try and understand what commodity trading is and the different means through which they can be accessed. 

what is commodity trading

What is a commodity?

Commodities in simple terms are raw materials or agricultural products that can be bought and sold. These are basic goods in commerce used as building blocks of the global economy. One very important characteristic of a commodity is that its quality may differ slightly but is essentially uniform across producers. These commodities are asset classes just like bonds and apart from being exchanged for money in real life they are also traded on dedicated exchanges throughout the world.

Classification of Commodities.

Commodities are classified into 4 broad categories. 

  • Agricultural – Corn, beans, rice, wheat, cotton, etc.
  • Energy – Crude Oil, Coal, and other fossil fuels
  • Metals – Silver, Gold, Platinum, Copper.
  • Livestock and Meat – Eggs, Pork Cattle.

Going through the examples above the characteristics of commodities being uniform becomes clearer. The market treats all goods of the same type as equals regardless of who produced them as long as they meet certain quality requirements. This characteristic is known as fungibility regardless of who mined, farmed or produced. 

Take the example of cold drinks. The demand for a Coke differs from that for Pepsi. This is because the brand too comes into play. Even if one of them loses their quality it still may be favored due to brand loyalty. Let us compare this with a commodity. Never would you have heard that “ the crude oil this year sourced from the US is bad unlike that from Saudi Arabia the previous year”. Despite them having some differentiating properties. Karl Marx describes it best:

commodity quote

What is commodity trading?

Now that we have gone through what commodities are let us have a look at how commodity trading comes into the picture.

1. Commodity trading by buyers and sellers

Commodity trading came into play as a means to protect the buyers and producers from price volatility that takes place. Take a farmer for eg. Inorder to protect himself from future price fluctuations what a farmer can do is enter into a futures contract. A futures contract is a legal agreement to buy or sell a commodity at a predetermined price at a specified time in the future. The buyer of the futures contract has the obligation to buy and receive the underlying commodity when the contract expires. The seller here takes on the obligation to provide and deliver the underlying commodity at the contract expiration date. 

This instrument is useful to farmers as he already knows the production cost of his soft commodity is going to take. Adding the required percentage of profit he can enter into the future contract with the buyer i.e. regardless of what the price in the market 6 months hence he will sell his commodity at Rs.50/kg. The buyer in this contract agrees to buy the commodity at Rs. 50/kg. regardless of the price 6 months hence. The farmer protects himself from losses of price falls but in return also forgoes the additional profit he may make from an increase in price in exchange for guaranteed cash flow.

Such future contracts are available for all categories of commodities. These contracts are also widely used in the airline sector when it comes to fuel. This is done in order to avoid market volatility of crude oil and gasoline.

2. Commodity Speculators

Another type of commodity trader is the speculator. The speculator enters the future contract but never intends to make or take delivery of the actual commodity when the futures contract expires. These investors participate in order to profit from the volatile price movements. Investors here close out their positions before the contract is due in order to avoid making or taking actual delivery of the commodity.

These investors enter into the future contracts generally to diversify their portfolio beyond traditional securities and hedge against inflation. This is because the prices of stocks generally move in the opposite direction o commodities.

In times of inflation the prices of commodities increases. This is because the demand for goods and services increases due to investors flocking to invest in commodities for protection. With the increase in demand, the price of goods and services rises as commodities are what is used to produce these goods and services, their price rises too. This makes commodities a good asset for hedging. Over the years this has also led to various assets traded in the financial markets. These include currencies and stock market indices.

Speculative Trading in Commodities for profit

It goes without saying that commodities are extremely risky because of the uncertainties associated with it. One cannot predict weather patterns, natural calamities disasters, epidemics that may occur. But then why do speculative investors still indulge in commodities if not for hedging and diversification? This is because of the huge potential for profits. Due to the high levels of leverage that exists in a future contract small price movements can result in large returns or losses.

In order to reduce this risk, most futures contracts also provide ‘options’. In the case of options, one has the right to follow through on the transaction when the contract expires. Unlike a future where you are obligated. Hence if the price does not move in the direction that you predicted you would have limited your loss to the cost of the option you have purchased. To understand better we can look at options as placing a deposit on a purchase instead of outrightly purchasing. In case things go sideways the maximum you stand to lose is your deposit.

Commodity trading in India

Commodities just like other asset classes are bought and sold on an exchange. These exchanges are called commodity exchanges and they tend to be specialized for such securities.

The commodity exchanges present in India are:

  1. Multi Commodity Exchange – MCX
  2. National Commodity and Derivatives Exchange – NCDEX
  3. National Multi Commodity Exchange – NMCE
  4. Indian Commodity Exchange – ICEX
  5. Ace Derivatives Exchange – ACE
  6. The Universal Commodity Exchange – UCX

The trading of commodities in the commodity market is regulated by SEBI and facilitated by MCX. The MCX provides a platform for trading in stocks. More than 100 commodities are traded in the Indian Commodity futures markets. Some of the top traded commodities are Gold, Crude oil, Copper cathode, Silver, Zinc, Nickel, Natural Gas, and Farm Commodities.

Also read: How to Trade Commodities in India? Step-by-Step Guide for Beginners!

Other Commodity investment options for individual investors.

Using futures and options to invest in commodities is often challenging for amateur investors. They may prove to be extremely risky for investors who do not have a background or understand how prices or commodities will likely move in the future. Hence investors can also opt for indirect exposure when it comes to commodities in the following ways.

1. Stocks

Investors interested in entering the market for a particular commodity can do so by investing in stocks related to that commodity. For eg. If one is looking to use gold in order to hedge, diversify or make a profit he can go ahead and invest in the stock of a jewelry company, mining company, or any firm that deals in bullion. The advantage that a new investor receives here is that of public information related to the company which will help him make decisions and predictions. The disadvantage that comes along with investing in commodities is that the price of the stock is not purely based on the commodity but is also influences by company-related matters.

2. ETF’s and ETN’s

Investors can make use of ETF’s and ETN’s in order to take advantage of the price fluctuations. Using futures contracts, commodity ETFs track the price of a particular commodity or group of commodities that comprise an index. The price of these indexes is tracked by these ETF’s. In order to simulate the fluctuations in price or commodity index supported by the issuer, ETN’s are dedicated. ETN’s are unsecured debts designed to mimic the price fluctuations of the commodity.

3. Mutual and Index Funds

Mutual funds at times invest directly in commodity-related industries like Energy, Food processing, metals, and mining giving exposure to the portfolio. There also exists a small number of commodity index mutual funds that invest in futures contracts and commodity-linked derivative instruments providing investors with greater exposure to commodity prices.

4. Physical investment in commodities.

Another method through which investors receive exposure to commodities is by investing directly in them i.e. by purchasing physical raw commodities. This is more common with metals as other commodities require a purchase in huge quantities to have any useful impact. We often see people buy gold in times of crisis. This may be done through the purchase of gold biscuits.

Closing Thoughts

Commodity trading provides investors with a vast number of benefits. These benefits range from the increased potential of returns, diversification, and a potential hedge against inflation.

But there also exist a number of disadvantages that mainly revolve around the volatile and speculative nature of the security. The increased opportunities in these markets come with increased risks.  

October 21, 2020 Beginner's guide, Trading No comments yet
4 Best Intraday Trading Strategies for Beginners cover

4 Best Intraday Trading Strategies for Beginners!!

A Guide on Best Intraday Trading Strategies for Beginners: There are hundreds of Intraday Trading Strategies for traders apply to make money in the stock market. However, not all are simple enough for beginners to implement and make money.

In this article, we are going to cover four of the best Intraday Trading Strategies for beginners. Let’s get started.

What is Intraday Trading?

As the name would suggest, the Intraday is that event which completes within the same day. Similarly, Intraday trading is that form of trading, in which the buying and selling of the shares or assets are completed within the same trading session. Intraday trading is one of the most sought after (and one with maximum volume) form trading amongst traders in the market. With proper analysis and execution, it has the potential of generating very handsome returns.

The General MYTH with Intraday Trading

It is a general Myth among many, that Intraday trading is all about buying and selling throughout the day. And one has to be on the go, all the time. No doubt, that intraday trading requires more focus and attention than investing or delivery based trading. But the level of planning which goes about in finding the stock or move for intraday trading is second to none.

About 85-90 % of day traders’ time goes into analysis and planning of trade opportunity, and the rest 10-15% of the time goes in trade execution.

Therefore, the whole world of day trading is entirely based on proper planning and execution. It has the potential of making 20-30% returns on the investment amount, but intraday trading can never be a part-time avenue of making quick money. One has to devote a lot of time and to be a successful intraday trader, it is advised to be in front of your trading screen throughout the market trading hours.

Intraday trading Factors

Choosing the shares for intraday trading is no Rocket Science. One needs to keep certain parameters, which if met, can a share/stock be chosen for Intraday trading. Following are some of the parameters which should be given due importance while choosing stocks for intraday trading:

  • Liquidity: This is the single most important factor in choosing shares for intraday trading. Illiquid shares/assets should be avoided. Even while trading commodities for Intraday trades, liquid commodities like Gold, Silver, crude oil, etc. should be traded.
  • Volatility: As the sole purpose of Intraday trading is to earn quick returns. And for this objective to be fulfilled, the stocks need to have a broader range i.e., high beta stocks should always be preferred while doing intraday trading.
  • Volume: This tells us about the quantity of stocks that have traded within the specified time frame. The higher the volume, it generally means that there is more interest in that particular share that day. And any move which happens in the share price, with volume in the market is more trusted than the moves with low volume.
  • Consistency: It is a general rule while doing intraday trading that one should be consistent in his/her approach while doing trading. One should not let emotions take over while doing intraday trading. The decisions should be based on logic, maths, and price action.
  • Patience: This is very important is all forms of trading, let alone intraday trading. One should not expect wonder trades (i.e., the hope of making all the money in one trade). One needs to bide his time and grind it out if one expects to have a long and fruitful trading career.

Intraday Trading Strategies for Beginners

Now, having understood the basics of Intraday trading the various facets which should be kept in while choosing the shares to intraday trade. One thing which should always be kept in mind that these strategies do not guarantee to make money. Let us try and understand a few intraday trading strategies:

Intraday Trading Strategy 1: Momentum Strategy

As the name suggests, the whole premise of this strategy is to catch the momentum in the market. It is imperative to track these stocks before the actual momentum starts in the market. If spotted at the right time, these stocks have the potential of generating returns of 20-30% within one session.

These movements could be because of Fundamental (Overnight news, Quarterly earnings, some big order procurement, new projects, etc.) and Technical (breakout) factors.

Intraday trading strategy 1 - Momentum Strategy

Img 1: 15 mins Chart of ESCORTS (source: www.zerodha.com)

Now, if you look at the picture above, the market opened near the previous day high, but the momentum soon fizzled out and we saw selling pressure coming in the market. And we saw a series of lower highs and lower lows in the market. And it ended the day near the lows of the day. So, this is a classic case of momentum intraday trade in the market.

Intraday Trading Strategy 2: Breakout Strategy

As the name would suggest, this strategy focuses on finding the trade which is going to trade in a new territory or has broken out of its usual territory. One thing should be kept in mind that the breakout has happened with volume (thin volume breakouts generally tend to be false breakouts).

If the breakout is on the upside, then we go long and if the breakout is on the downside, then we go short. One should always mark the supports and resistances, so as to have right stop losses for the breakout trades.

Intraday trading strategy 2 - Breakout Strategy

Image 2: 15 Mins chart of Maruti (source: www.zerodha.com)

Now, if you carefully look at the image above, we see a classical breakout trade. These trades when spotted, have the potential of generating significant returns. The Stop loss for this kind of trades is always the low of the range prior to the breakout.

Intraday Trading Strategy 3: Scalping Strategy

This strategy is the most beneficial strategy for a day trader. The whole idea to constantly keep scalping in the market for small profits. This strategy is a very common method of trading while trading commodities. This kind of trading is generally done by high-frequency traders in the market. The overall technical and fundamental setup does not have a major bearing on this trade. Price action plays a very important role while selecting the trade for scalping.

The stocks or commodities chosen for purpose of scalping should be liquid and volatile. And one important thing to always keep in mind is to have a stop loss for every trade. One should not let the position drift away. The scalping strategy is best suited when the market is stuck in a tight range. Liquidity and tighter range are two friends of scalpers.

Intraday Trading Strategy 3: Scalping Strategy

Img 3: 15 Mins chart of TCS (source: www.zerodha.com)

If we look at the image above, the market is stuck in a tight range and it provides a great opportunity for scalpers.

Intraday Trading Strategy 4: Moving Average Strategy

This Strategy can also be called as the moving average crossover strategy. This is generally a trend reversal strategy in the market.

When the price of the underlying asset goes above or below the moving average, it generally signals a change of momentum in the market. When the crossover happens from bottom to top, it is called Bullish crossover and when the crossover happens from top to bottom, it is called a Bearish crossover.

Intraday Trading Strategy 4: Moving Average Strategy

Image 4: 30 Mins chart of ICICI Bank (source: www.zerodha.com)

The image above is a 30 minutes chart of ICICI Bank. We see an obvious weakness in the market when its price is trading below the two moving averages (13 EMA and 34 EMA). And when the market starts trading over the moving average, the dips are being bought back in the market.

Therefore, when the market is trading over MA, it is advised to go long and when the market is trading below MA, it is recommended to initiate a sell position. For a long position, the stop loss is below the Moving Averages (MA) and for a short position, the stop loss is above the MA’s.

Also read: How to do Intraday Trading for Beginners In India?

Conclusion

In this article, we covered the four best Intraday Trading Strategies for beginners. Here are a few key takeaways from this post:

  • Intraday trades are those trades for which the activity of buying and selling is completed within the same day.
  • About 90% of the time in intraday Trading goes for planning and the remaining 10% goes in execution.
  • Liquidity, Volatility, Volume, Patience, and Consistency are the key ingredients of Intraday trading.
  • One has to devote complete time and dedication if one wants to be a successful intraday trader.
  • Traders need to always have good Risk management. Always place stop loss for all orders while taking intraday trades.

That’s all for this post on Intraday Trading Strategies for beginners. I hope it was useful for you. Happy Trading and Money Making.

October 13, 2020 Technical Analysis, Trading 6 comments
How to Trade Commodities in India? Step-by-Step Guide for Beginners!

How to Trade Commodities in India? Step-by-Step Guide for Beginners!

A Beginner’s Guide on How to Trade Commodities in India: In olden times, commodities like grains, cotton, oil, cattle, etc were heavily traded among the people and communities to meet their requirements. You might have seen movies of people carrying goods on the top of Camels to trade with others. Not much has still changed even in the 21st century. Even now, people and countries trade these items. And these days, anyone can trade in commodities to make substantial profits, apart from trading in traditional stocks and other derivatives instruments.

In this article, we are going to discuss the step-by-step process of how to trade commodities in India. Here, we’ll first cover the basics like what is a commodity, who are commodity buyers and sellers, the types of commodities traded in India, etc. Later, we’ll get into the technicalities like margin required and how exactly to trade in commodities in India. Let’s get started.

What is a Commodity?

In simplest words, a commodity is any raw material that has a physical form and which can be bought or sold and are interchangeable in nature with another similar commodity.  Some of the traditional examples of commodities include Grains, Wheat, corn, soybeans, or other foodstuffs, Cattle or other stock animals, Cotton, oil, gold, etc.

Investing/trading in commodities is a good way to diversify your portfolio with assets other than stocks, gold, etc. Investors or Traders can buy commodity directly in the spot (cash) market or via derivatives market by trading in Futures and Options.

Types of Commodity traders

There are generally two types of commodity traders – Hedgers and Speculators.

— Hedgers are buyers or producers of commodities that use commodities futures contracts for hedging purposes. These traders take the delivery position of the original commodity when the futures contract expires.

— The second types of trader are the Speculators who enter the market for the sole purpose of profiting from the price movement or volatility of commodity futures contract.

Commodity trading exchanges in India

In India, the commodities are traded via five exchanges. Traders are allowed to trade commodity derivative contracts from any of the following exchanges:

  • National Stock Exchange of India Limited (NSE)
  • Bombay Stock Exchange (BSE)
  • Multi Commodity Exchange of India Limited (MCX)
  • National Commodity and Derivatives Exchange Limited (NCDEX)
  • Indian Commodity Exchange Limited (ICX).

An interesting point to mention here is is that NSE and BSE launched trading in commodities only in 2018. Further, the commodities market is regulated by SEBI. (Earlier it was regulated by Forwards Markets Commission (FMC), which was later merged with the SEBI in 2015). All the commodities in India are traded via the online portals.

Margin required to trade Commodity in India

Commodities are products that require higher-margin, compared to any other product like equity futures or options. Different products under the preview of a commodity require a different amount of margins.

Here is a list of the most actively traded commodity along with the margin required for Normal (or delivery) mode and MIS (Margin Intraday Square off) mode.

Margin required to trade Commodity in India Margin required to trade Commodity in India

Pic: Intraday and Normal margin for various commodities (source: www.zerodha.com)

If we were to carefully look at the picture above, for different commodities the margin varies with the change in the price of the commodity futures contract. The images above clearly give information about the Normal margin, the Intraday margin, and the price levels for which the margins are calculated.

List of commodities traded in India

The commodity sector in India has been divided into five sectors namely – Agriculture, Metals and Materials, Precious metals and materials, Energy and, Services. These sectors are again classified and divided into various constituents.

(Image: List of various commodity sectors and its constituents (source: www.indiainfoline.com))

Tips before Entering the Commodity Trading

Here are a few factors to be kept in mind before deciding to enter the commodity trading:

  • Commodity trading is one the fastest growing product, for trading in India.
  • Although risky by nature, but if done with careful analysis and complete understanding, commodity trading adds the required pinch of diversification to the portfolio.
  • The margin required to trade commodities is slightly on the higher side.
  • The amount of margin required to trade the commodity keeps on changing depending upon changes in the price of futures contact of those commodities.

How to Trade Commodities in India? Step-by-Step Explanation

By now, you would have understood what commodity trading is, its various nuances, the margin requirements, the various players in commodity trading, and the different products. Let us now try and understand as to how does one start commodity trading in India.

For the sake of explanation, we have used Zerodha’s web (as they are the discount brokers with the highest customer base), to explain the steps.

Step 1: You need to have a trading account with one of the brokers that allow commodity trading (for example, Zerodha, Angel broking, 5Paisa, etc.). If you don’t have one, here’s an article on the best discount brokers in India, so that you can pick the one that suits you the best.

After opening the trading account, a separate form has to be filled, which activates the commodity trading along with equity trading in the same account. The margin account for equity trading and Commodity trading is different. The margin of Equity cannot be used for Commodity trading and vice-versa.

Step 2: We need to have a sufficient margin balance in our commodity trading account. Margin is the minimum amount of money required to trade. The amount of margin required varies from a Normal trade to a MIS (Margin Intraday Square off) trade.

The main difference between these two is that in case of Normal trade, the position can be carried over to the next day. However, in case of a MIS trade, the position will automatically get squared off before the end of the day.

The amount of margin required is the least for the Covered order. The covered order is that order for which the stop loss is pre-decided. And, hence the margin is least.

oil trading zerodha futures margin

Now, if we carefully look at all the images above, the first image shows the amount margin required for Crude oil October futures contract in Intraday MIS mode (Margin = Rs. 2,00,410). The second image shows the margin required when we trade NRML (Normal) contract (Margin = Rs. 4,00,882). And the third image shows the amount of margin required for a covered order (Margin = Rs. 88,026).

Step 3: The next important step that we need to consider, is to select the commodities, which we wish to trade. And upon selecting the commodities, it is advised to have all the commodities for various expiries pinned to the watch list.

Watch list of the commodities - How to Trade Commodities in India(Image: Watch list of the commodities (source: www.zerodha.com))

Step 4: After Shortlisting the commodities to be traded, the next step is to place the order. After selecting the contract, we just need to punch in the trade on the ticket.

Now, we have two ways to take the trade – Limit order & Market order. If we place the market then we end up buying or selling at the existing market price. But if we place a limit order then we can choose the price at which we want to place the order.

limit and market order commodity trading

Step 5: The next step while trading options is to check in the order book if the order has been placed.  We can do that by simply clicking on the orders tab, and we can see the list of all the order which have been placed or canceled or executed.

Step 6: The last, but the most important step is the continuous monitoring of the positions. We should always be on the constant lookout for opportunities to trade and always have a stop loss for the existing trade.

Conclusion

In this article, we discussed the step-by-step procedure on how to trade Commodities in India. Here are a few key takeaways from this post:

  • Commodity trading is done by both hedgers and speculators.
  • It is one of the most common form of portfolio diversification method used by investors or traders.
  • The amount of margin required to trade is slightly on the higher side, so the trades must be entered after doing a careful analysis of the technical and fundamental picture.
  • We can do both Intraday (MIS) trading and NRML (delivery based trading) while trading commodities.
  • It is always advised to have proper risk management (stop loss and target) for all the trades

That’s all for this post on how to trade Commodities in India for beginners. I hope it was useful to you. If you still have any queries to related to this topic, feel free to comment below. I’ll be happy to help. Happy Trading and Money Making!!

October 9, 2020 Beginner's guide, Trading 1 comment
How to do Intraday Trading for Beginners In India cover

How to do Intraday Trading for Beginners In India?

A Definite Guide to starting Intraday Trading for Beginners in India: If you want to make a livelihood from the stock market, the most popular approach is day trading or Intraday trading. Unlike investing, where you have to wait months and years to book the profits, here gains can be made within hours and sometimes even within minutes. Moreover, with the advancement of the internet and technology, day trading can be learned and started even from your phone and that too comfortably sitting on your sofa at home.

In this article, we’ll cover the step-by-step procedure to start Intraday trading for beginners in India. Here, we’ll also discuss what is intraday trading, who are intraday traders, thumb rules for day trading, and more. Let’s get started.

What is Intraday Trading?

As the name would suggest, Intraday trading is a type of trading where both the buying and selling activity in a stock (or an asset) is completed the same day i.e. in the same trading session.

Here, the trading is not done with the objective of holding or carrying a position over the next day or weeks. The main objective while intraday trading is to earn quick profits and exit your position as soon as possible. Further, the holding time for assets can vary between a few minutes to some hours.

In addition, generally, Intraday trading is done for high beta stocks i.e., the stocks that have high fluctuations in their prices on day to day basis. If the prices do not move at all in the entire day, there won’t be any opportunity for the intraday traders to make money from that stock.

— Who are Intraday Traders?

There is a proven theory on the market- “The more time you spend in the market, the more rewarding it is”. Intraday trading is generally done by traders who are very active participants in the market i.e., they have an eye on the market in every passing second.

One thing which one must keep in mind while doing intraday trading is that one should not become too greedy while taking intraday trades. If we have strict profit targets and stop-loss levels, then it goes a long way in selecting the right trades for intraday trading. Stop-loss is an advance order to sell the shares if the share price reaches a particular price point. Therefore, it helps to automate the selling process in different market scenarios.

For example, suppose I am doing intraday trading for shares of Reliance Industries Limited (RIL). The current price per share is Rs. 2200. Therefore, if I buy one share at CMP and have a target price of 2225 and stop-loss at 2185, then by rule we should stick to those levels and not increase our profit targets or trail our stop losses, as the market starts to move.

— Some Thumb Rules in Intraday Trading for Beginners

Here are some of the best rules that beginners must follow while doing Intraday trading to maximize profits and limit the losses:

  • Always chose liquid stocks for intraday trading that can easily be entered or exited.
  • Have entry and exit points in mind before entering the trade.
  • Always have a stop loss for trades, as the position might drift away and huge losses might be incurred.
  • It’s important to have a trading mentality and not the mentality of the investor while doing Intraday trading.
  • One should be willing to take multiple trades in the same companies or indices as the market might provide multiple trading opportunities.
  • Always take trades in the direction of the market. Remember “Trend is your friend.”
  • Mean reversion trades are generally not a good strategy for intraday trading.

— What products can be traded intraday?

You can do intraday trading in almost all stocks that are trading in the stock exchanges. You can also trade in Indices.

Further, Intraday trading is done not only in the cash segment but even in the derivatives segment (Futures and Options). Derivate segments are big contributors to the intraday trading market. And the margin required to trade Intraday futures contract is comparatively lesser than that of delivery contracts.

margin for different trades intraday tradingIf we look at the images above, then we see that in the window with the order type selected as MIS Intraday, the amount of margin required is 1/5th of the amount of margin required to trade in overnight (NRML) mode.

How to do Intraday Trading for Beginners In India?

Having understood the basic premise of Intraday trading and its elementary characteristics, the next important point of consideration is how does one go about doing intraday trading in India. Following is a step by step procedure which should explain the complete procedure. For the sake of explanation, we have used Zerodha’s kite trading platform to explain the steps as they are the discount brokers with the highest customer base.

Step 1: You need to have a trading account with one of the brokers (For example, Zerodha, Angel broking, 5Paisa, etc.). If you don’t have one, here’s an article on the best discount brokers in India, so that you can pick the one that suits you the best. Anyways, the steps required for Intrady trading are almost the same for any othe broker that you choose.

Step 2: You need to have a sufficient margin balance in your trading account. Margin is the minimum amount of money required to trade. The amount of margin required varies from a regular trade to a MIS (Margin Intraday Square off). The main difference between these two is that, in case of regular trade, the position can be carried over to the next day but in case of a MIS trade, the position will automatically get squared off before the end of the day.

The Margin allowed to trade for MIS trades varies anywhere between 4x to 20x depending on the nature of the stock and its expected volatility. Therefore, Margin trading gives us the power of leveraging.

margins in intraday trading

Step 3: The next important step which we need to consider is to select the share/asset we wish to intraday trade for that particular day and add those shares to one separate watch list. This step is of prime importance because it is practically not possible to keep an eye on all the shares listed on NSE and BSE.

However, having a watch list of the selected stocks gives us an opportunity to moderate and buy the stocks and take maximum advantage of all the intra-day trading opportunities.

intraday trading for beginners

Therefore, if we carefully look at the image above, it can be seen that it becomes very easy to keep a watch on the selected shares if we make a separate watch list of all the shares that we wish to intraday trade.

Step 4: The next step in this process is to select the share in which you wish to trade. And after selecting the share, we just need to punch in the trade on the ticket.

Now, we have two ways to take the trade – Limit order & Market order. If we place the market then we end up buying or selling at the existing market price. On the other hand, if we place a limit order then we can choose the price at which we want to place the order.

And the next thing to choose is the kind of order i.e., either normal order or MIS order. If we choose the limit order, then the margin required is exactly the same as the current value of the stock. But if we choose MIS order, then the margin required to trade varies anything between 5% to 20% of the current stock price.

Intraday trading for beginners

Now, if we carefully look at the image above, we see that in the window we have chosen the MIS Intraday option and hence the margin required to trade 7 shares of Marico is comparatively lesser than the actual trading price of one share.

Step 5: The next step while trading options is to check in the order book if the order has been placed.  We can do that by simply clicking on the orders tab and we can see the list of all the order which have been placed or canceled or executed.

Step 6: The last, but the most important step in Intraday trading is the continuous monitoring of the positions. We should always be on the constant lookout for opportunities to trade and always have a stop loss for the existing trade. If we follow these rules, then we always have a better chance of having a successful and rewarding trading career.

Also read: 4 Best Intraday Trading Strategies for Beginners!!

Closing Thoughts

In this article, we discussed the exact steps to start Intraday Trading for Beginners in India. To conclude, here are a few takeaways from this post.

  1. Intraday trading has been on a rise in India. And with the growing education about trading and investing, this trend is likely to grow at a faster pace in the future.
  2. While trading Intraday, buying and selling of the stocks should be completed within the same day.
  3. Intraday trading could be done for both cash stocks and in the derivatives market also.
  4. It is always advised to have proper risk management (stop loss and target) for all the trades
  5. And for a long and rewarding career, it is always advised to have a proper trading rules and discipline.

That’s all for this post on how to do Intraday trading for beginners. If you still have any queries related to this article, feel free to comment below. I’ll be happy to help. Take care and happy trading.

October 7, 2020 Beginner's guide, Trading 7 comments
how to trade options in India 2020

How to Trade Options In India? Step-by-Step Guide!

A Beginner’s Guide on How to Trade Options in India: Options Trading has been quite popular in India in recent days. Because of the pandemic situation, a lot of new and existing traders have been able to understand and learn this new craft of trading (Options Trading).

Nonetheless, as the skills and steps required to trade Options is not taught in schools or academics, most beginners find it difficult to learn how to trade options in India. Therefore today, we are going to explain the step by step process on how to trade options in India in the easiest possible words. Let’s get started.

Brief Overview of Options Trading

The most common concept that most of you must have heard about trading via options is the power to leverage.

Leveraging in terms of Options trading would simply mean, the power to trade at higher capacity then what the direct value of trade would allow. Let us understand this with the help of a simple scenario from day-to-day life.

Say, Ram has a wedding in his house two months down the line and for the purpose of the wedding, he needs to get 100 grams of Gold. The current price of 10gms of Gold is Rs. 50,000. However, Ram is a little skeptical about the volatility in the market and wants to lock in the current price of Gold, to be bought two months down the line. Therefore, with the objective of freezing the price of gold, he visits the jewelry shop and puts forward his proposition of buying the gold at the current price, two months down the line.

Why are Gold prices skyrocketing? Is it a good time to buy?

But looking at the current volatility, the jewelry shop owner is a little skeptical of taking the risk of fixing the price of Gold. Therefore, to incentivize the Jewelry shop, Ram pays him certain token money (say, Rs. 2000 per 10 gm of Gold) to fix the price of Gold. Therefore, the total money paid by Ram to enter the agreement with the jewelry shop owner is Rs. 20,000.

Let’s suppose, if upon expiry (i.e. after two months) if the price of gold goes above Rs 50,000 (per 10 gm), then Ram will exercise his right to buy the gold at Rs. 50,000. However, if the price of gold after two months remains unchanged or goes down, then Ram is not obligated to honor the agreement. He merely stands to lose the token money (Rs. 20000), which he paid to enter into the agreement. And that becomes the income of the Jewelry shop owner.

For example, if the price of Gold were to increase to Rs. 57,000 for 10 grams, then the overall benefit of Ram will be –

= Total gold * (Price after two months – Current price – Premium paid) = 10*10*(57,000-50,000-2,000) = Rs. 50,000.

Now, if I were to relate this example to options, then the Ram is the Option buyer, the Jewelry shop owner is the option seller, Gold is the underlying asset, the current price of gold is the Strike price and token money paid is the option premium.

A similar scenario is also applicable to the stock market. Here, if the option buyer believes that the price of a share may go higher in the future (through his analysis or study), he/she may pay a premium to the options seller to enter in a contract to buy the stocks at the pre-decided value. Further, the premium paid might be an expense, however, if the share price goes way above the pre-decided agreement price, then the option buyer will make profits.

Basic Options Trading Definition

To define in financial terms, Options are a derivative instrument that gives the right to option buyer to buy the underlying asset at a pre-decided price from the option seller, on or before expiry.

However, the option buyer is not obligated to honor the contract upon expiry. He has the right to buy the asset if he chooses to. However, if he does not wants to buy (in case the current price goes below the pre-decided value), he will simply lose the premium paid beforehand.

Nevertheless, the Option seller is obligated to honor the contract as he/she has taken a premium at the starting of the agreement. And the option seller is compensated in the form of this fee (or premium) to give up his right on underlying assets till the expiry of the contract.

Also read: Options Trading 101: The Big Cat of Trading World!

How to Trade Options In India?

Now that you have understood the basics of Options Trading, we’ll be covering how to trade options in India next.  For the sake of reference and explanation, I will be using the trading portal of Zerodha (Kite) in this article, as it is the most commonly used trading platform in India. Following are the step by step procedure to trade options in India.

Step 1: You need to have a trading account with one of the brokers (For example, Zerodha, Angel broking, 5Paisa, etc.). If you don’t have one, here’s an article on the best discount brokers in India so that you can pick the one that suits you the best. The steps to trade options in India are almost same in any trading platform you chose.

Step 2: We need to have a margin in our trading to be able to trade options. Based on the position taken by the investor, the margin requirement varies. Option buyer needs margin to pay for the premium required to trade options. And option seller needs margin as they have to keep certain money with brokers to account for Marked to Market (M2M).

Step 3: Next, we need to understand as to what is our view on the underlying asset. If we have a bullish view, then we can buy a call option (or sell put option) and if we have a bearish view, then we can express the same by either buying a put option (or selling a call option).

“Buying a Call option gives us the right to buy the underlying asset on or before expiry. And Buying a Put option gives us the right to sell the underlying asset on or before expiry”

Step 4: Select the underlying asset you chose to trade and also select the various strike prices that we choose to trade upon. For example, here’s a screenshot from Zerodha Kite where you can choose the asset and strike price.

zerodha kite astrike price

Now, say we are looking to trade Nifty 50 Contract via Option and we have a bullish stance on the market. Therefore, we could trade In the Money Call Option (Nifty 11450 CE), At the Money Call Option (Nifty 11500 CE) or Out of Money Call Option.

An In the Money Option is one that would make money if we were to exercise it right now at current spot levels. An Out of Money option is one that would be worthless if we were to expire it right now and an At the Money option is one that is the closest strike price to the current spot price levels.

It is advised to not to go too out of money while buying an option as the chances of them expiring in the money by expiry, is very less and more often than not, they expire worthlessly.

Step 5: Let’s say, we decide to go ahead and buy an At the Money option. Then, the next step in this process is to place an order to buy the option. We can choose to buy the option at the existing price and we can also choose to place the order at a specified price by placing a limit order.

options trading in zerodha kite

Therefore, if you look at the ticket in the image above, we have two options to buy the contract from i.e. Market or Limit.

If we choose the option of market order then the order is executed at the current market price. And if we choose Limit order, then we can choose the price at which we want to buy the contact. In the image above, the current rice of the contract 11500 call option is 90.65, but the price at which we want to buy the contract is 80.

The total number of shares in one contract of nifty is 75. If the option premium is 60, then the total amount of premium required to buy the contract will be = 75*60 = 4500. And this information is directly available on the ticket shown above.

Step 6: The next step while trading options is to check in the order book if the order has been placed.  We can do that by simply clicking on the orders tab and we can see the list of all the order which have been placed or canceled or executed.

Step 7: The last but the most important step while trading options is to monitor the existing position in the market. It is always advised to have a stop loss for every trade as it will help us in having good risk management and also prolong one’s trading career.

That’s all. This is how you trade options in India. If you still have any doubts, I will strongly recommend you to also watch the below video on how to trade options using Zerodha kite Demo. This video will help you even more to learn the steps for Options trading in India. Watch it Now!!

Closing Thoughts

In this article, we discussed how to trade options in India through a step-by-step guide. Here are the key takeaways from this article:

  • Options are derivative products that derive their value form the value of the underlying asset.
  • Call options give us the right to buy the underlying asset upon expiry. On the other hand, Put options give us the right to sell the underlying asset upon expiry
  • Bullish views can be expressed by either buying a call option or selling a put option.
  • Bearish views can be expressed by wither buying a put option or selling a call option.
  • One can use the Zerodha platform to trade option as it is very user friendly and there is rarely any delay in the order execution.

If you still have any doubts on how to trade options in India, feel free to comment below. I’ll be happy to answer all your queries. Have a great day and happy trading!

October 6, 2020 Options Trading, Trading 1 comment
best stock market apps

7 Best Stock Market Apps that Makes Stock Research 10x Easier.

List of Best Stock Market Apps in India 2020: Now a day, if you are a stock market trader, then it’s essential for you to stay updated with every minute market movements. The modern stock market traders keep tabs on the rising and fall of the stocks on daily basis and sometimes that too hourly. The high-speed internet and handy mobile apps have made the life of traders simple, faster, and efficient. These financial apps help the traders to stay informed and ready all the time.

From checking the real-time streaming market price of the stock, making a virtual portfolio, drawing stocks charts, following market trends to tracking your portfolio; everything is now accessible from your smartphone or tablet.

Therefore, today I am going to present to you the 7 Best Stock Market Apps that will make your stock research easier in India. Moreover, all the apps listed here are free. In short, be with me for the next 5-8 minutes to learn the best stock market apps for Indian stock research.

7 Best Stock Market Apps in India 2020

1. MoneyControl

best stock market apps money control

Play store rating: 4.0/5 Stars (335k Reviews)
Downloads: +10 Million
Available on: Android, IoS, Windows

This is my personal favorite mobile app for stock market news and updates. If you are planning to keep only one stock market app on your smartphone, then I will highly recommend you to have this one. The money control app is simple, yet have tons of information and news.

You can track the latest updates on Indian and Global financial markets on your smartphone with the Moneycontrol App. It covers multiple assets from BSE, NSE, MCX and NCDEX exchanges, so you can track Indices (Sensex & Nifty), Stocks, Futures, Options, Mutual Funds, Commodities and Currencies with ease.

Key Features:

  • Ease of Use: Easy navigation to all financial data, portfolio, watchlist and message board. Single search bar with voice search for stocks, indices, mutual funds, commodities, news, etc
  • Latest Market Data: Latest quotes of stocks, F&O, mutual funds, commodities and currencies from BSE, NSE, MCX, and NCDEX
  • News: All-day coverage of news related to markets, business and economy; plus interviews of senior management
  • Portfolio: Easy monitoring your portfolio across Stocks, Mutual Funds, ULIPs, and Bullion. Timely updates on the performance of your portfolio, and news & alerts relating to stocks you hold
  • Personalized Watchlist: Adding your favorite stocks, mutual funds, commodities, futures, and currencies to monitor. Get timely alerts in form of news and corporate action
  • Message Board: Follow your favorite topics and the top borders to get recommendations. Engage and participate in conversations relating to your portfolio or interest

You can download from google playstore here

(Source: Money Control)

2. Stock Edge

stock edge

Play store rating: 4.3/5 Stars (28k Reviews)
Downloads: +1 Million
Available on: Android, iOS

Stock Edge helps Indian Stock market traders and investors do their own research and make better decisions by providing them with end-of-day analytics and visualizations and alerts.

Key Features

  • Daily Updates Section for filtered major market tracking with News, NSE & BSE Corporate Announcements, Forthcoming events, & Corporate Actions and more.
  • FII/ FPI & DII Cash and Derivatives with strong historical data visualization Daily, Monthly & Yearly.
  • Opportunity Scans: Price Scans, Last week high/ low, Last Month high/ low, 52 weeks high/low, 3 days price behavior, etc
  • Track what Big Indian Investors are doing. Use MyInvestorGroup section to create your own group of Investors with their multiple names/entities etc
  • Sector Research: Sector List, Industries in a sector, Companies in a sector/Industry, Price Movement of last 30 days presented in a simple graph, Gainers, Losers etc.

You can download StockEdge App here!

3. Economic Times(ET) Markets

best stock market apps et market

Play store rating: 4.7/5 Stars (37k Stars)
Downloads: +1 Million
Available on: Android, IoS, Windows

This is another of the best stock market apps. I regularly use ET Markets app for reading market news and updates as they provide the best latest news. Moreover, the stock details feature on this app is always very well organized.

Key Features:

  • To track BSE Sensex, NSE Nifty charts live and get share prices with advanced technical charting.
  • Follow stock quotes real time, get tips on intraday trading, stock futures, commodities, forex market, ETFs on the go.
  • One-stop destination for mutual fund news, NAVs, portfolio updates, fund analysis, SIP calculator
  • Simple swipe to build, manage and access your portfolio; get customized news, analysis and data of the Indian stock market
  • To create your watchlist and track them regularly
  • Get analyses/expert views delivered to you, participate in discussions/conversations through comments

You can download ET Markets app here

4. Tickertape

tickertape app android

Play store rating: 4.2/5 Stars (2.8k reviews)
Downloads: +500k
Available on: Android, IoS,

This app has become quite popular in the best stock market apps in India in recent months and relatively newer when compared to other apps in this list. Tickertape is a modern stock analysis platform that is designed for keeping you at the center of the process. It focuses on salient metric analysis with powerful tools and robust ecosystem support that can be a catalyst to improve your knowledge about the market and their participation in the same.

Key Features:

  • Detailed stock analysis for all the publically listed companies in India.
  • Advanced Screener with 130 filters for you to analyze any Indian stocks.
  • Market mood Index (MMI) which is the market sentiment indicator trusted to correctly time their trades.
  • Peer comparisons, news, and events are presented in such a way that will help in your investment decisions.
  • Finally, Broker Connect to help you log in and connect your broker account to the Tickertape account.

You can download Tickertape app here

5. Yahoo Finance

best stock market apps yahoo finance

Play store rating: 4.2/5 Stars (168k reviews)
Downloads: +5 Million
Available on: Android, IoS, Windows

First of all, after downloading this app, you need to change the settings. In the region settings, select ‘India (English)’ for getting the updates about the Indian stock market. The simple yet dynamic user interface makes it one of the best stock market apps for stock research.

Key Features:

  • Follow the stocks you care about most and get personalized news and alerts.
  • Access real-time stock information and investment updates to stay on top of the market.
  • Add stocks to watchlists to get real-time stock quotes and personalized news
  • Track the performance of your personal portfolio.
  • Find all the financial information you need with sleek, intuitive navigation
  • Go beyond stocks and track currencies, bonds, commodities, equities, world indices, futures, and more
  • Compare stocks with interactive full-screen charts

You can download Yahoo Finance app here!

Also read: 7 Best Mutual Fund Apps for Direct Investment

6. Market Mojo

best stock market apps market mojo

Play store rating: 4.4/5 Stars (1.9k Reviews)
Downloads: +100,000
Available on: Android

This is a new yet powerful app for stock market research. Market Mojo is great for the fundamental analysis of stocks. It offers pre-analyzed information on all stocks, all financials, all news, all price movement, all broker recommendations, all technicals and everything that matters in the Indian stock markets.

Key Features:

  • The Mojo Quality rank reflects the company’s long-term performance vs its peers.
  • Its Valuation determines how the stock is valued at its current price
  • The current financial trend indicates if the company is currently on a growth path and its ability to generate profits.
  • The Portfolio Analyser evaluates every hidden opportunity and risk in the portfolio and tells the investor what he should be doing rather than what he should be just tracking. Every portfolio goes through our test of seven parameters-Returns, Risk, Diversification, Liquidity, Quality, Valuation & Financial Trend

You can download Marketsmojo app here!

7. Investing.com

investing com mobile app

Play store rating: 4.6/5 Stars (355k Reviews)
Downloads: +10 Million Downloads
Available on: Android, iOS

Investing.com is a popular stock market app uses worldwide. Along with Indian stock details, you can also find the details about the world indexes and foreign stock exchanges. It offers a set of financial informational tools covering a wide variety of global and local financial instruments.

Key Features:

  • Live quotes and charts for over 100,000 financial instruments, traded on over 70 global exchanges.
  • Live updates on global economic events customized to your personal interests.
  • Build your own customized watchlist and keep track of stock quotes, commodities, indices, ETFs and bonds – all synced with your Investing.com account.
  • Breaking news, videos, updates and analysis on global financial markets, as well as technology, politics and business.
  • Quick access to all of our world-class tools, including: Economic Calendar, Earnings Calendar, Technical Summary, Currency Converter, Market Quotes, advanced charts and more.

You can download Investing.com app here!

BONUS App to Check: Best Stock Market Apps in India

1. Trade Brains -Learn to Invest

trade brains learning app Feature Page 2

Play store rating: 4.4/5 Stars (344 Reviews)
Available on: Android

Trade brains is a FREE financial education app focused on teaching stock market investing and personal finance to the DIY (do-it-yourself) Investors. Trade Brains app will guide you on how to invest in the Indian stock market with simple, easy-to-understand, and original content.

Key Features:

  • Pocket guide for stock market Investment.
  • LEARN- Step-by-step stock investing lessons.
  • Easy to understand contents on various investment concepts and strategies.
  • Financial Calculators to Simplify your investment planning
  • Stockbrokers section to compare the best Online Stockbrokers in India.
  • Investing quizzes to test your knowledge.

You can DOWNLOAD TradeBrains App here!

2. Intrinsic Value Calculator

trade brains learning app Feature Page 2

Play store rating: 4.0/5 Stars
Available on: Android

Want to find the undervalue valued stocks? Then, download this app!! The intrinsic value calculator App helps the users to calculate the true value of stocks by offering different IV calculators like a Discounted cashflow calculator or DCF Calculator, Return on Equity Valuation or ROE Valuation calculator, Graham number valuation or Graham Calculator, Price to Earnings valuation, PE Valuation calculator and more.

Key Calculators and Features:

  • Discounted Cashflow (DCF) Calculator: DCF analysis is a method of valuing a company using the concepts of the time value of money.
  • Fair Value Calculator: This is a simple discounted model calculator to help you find the fair value of a company using Earnings per share (EPS) forecast. With a few simple values, you can estimate the intrinsic value of a company.
  • Graham Calculator: This calculator is a good tool to find a rough estimate of the intrinsic value. It is simple and very easy to use.
  • Future Value Calculator: This is a basic compound interest calculator. It will give the future value of one time lump-sum investment.

You can DOWNLOAD IV Calculator App here!

That’s all. I hope this blog post ‘7 Best Stock Market Apps that makes Stock Research 10x Easier’ is useful to the readers. If I missed any amazing app that you believe should be mentioned here, feel free to comment below.

Further, please comment below which Stock market app is your favorite? Happy Investing!

October 2, 2020 Investment Basics, Trading 62 comments
What is Open Interest(OI)? How to interpret it in Options Trading?

What is Open Interest (OI)? How to interpret it?

Understanding Open Interest: The term open interest (OI) is one of the most popular terminologies used among stock market traders. In this article, we are going to discuss what exactly is Open Interest. Here, we’ll discuss it’s definition, what does an increase or decrease in open interest implies, the difference between open interest vs volumes, and how one should interpret open interest. Let’s get started.

Open Interest Definition

Open Interest is the total number of the futures contracts (or Options) held by market participants at any given point of time. The total number of open interest contracts keeps on changing with every transaction executed. The open interest is said to be the best indicator to gauge the market sentiment and understand the reliability of the price movements.

Therefore, for an open interest to exist, there must be a buyer for every seller and vise-versa. Here, the relationship between buyer and seller creates one open interest. So, when buyers and sellers come together and initiate one new position, then open interest is increased by one unit. And when the same buyer and seller decrease their position, an open interest is reduced. But, if a buyer and seller passes their position to a new buyer and seller, then the Open interest remains unchanged, its just a transfer of position.

What does the Increase/Decrease in Open Interest Imply?

An increase in Open Interest means that new money is flowing in the market. And it generally indicates that the present trend (Bullish, Bearish, or sideways) is expected to continue.

A decline is an open interest usually implies, that the current trend is expected to halt and we could see a reversal in the market. To know the current open Interest, we just need to know the total from the buyer or seller side and not both.

Difference between Open Interest (OI) and Volumes

There is generally a common misconception that both OI and volumes mean one and the same thing. However, they are two different concepts, giving out two different sets of data. But, both the data can be used in conjuncture. Let us understand the concept of Open Interest with the help of an example.

Say, there are five traders (A, B, C, D, E) trading the Nifty futures contract. Let us understand, as to how their trading has an impact on the open interest and its calculation.

On Monday: ‘A’ buys 20 Nifty futures contract and ‘B’ also buys 10 Nifty futures contract. While ‘C’ sells 30 Nifty futures contract in the market. Therefore, we have a buying activity of 30 futures contracts and a selling activity of 30 futures contracts. Hence, the total Open Interest is 30.

TraderBuy (L = Long)Sell (S = Short)Contract held
A2020L
B1010L
C3030S
D
E
Total30

On Tuesday: C wants to get rid of half the position and ‘D’ comes into the market and takes 15 short contacts from C. Here just the mere transfer of position happened and no new contracts were added. So, the open Interest will still stand at 30.

TraderBuy (L = Long)Sell (S = Short)Contract held
A
B
C1515L
D1515S
E
Total30

On Wednesday: D wants to add 15 more short contracts. And both A & B want to add 5 long contracts each, to their existing long positions. And C wants to exit 5 more short contract position form here existing position of 15 short contracts. Therefore, 10 more long contracts (both A & B) are added in the market. And the contract between C and D would be just a mere transfer of positions. In short, the table on Wednesday would look like this:

TraderBuy (L = Long)Sell (S = Short)Contract held
A55L
B55L
C55L
D1515S
E
Total30

On Thursday: Trader E decides to enter the market. And wants to sell 50 Nifty futures contracts. Therefore, trader D decides to exit his 30 lots position and transfers his position to E. While trader A & B add position so 10 lots each to their existing positions. Overall, 20 new lots get added to the system and the final table at the end of Thursday looks like:

TraderLSContractsLSContractsLSContractsLSContracts
A2020L20L525L1035L
B1010L10L515L1025L
C3030S1515S510S10S
D1515S1530S300
E5050S

If we carefully analyze and look at the table above, it gives us a fair sense that open interest is eventually a zero-sum game. If we add all the longs and subtract them with all the shorts in the market. The end result is eventually zero.

open interest data money controlFigure 1: Open Interest data (Moneycontrol.com)

Now, if we look at the snapshot above (Fig 1), it is the data showing the shares with the highest change in the open interest for the day. With the change in the open interest, the share price has also gone up and which is usually an indication that the buying momentum is expected to continue in these ten shares.

— Open Interest and Volume interpretation

From the discussion above it is clear that OI tells us information about the contract which are open and live in the market. But, the volume gives us information about the number of trades executed in the market.

The volume data is reset at the end of the day and the new counter starts at the beginning of the next day, but the data of the OI is a continuation from the previous day. 10 lots bought and 10 lots amount to 10 volume and 10 OI for the day.

— Interpreting Open Interest

PriceOpen Interest (OI)Expectation from market
IncreaseIncreaseThe buying momentum is most likely expected to continue
DecreaseDecreaseLong unwinding can be seen i.e., buyers are exiting from the market
IncreaseDecreaseShort covering can be seen in the market.
DecreaseIncreaseWe could be a reversal in buying momentum as we can see more shorts than longs in the Market.

Conclusion

In this article, we tried to simplify the concept of open interest in share market and what it interprets. Here are a few of the top takeaways from this post:

  • Open interest gives you information about the total number of contracts which are outstanding in the market.
  • It is an excellent indicator to understand the market sentiment and expected momentum in the market.
  • When the contract switches hands, it’s just a transfer of positions and Open interest does not change.
  • The data of volume refreshes every day but Open Interest is a continuous data.

That’s all for this post. I hope it was useful for you. If you still have any queries related to open interest in the share market, please comment below. I’ll be glad to help you out. Happy trading.

September 2, 2020 Technical Analysis, Trading No comments yet
What Are Futures Contract meaning

What Are Futures Contract? And How are they traded in India?

Understanding Futures Contract and their importance: The Futures and Forward Contracts are a financial instrument that derives their value from the value of the underlying asset. Basically, the futures contract are contracts between buyers and sellers, where the buyer agrees to buy a fixed number of shares from the sellers, at a specified time in the future and at a pre-determined price. The futures contract derive their value directly from the value of the underlying asset. Moreover, they are one of the highest traded derivative instruments in the world.

In this article, we are going to discuss futures contract in detail including the importance of these contracts and how to trade in futures contract in India. Let’s get started.

Difference between Futures contract and Forward contract

There are two major points of difference between Futures and Forward contract. Firstly, futures are a legally binding contract to buy or sell the underlying asset or a specific date. Secondly, the futures contract are done via Futures exchange i.e., they are regulated.

A standardized contract specifies the time, quantity, value, quality, time, and location of the underlying asset. The product can be a commodity, currency, stocks, index, etc. The standardization of contract sets the same rules, specification of contract for all the participants. And because of the standardization, the ownership of the contract can be passed to any other trade by way of a trade.

As the Futures contracts are exchange-traded, it guarantees the parties involved that the contract will be honored. All the futures contracts are centrally cleared via exchanges thus eliminating the counterpart risk.

How are Futures contract traded in India?

In India, the futures contract are mainly traded in two forms – Stock Futures and the Index Futures.

— Index Futures

The index is the grouping of stocks. It simply measures the change in the prices of group stocks over time. Say, for instance, Bank Nifty represents the top 12 banks in the Indian Banking system. These banks are from both the public and private sectors. And any movement in the share price of these banks directly impacts the index. Future contracts are also available for these indexes. They directly derive their value from the value of the index. The following are some of the characteristics or traits of these indexes:

  • Size of the contract: Each and every contract in the futures contract have a specified fixed size. Anyone willing to trade will have to buy the full contract or multiples of it. Say, for instance, if I am trading Nifty 50 Index, then each lot has 75 shares in it. And in the Bank Nifty, each future lot has 25 shares in it. These are the two most actively traded Index futures in the Indian equity market.
  • Expiry: Each and every index futures have a specified date of expiry. All the Index futures are settled on the last trading Thursday of the month. If the last Thursday is a holiday, then the expiry happens on the previous working day. Since the index are the culmination of various stocks, hence there is no physical delivery of the shares on the index. Only the cash differential is to be paid.
  • Time frame: The Index futures have three contracts running simultaneously all the time i.e., the near month (1-month), the middle month (2-month), and the far month (3-month). As and when the near month contract expires, a new far month contract is added to the series.
  • Margin Required: The margin required to trade the futures contract is comparatively high, as the position are exposed to market to market (M2M) risk and the brokers and exchanges will have to safeguard their interest in case the index becomes very volatile on a particular day.

— Stock Futures

The basic premise of trading stock futures is very similar to Index futures. Stock futures are the derivative instruments, that derives their value from the value of the underlying security/stock. The contracts have a specific size, fixed price, and specified date. Once the contract is entered, it will have to be honored. Following are some of the characteristics of Stock futures:

  • The size of the contract: All the stocks trading in the futures market, have a different number of shares in each lot. We can’t trade just one share to trade futures. A minimum of one lot has to be traded. For example, one lot of futures contract of Reliance industries has 505 shares, one lot of Maruti has 100 shares, one lot of ICICI bank has 1375 shares etc.
  • Expiry: All the stock futures contract have a fixed maturity. They expire on the last trading Thursday of the month. And if the last Thursday is a holiday, then they expire on the previous trading day. The stocks have three expiring contracts – near month (1-month), middle month (2-month), and far month (3-month).
  • Margin: The margin required to trade stock futures contract is very high to cover for Mark to Market (M2M) losses. This is basically done to protect the interest brokers and the exchange.

How Are Futures contract Priced?

Futures contract derive their value from the value of the underlying assets. There is always a variation/difference in the prices of the cash segment and derivatives segment. There are basically two methods of pricing the futures contract: The Cost of Carry Method & The Expectancy Method.

— The Cost Of Carry Model

Under this method, the market is assumed to be perfectly efficient. There is no difference in the value of cash market and futures contract. So, the profit made by trading the cash segment or futures segment is same, as the movement in the prices are aligned. Following is the process of calculating the prices under the Cost of Carry model

Futures Price = Cash Price + Cost of Carry

The cost of carry here refers to the cost of holding the futures contract till maturity.

— The Expectancy Method

Under this method, the futures prices are the expected cash price of the underlying asset in the Future. So, if the market is positive/conducive for the underlying asset, then the futures price will be higher than the cash price. And if the market has a weak sentiment towards the underlying asset, then the futures price will be lower than the underlying asset.

Advantages of Trading Futures contract

Here are a few of the major advantages while trading in the futures contract:

  • Futures contract are one of the safest mode to hedge one’s exiting position in the market i.e., if I am long in shares of a particular company, I can hedge my position by taking short in futures contract of the same underlying Asset
  • The futures contract are high leverage instruments i.e., to trade futures contract we have to pay only a fraction of the total value. In general, the margin amount is just 10% if total value. This margin money acts as a collateral, in case the value of the underlying asset goes opposite to the views of the investor and he incurs losses. Say, if one futures lot of XYZ company has 1000 shares. And if the price of one share is Rs.100. So, if one were to buy 1000 shares, then the total value to be invested will be Rs. 100000 (1000*100). But, to trade futures contract, one has to keep only Rs. 10000 (10% of total value) as margin.
  • Because the futures contract are regulated by exchange, liquidity is never a factor while trading futures contract. One can exit their position anytime from the market.
  • Because of the low margin requirement, small players and speculators get to be a part of bigger game
  • Short selling becomes very easy while trading Futures contract. And one can legally short position in the shares of the company, by shorting futures contract.
  • The buying or selling pressure in on particular underlying asset can help us to gauge the future demand and supply of the shares

Key Takeaways

In this article, we tried to cover what are futures contract, how they differ from forward contracts, how are futures contract traded in India, and the advantages of trading futures contracts. Here are a few of the key points to remember from this post.

  • Futures contract derive their value from the value of the underlying assets.
  • Because of the low margin requirement, the futures trading is very popular amongst traders
  • The futures contract are exchange regulated, there is never the question of trust amongst the traders
  • One can exit their existing futures contract position anytime from the market by taking an opposite position in the futures market.
  • It is also a very popular hedging instrument for already existing long position in the cash market
  • The Index futures are cash-settled
  • There are two methods of calculating the futures contract value – The cost of carry method or the Expectancy method

That’s all for this post. I hope this article on what are futures contract is useful to you. If you’ve got any queries related to this concept, feel free to ask below in the comment section. I’ll be happy to help. Happy trading and investing.

August 10, 2020 Options Trading, Trading 3 comments
What are Forward Contracts cover

What are Forward Contracts? And How do they work!!

Understanding what are Forward Contracts along with its risks and outcomes: One of the most important key concepts to understand for a derivate trader is forward contracts.  Through this article, we aim to give a clear understanding of the Forward Market and Forward contract.

Today, we’ll cover what are forward contracts. We’ll also look into why do both the parties enter into the contract, possible outcomes, how they are settled, risks associated, and more. Let’s get started.

What are Forward Contracts?

The Forward contract, as the name suggests, is a financial derivative transaction that is settled at a specified date in the ‘future’. The forward contract derives its value from the value of the underlying asset. Therefore, in that regard, the futures and forward contracts have a lot of similarities.

The forward contract can be said to be the more ancient version of the futures contract. The basic framework of the futures contract is very similar to a forward contract. The forward contracts are still used, however, the scale and volume are very limited.

— Understanding Forward Contracts with an Example

Let us understand this concept further with the help of a simple example. Suppose, there are two parties involved. One is the manufacturer and designer of Silver jewelry. Let us call the manufacturer as “ABC Jewelers”. The other party involved is the importer of silver and he sells in bulk to jewelry shops. Let us call him “XYZ Dealer”.

Say, on 5th Aug 2020, the current price of 1 kg of silver is Rs. 65,000. ABC enters into an agreement to buy 50 kg of silver two months down the line. The agreed-upon price is the price of silver on 5th Aug 2020. Therefore, ABC has to pay Rs. 32,50,000 (65000*50) to XYX to buy 50 kg of silver on 5th Oct 2020.

In short, after two months, both the parties in the contract will have to honor their agreement irrespective of the price of silver at that time.

— Why both parties enter into the contract?

From the above context, the buyer of the silver (ABC) is of the view that the price will go up in the future and wants to lock in the prices to benefit from the increased price in the future. On the other hand, the seller of the silver (XYZ) is of the view that the price is most likely going to decline in the future and wants to benefit from the locked-in current price.

Both the parties involved in this transaction have opposing views and hence they enter into a forward contract to express their views.

— The possible outcomes of the Forward contract

Scenario 1: Either the silver price goes up

If the price of the silver goes up in the future, then ABC Jewelers stands to make a profit, and XYZ dealer is dealt loses. Say, if the price of silver goes up to Rs. 70,000 per kg after two months. So, the profit of ABC in this case will be = (70000-65000)*50 = Rs. 2,50,000. And the same is the loss for XYZ dealers.

Scenario 2: Either the silver price goes down

If the price of silver falls in the future, the XYZ dealers stand to make a profit, and ABC jewelers stand to make losses. For example, if the price of silver after 2 months falls down to Rs. 61,000 after two months. Here, the profit for XYZ dealers, in that case, will be = (65000-61000)*50 = Rs. 2,00,000. And, this will be the loss for ABC jewelers.

Scenario 3: If the price of silver remains unchanged

In that case, neither of the party (ABC or XYZ) will stand to lose or make any money from this contract.

How are forward contracts settled?

Forward contracts are settled via two ways, either cash-settled or the underlying asset is physically delivered.

1) Physical Settlement: Here, ABC jewelers pay XYZ dealers, the full agreed-upon amount (Rs. 32,50,000) of buying 50 kg of silver and in return gets the physical delivery of silver.

2) Cash Settlement: In this case, there is no actual physical delivery of silver. Just the cash differential has to be paid. Say, if the price of silver goes up, then XYZ dealers will have to give the cash differential to ABC jewelers. And if the price of silver goes down then XYZ dealers receive cash differential from ABC jewelers.

Assume, if the price of silver goes up to Rs. 67500 per kg. Then, XYZ dealer pays Rs. 1,25,000 ((67500-65000)*50) to ABC Jewelers for cash settlement.

Risks Associated while Trading Forward Contracts

Following are some of the risks associated with trading Forward contracts

  • Liquidity Risk: Theoretically, the parties with opposing views enter into a forward transaction. But, in reality, it is difficult to find two parties having an opposing view and willing to enter into the forward transaction. Therefore, the parties involved will have to approach the investment bank and who in turn scouts for willful parties willing to enter the forward contract.
  • Cost: The cost is a big factor in the forward contract. As the investment banks are involved in finding parties to enter into a forward contract, they come at a cost i.e., fee. Therefore, even if the price goes in favor of one of the parties, they make real profit only after the cost (fee to investment bank) is recovered.
  • Default Risk: The default risk is very much if losing party upon the expiry does not pay up the other party i.e., it defaults.
  • Regulation Risk: There is no regulatory framework while dealing with a forward contract. They are entered into with the mutual consent of the willing parties. Therefore, there is a situation of lawlessness and which is where the chances of default also increase.
  • Non Exit able before expiry: Say, halfway through the contact, if the view of one of the party reverses, then there is no way to exit the contract before expiry. There is no clause of foreclosure. The only option which they have is to enter into another agreement which again is a tedious and cost consuming process.

Also read- Options Trading 101: The Big Cat of Trading World

Conclusion

In this article, we tried to cover what are future contracts and how future market actually works in terms of transactions and settlement. Let us quickly conclude what we discussed here:

  • The basic premise while trading both forward and futures contracts are the same.
  • The forward contracts are contracts that are settled at a future date.
  • They are not traded via an exchange. The forward contracts are Over the counter – OTC  derivative.
  • The forward contracts are non exit-able before the expiry.
  • These contracts can be either physically delivered or it can be cash-settled.

That’s all for this post. I hope it was useful to you. If you still have any queries related to future contracts, feel free to comment below. I’ll be happy to help. Happy trading and investing.

August 7, 2020 Investment Basics, Trading No comments yet
Understanding what are Fibonacci Retracements and how to use it while trading

Fibonacci Retracements: How to use it in Technical Analysis?

Understanding what are Fibonacci Retracements and how to use it while trading: The concept of Fibonacci was introduced by Italian Mathematician called Fibonacci (also known as Leonardo Bonacci or Leonardo of Pisa). This concept was primarily introduced to solve the problem of understanding the population growth of Rabbits. And it has now become one of the most interesting and sought after concepts in Mathematics and Trading.

In this article, we’ll cover what is a Fibonacci Series, the implication of Fibonacci on trading, and how exactly to use Fibonacci while Trading. Let’s get started.

What is Fibonacci Series?

The Fibonacci is a series of numbers starting from zero and arranged in such a way that the next number is a summation of the previous two numbers.

Therefore, the Fibonacci series is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377………

Here are the calculation involved while finding the numbers in the Fibonacci series:

  • 0 + 1 = 1
  • 1 + 1 = 2
  • 1 + 2 = 3
  • 3 + 5 = 8
  • 5 + 8 = 13
  • 8 + 13 = 21
  • 13 + 21 = 34 and so on.

A Few Fun Facts about Fibonacci series

Before moving forward, here are a few fun facts about Fibonacci series that you should know:

  • If we divide any number by the previous number, then the ratio is always equal to 1.618 (233/144 or 144/89 or 89/55 or 55/34, etc.)
  • Second, if we divide the number by the next number, then the ratio is always equal to 0.618 (21/34 or 34/55 or 55/89 etc.)

Needless to that the number 0.618 (or 61.8%) holds a lot of significance while calculating Fibonacci.

  • If we divid any number in the series by a number which is two places higher, then the ratio is always equal to 0.382 (21/55 or 34/89 or 55/ 144, etc.)
  • And if we divide any number in the series by a number which is three places higher, then the ratio is always equal to 0.236 (21/89 or 34/144 or 55/233, etc.)

From the above facts, we get the percentage series for Fibonacci to be 61.8%, 38.2%, 23.6%

The implication of Fibonacci on trading

The Fibonacci series of 61.8%, 38.25, and 23.6% have a very impactful presence in all the charts of the share price of any company. It is applied regularly when we see movement in the prices of the shares. And it can be applied in all the time frames.

It is a known fact that the share price of the company does not move in one direction. The prices always have a zig-zag pattern. If the share price of the company has gone up from 100 to 150, then before having another leg up, it is most likely to retrace back. But to find the level of retracement, Fibonacci retracement levels come in very handy.

For example, if the share price of the company before going up = Rs. 100. In, the first leg of the move, the share price goes up to = Rs. 150

Therefore, if the share price retraces to 38.2% then it will fall to = 150 – 38% of 50 = 131. And if the share price retraces to 61%, then it will fall to = 150 – 61 % of 50 = 119 (approx.)

fibonacci retracements for Daily chart of Maruti

Fig 1: Daily chart of Maruti (www.zerodha.com)

If we look at the above figure above, Maruti looks strong in the move up from Rs. 4000 to Rs. 5500. And looks poised to go up more. But before going up, the market makes a correction and it’s till the projection range of 38.2% to 61.2%. And after consolidating in that range, it makes a fresh move up and makes new recent high.

Therefore, if someone is looking for a correction in the market, Fibonacci retracements are a very useful tool and it also helps in entering the market if someone had missed the first move in the market.

fibonacci retracement example

Fig 2: Daily chart of BajajFinsv (www.zerodha.com)

In fig 2, If we look at the figure above, the share price of BajajFinsv is on a downward trend. And looks poised to fall more.

However, before falling, the market has made a small correction rally and is consolidating around a 38% retracement level. And now we see, that the share price is making lower highs and lower lows. Therefore, we could see the bearish momentum coming back and market breaking or re-testing previous lows.

Uses of Fibonacci while Trading

Assume, if we are looking to buy the stocks of a particular company but because of the strong momentum in the price, the share price has gone up substantially and it is very expensive to buy the shares at the current price. Here, we wait for a correction in the share price of the company and wait for it to retrace around 61.8%, 38.2%, or 23.6% levels.

Anyways, before picking the right retracement levels, the following factors also need to be considered: The candlesticks formation near the retracement levels, The price action around the level, The support and resistances around it, The volume at these retracement levels, And the overall fundamental picture.

Conclusion

In this article, we tried to explain what are Fibonacci Retracements and how to use it while trading. Here are a few conclusions from this post to take away:

  • The Fibonacci should be used when one is looking to plot the retracement or projection levels.
  • Then Fibonacci is useful when one has missed the entry at first instance but is still interested in buying the shares of a particular company.
  • The important levels of Fibonacci are 61.8%, 38.2%, and 23.6%
  • Just the Retracement levels of Fibonacci should not be the only basis of entering the trade. Overall, fundamental and technical factors should also be considered.

That’s all for this article. I hope it was helpful to you. If you have any doubts related to Fibonacci Retracements, feel free to comment below. I’ll be happy to help. Happy trading.

August 4, 2020 Technical Analysis, Trading 1 comment
New Margin Trading Rules by SEBI cover

Margin Trading: The New Tighter Rule by SEBI (Dec 2020)!

New Margin Trading Rule by SEBI: Recently, SEBI published a new circular on margins that astonished the entire trading community along with the stockbrokers. Through this circular, SEBI announced tighter margin norms for the traders. In this article, we are going to discuss what exactly is this new margin rule introduced by SEBI and how it will affect the people trading in share market.

What is Margin trading?

In terms of the financial market, Margin would be a direct synonym to leveraging. It simply gives you the power to buy/trade in stocks that we can’t afford to buy. Through Margin trading, one is allowed to buy the stocks by just paying the part of the actual value of shares.

The margin can be paid either in terms of cash or in shares as security. The balance amount of shares are funded by the brokers. In other words, Margin simply refers to the amount of money borrowed from the broker to buy the shares of a company. The broker acts as the lender of money and the securities in the investor’s trading account, are kept as collateral.

The margin is settled later when the positions are squared off. We receive profit if we sell the shares at profit or we stand to lose the margin if we make losses.

— How to trade using Margin?

To trade using a margin account, one must have a separate margin account and not the standard brokerage account. A margin account is a separate trading account in which the broker lends money to the investor to buy a security which otherwise he will not be able to buy. The loan or the margin money which is borrowed from the broker comes at a cost i.e., the interest. Therefore, one should use a margin account for short term trading as the interest on the margin money keeps accruing.

Say, if you deposit Rs. 1,00,000 in your margin account and you have a 50% margin in your account, which means buying power of Rs. 2,00,000. Now, if you buy stocks of Rs. 70,000, you still have the buying power of Rs. 1,30,000. And we have enough cash in our margin account to cover for the transaction. We start borrowing only, once we have bought shares worth Rs. 1,00,000.

— Three steps in Margin trading

  1. We need to maintain the Minimum Margin (MM) throughout the trading session because volatility in the stocks can push the prices (up or down) more than one’s anticipation.
  2. The position needs to be squared off at the end of each session. If we have bought on margin, we need to sell it off before the end of the day (EOD) and vice-versa if we have sold using margin.
  3. If we want to carry the trade onto the next session, we need to convert it to the delivery trade. And for that, we need to keep the cash ready.

If any of the above three steps are missed then the broker automatically squares off the position in the market.

New Margin Trading Rule by SEBI

The Securities and Exchange Board of India (SEBI) gave out guidelines pertaining to Margin trading (which account for nearly 90% of the daily turnover of the stock market), which has not been welcomed by the brokerage firms with open arms. These rules will put an end to intraday trading and turnover generated out of it.

The brokers have been instructed to collect VaR (value at risk) and ELM (extreme loss margin) upfront from their clients. These rules will be implemented in a phased manner starting in December 2020.

  • Phase 1: From December 2020, the brokers will be penalized if the margin is more than 25% of the sum of VaR and ELM.
  • Phase 2: From March 2021 and June 21, brokers will be penalized if the margin exceeds 50% and 70% of the sum of VaR and ELM
  • Phase 3: From August 2021, brokers will be penalized if the margin exceeds VaR and ELM

Also read: What is SEBI? And What is its role in Financial Market?

Reactions from the Brokerage community

The broking community feels that this will put an end to leverage based intra-day trading. Currently, some brokers collect as low as Re. 1 for every Rs. 100 worth of trade. Here are some of the reactions from Big brokerage houses:

Nithin Kamath, CEO of Zerodha Brokerage Tweeted, “Today’s SEBI circular says that all brokerage firms have to stop intraday leverage products by August 2021 in a phased manner”. In another tweet, he added:

“While many (even we) don’t like restriction on intraday leverages by SEBI, I don’t think any regulator in the world has done so much to protect retail investors. A lot of this slows brokerage business but what is good for the client eventually is good for the business as well.”

nithin kamath on New Margin Trading Rule by SEBI

Jimeet Modi, CEO, and founder of Samco Securities said, “This was expected since last year after the December 2019 circular. Now the industry and exchanges will need to adjust to this new reality. This probably will also accelerate the market share towards discount brokers from full-service brokers. Differentiated margins was a service offering by full-service brokers which has now been arbitraged away. Our estimate is that almost 30-35 percent of the intraday turnover is based on additional leverage provided by brokers. Now assuming full margin is required, total turnover would shrink by approx 20 percent since balance part margin was still being collected from clients.”

How Market Turnover is impacted by new SEBI rule?

On July 21, SEBI gave out a circular pertaining to new rules on Margin trading. And these rules are directly going to impact the market turnover both in the cash and derivatives segment. The cash segment on NSE recorded an average daily turnover of Rs. 50,322 cr (April), Rs. 52,656 cr (May), Rs. 61,395 cr (June). And the derivatives market is nearly 18-20 times of the cash market. NSE is the largest derivatives exchange in the world with an average daily turnover of more than rupees 11 lakh crore.

Some of the brokerage houses are of the view, with the new rules if VaR+ELM, the daily turnover may shrink by almost 20-30%. The clients will also have to maintain a higher margin in their account and which will also impact their return on investment. And these changes in rules will not only impact the brokers but will also impact the government, in the form of reduced Securities Transaction Tax (STT).

July 24, 2020 Beginner's guide, News, Trading 1 comment
Understanding Volume Profile for Technical Analysis

How to use Volume Profile while Trading? – Technical Analysis Basics

Understanding Volume Profile for Technical Analysis: In today’s day and age, the success of any movie depends on the number of people viewing it. If the movie has a large audience anticipating it, then we can be assured that it will have a large audience watching it and which in turn garners success for the movie. Here, the number/volume of the audience plays a very key role in the success of the movie.

Further, if we were to take the example of television series or any online series, its success is measured by the number of viewers. Game of Thrones (GoT) is a classic example of it. It has one of the largest numbers of viewership in online content history. Therefore, eventually, it all boils down to the volume or number of people watching.

Similarly, in trading also, the volume is the number of shares traded on a day to day basis. If there is no volume, then the price of shares won’t move. In short, volume plays a key role in deciding the movement. In this article, we are going to discuss what is Volume Profile, how is volume calculated, the correlation between volume and price, and the Correlation between Candlesticks, Supports & Resistances with Volume. Let’s get started.

What is Volume Profile?

In simple terms, volume simply signifies the quantity of shares traded of a particular company within a specified time. If a move in prices of shares happens with high volume then, it is considered to be more reliable. And the move can be expected to continue. But if the move happens on low volume, then the authenticity of the move is always questionable.

To confirm any pattern or to apply any technical indicator on the market, the Volume profile plays the most critical role. It plays an important role in confirming the trends or patterns in the market. It also plays a very big role in understanding the buyers’ or the seller’s perspectives. Without sizable volume, even the strongest of technical indicator or pattern might not hold much significance.

Quick note: Market Profile or MKTP is the synonym for volume profile. They are used interchangeably.

How is Volume calculated?

From the above explanation, we understood that Volume simply signifies the number of shares bought or sold within a specified time-frame. The more active the share is, the higher the volume and vice-versa.

For example, in the case of RIL, if for the price of Rs. 1,900, a total of 50 share been bought and 50 share being sold, then the volume here is 50 (and not 100). For the correct volume calculation, there has to be a buyer for every seller to complete a transaction. We should not consider the volume to be 100 (50 buys + 50 sell). Let us understand it with the help of an example:

How is Volume calculated?

So, from the table above, we can notice different buying and selling activities for the security for the different levels of time. The buyers and sellers meet to create volume for the share. And the cumulative volume is a summation of all the volume traded for the day.

The following tables show the volume change in the market for the most active securities on NSE with a time gap of 40 minutes.

The following tables show the volume change in the market for the most active securities on NSE with a time gap of 40 minutes.

Figure 1: Most active share at 11.42 am (21/07/2020, NSE India)

Figure 2: Most active share at 12.22 pm (21/07/2020, NSE India)

Now, if we were to compare to the tables above, we can see the volume table of most active security and the change in them with a gap of 40 minutes.

If we take the example of Bajaj Finance from Table, we see the change in price by Rs 8 (reduced) and the volume has increased by nearly 50% in 40 minutes. So, the move with this volume can be said to be genuine and not artificial. Any move with sizable volume helps the technical charts and indicators to take shape.

Correlation between Volume and Price

While trading with keeping volume in mind, the prior price and volume trend is of high significance. If the move happens, with the volume near its average volume or more than average volume, then that move holds more significance, than the move with thin or low volume.

Now, let us understand the correlation between volume and price with the help of the following table:

Correlation between Volume and Price

If the price increases with an increase in volume, then the expectation from the market is that the bullishness or strength is expected to continue. And if the same move were to happen with low volume, we can say that one needs to be cautious and be careful about forecasting the next move.

Similarly, if the price of the share reduces, with increased volume, we can expect the bearishness to sustain and continue. And if the same move happens on less volume, we need to be careful with the next leg of this move. And similar interpretation can be done for Rangy markets.

Participants on Low and High Volume days

If the market is trading with low volume, we can say that there is a lot of retail player’s participation in the market.

However, if the market is trading on high volume, we can say that there is a lot of institutional buying and selling in the market. Higher volume moves have better conviction and a higher chance of a continuation of the move, in the near future.

Correlation between Candlesticks, S&R and Volume

If the candlestick pattern gives certain trade patterns and if the signal were to come near the supports and Resistances and to top it off if the volume profile were aligned with the technical signals, then the trade can be said to have a very high probability of being successful.

In other words, a marriage of technical factors along with volume goes a long way in generating strong trading signals. Traders can benefit significantly from it if spotted at the right time.

Also read: Introduction to Candlesticks – Single Candlestick Patterns

Conclusion

Let us quickly conclude what we discussed in this article:

  • Volume is one of the most important indicators in understanding the trend of the market.
  • It provides a very strong impetus to our technical view on the market.
  • If the market is trading on low volume, we can say that retail traders are participating in the move.
  • If the price increases with an increase in volume, we can expect the bullishness or strength to continue (and vice versa).
  • And, if the market trades on high volume, it generally is a signal that institutional players are participating in the market

That’s all for this post on Volume Profile. I hope it was useful for you. If you have any doubts regarding volume while trading in stocks, feel free to comment below. I’ll be happy to help. Happy trading.

July 22, 2020 Investment Basics, Stocks, Technical Analysis, Trading 2 comments
technical analysis Cup and Handle Pattern

Cup and Handle Pattern: Technical Analysis

Understanding Cup and Handle Pattern: Technical Analysis can be used by both traders and investors for entering into any trade. It provides a means to have a stronger conviction about the trade. Candlesticks are the most common form of Technical analysis tool used by the traders globally.

We have several types of candlestick patterns that are used by traders in their day to day trading. One such form of candlestick pattern, that gives trades with a high level of conviction is the “CUP AND HANDLE FORMATION”. In this article, we are going to cover what is a Cup and Handle Pattern and how to use them for your trades.

What is a Cup and Handle Pattern?

cup pattern

A cup and handle pattern is a formation that resembles the cup. The main body of the formation is like a “U shape” and further, we have a small body or a downward drift, which resembles a handle attached to the cup. This pattern is generally a bullish pattern as it follows a series of bearish sessions.

From the perspective of the long term, this formation pattern may take from a few weeks to a year. And for a short term view, we can see this formation in a minute, hourly, etc., time frame.

How is Cup and Handle Formed?

The market trend is generally bearish at the start of formation. We see new lows being formed, followed by a period of consolidation/stabilization, and then we have a move up, similar to initial move down. Therefore, the chart formation is like a cup. Afterward, the price then moves sideways or comes down within a channel, forming the handle for the cup.

The handle can have the shape of “Reverse C” or “A Triangle” or “A sideways zone”. Ideally, for a valid Cup and Handle formation, the handle should not have a depth of more than 50% of the size of the cup. Let us understand the formation with the help of a few examples.

— Cup and handle formation on DMart

Cup and handle formation on DMart

Figure 1: D’mart Chart (Source: www.zerodha.com)

In Figure 1, we see a formation of Cup and Handle and the formation, which took nearly four months to complete. The first phase is a part where the market sees bearish momentum. Then, in the 2nd phase, we see consolidation at the bottom of the cup.

Next, in the third phase, we see buying momentum coming back and market-moving back up to the high of the first phase. And in the final phase, we see a formation of the handle.

— Cup and handle formation on TATA Motors

Cup and handle formation on TATA Motors

Figure 2: TATA Motors’s Chart (Source: www.zerodha.com)

In Figure 2, the pattern formation is very similar to the pattern formation on the D’MART chart. There are four phases of fall, consolidation, rise, and the handle formation. The trade for TATA Motors after the formation gave a very decent return of nearly 90%.

Also read:

When to Enter the Trade using Cup and Handle Pattern?

Before entering the trade, one has to wait for the formation of the handle. During the formation of the handle, the market is often in a sideways trading mode. But when then market breaks the top of the sideways channel, the Cup and handle formation is complete and the market is expected to rise from there.

There is no guarantee of the trade making money after the completion of the formation. The market could again come back in the sideways zone and the pattern might fail. And that is why, we should always have a stop loss for the trade, entered by using this pattern.

— How to set a Stop Loss for the Trade?

Stop-loss while trading is a point beyond which the trader does not want to lose money. It is a point to exit the existing trade. So, while trading using this formation, the stop loss for the trade is the low of the handle.

This low point is chosen because the price might again comeback in the sideways territory and then make a move up. And in case the market starts to go in favor, one can keep on trailing the stop loss and rise the move.

— What is the Exit Point for the trade?

As a rule, the height of the cup should be the profit target for the trade, from the point of breakout.

Say, for example, the price at the bottom of the candle is Rs. 100 and the height of the candle is 10 units. Therefore, Rs. 110 is the breakout point for the trade. The target for this trade should be Rs.120 (Breakout price = 110 + the depth of cup = 10). The other way to keep a target for the trade would be using Fibonacci Projections.

The stabilization period at the bottom of the cup is very important for this formation, as it forms a base for the cup. The stronger the base, the better the quality of the trade. The volume at the formation of the pattern also plays a very important role in the authenticity of the trade. If formed on low volume, the pattern might not be as reliable as the one formed with higher volumes.

Quick Note: If you new to stock trading and want to learn how to read charts, candlesticks, and technical indicators, you can enroll in our “Technical Analysis Course” for beginners. Click here to check out this course! Happy learning.

Conclusion

The Cup and handle formation takes some time to spot and trade upon. Constant practice is the best way to spot this pattern. But once if we get a hang of the pattern, it provides trades with very good risk-reward.

One should ideally enter the trade at the confirmation of the pattern as it provides trades with better conviction. And always have a stop loss for every trade which we enter in the market. Happy trading and Money making.

July 20, 2020 Technical Analysis, Trading No comments yet
What are Moving Averages And how to use them

What are Moving Averages (MA)? How to Use Them?

Simplifying what are Moving Averages – SMA & EMA: Moving averages are one of the simplest yet most frequently used technical analysis tools by traders. Every time you read any technical or research report, on any Index or shares of a particular company, you must have come across terminologies like the Simple Moving Average (SMA) or Exponential Moving Average (EMA). These are the two types of Moving Averages.

In this post, we discussed the basics of Moving Averages in the technical analysis of stocks. Here, we covered what are Simple Moving Averages (SMA) and Exponential Moving Averages (EMA) and how to use them correctly. Let’s get started.

An Example to Understand Moving Averages

In mathematics (or statistics), a moving average creates a series of averages of different subsets of the full data set in order to analyze data points.

For example, imagine in a game of Cricket, we want to analyze the performance of a bowler. Here, the parameter that we can use for our judgment is the number of runs conceded against every wicket picked. Let’s assume that we have the following data available for the bowler:

InningsRuns ConcededWickets
1452
2393
3602
4481
5504
6381
7405
8750
9502
Total44520

From the table above, the total runs conceded by the bowler over 9 innings is 445. Further, he has got 20 wickets against his name.  Therefore, the average number of runs conceded per wicket will be equal to 445/20 = 22.25 runs conceded per wicket This is the simplest method that we can use for calculating the average.

A similar concept can be used while looking at the price movements of the shares. Through this article, we will try to understand the concept of the moving average and its implication while trading.

What are Moving Averages?

Moving averages are the most common and sought after form of technical analysis tools used while trading. These indicators are said to be lagging indicators, as is it is constructed with the help of the data presented as the end of day prices.

In order to understand this concept easily, let us take another example. Consider the following closing prices for the shares of Reliance Industries limited:

DateClosing Prices
03/07/201788
06/07/201852
07/07/201823
08/07/201798
09/07/201824
Total9085

Now, a simple moving average (SMA) is a calculation that considers the average or arithmetic mean of a given set of prices over a specific time period. For example, the SMA or average price of shares of RIL over these five days will be equal to 9085/5 = Rs. 1,817

Next, imagine if the share price of RIL at close on 10/07/2020 is 1,800. Now, if the calculate the moving average again for the last five days, its value will change as the average price changes after accounting for new data. In other words, the average price changes as and when the value of underlying asset changes on day to day basis.

Further, the moving averages can be calculated for any time frame. It could be 5 minutes, 15 minutes, hours, days, weeks, and so on. Depending on one’s trading style and trading objective, one can choose the Moving Average charting pattern. If we are using 5 observations within the selected time frame, it is called 5 SMA, and if we are using 9 observations within the selected time frame, it is called 9 SMA and so on.

Now, the chart below is the daily chart of Airtel Limited. And we have plotted 50 Day Simple Moving Average on it.

Fig: 50 DMA of Airtel Limited (Source: www.kite.zerodha.com)Fig: 50 DMA of Airtel Limited (Source: www.kite.zerodha.com)

Now, if you carefully analyze, the 50 SMA clearly bifurcates the chart in two halves. When the market is trading over 50 SMA, we see continuous buying momentum in the market and the bulls are having a tight grip on the market. And as and when the market comes below 50 SMA, we see selling pressure in the market and the bears are having higher say in the market. Overall, in simple words, it can be said that prices above SMA are considered to be bullish and below it are bearish.

Exponential Moving Average (EMA)

Exponential Moving Average (EMA) are slightly advanced and more trusted form of moving average. The main difference between EMA and SMA is the weightage given to each and every value under consideration.

Under EMA, the more recent values are given higher weightage, but in SMA, all the values are given equal weightage. For this simple reason, EMA is sometimes said to be a better parameter for trading than SMA. We will not be going to explain the calculation methodology of EMA in this article.

The chart below is the daily chart for HDFC Bank and the yellow line plotted is the 50 EMA

Fig: 50 EMA of HDFC Bank (source: www.kite.zerodha.com)Fig: 50 EMA of HDFC Bank (source: www.kite.zerodha.com)

Now, before explaining the chart, the following rule has been set for the entry and exit of the trade. A position is entered when the current price crosses over 50 EMA and the position is held till the share price down not crossover or come below 50 EMA.

If we look at the chart, the 50 EMA in the chart above has given multiple entry and exit signals based on EMA. For example, if we look at Trade 1, the chart gave a long trade as the market came close to the EMA and it bounced back and gave a return of about 15% (not bad by any standards). And similarly, Trade 2 gave an entry near EMA and upon exit, it gave a return of near 7%.

Also read: What are Supports and Resistances? And How to identify them?

Moving Averages: Key understandings 

In this post, we tried to simplify the concept of moving averages. Let’s quickly summarize what we discussed here:

  • Moving Average gives us simple and traceable buying and selling signals
  • When the price is trading above a certain MA, it usually signals strength in the market and buyers are having more say
  • When the price is trading below a certain MA, it usually signals weakness in the market and sellers are dictating in the Market

Moving averages are considered to be a reliable indicator while understanding the trend and market sentiment. One has to continuously keep using them go get a better hang of them and find a moving average that suits their trading style. One Golden rule which every trader must follow: “Always have a stop loss for your trades” Happy trading and Happy Learning!

July 15, 2020 Technical Analysis, Trading 1 comment
What are Supports and Resistances? And How to identify them cover

What are Supports and Resistances? And How to identify them?

Understanding what are Supports and Resistances: One of the most elementary concepts while trading in stocks that every trader should know is, “Supports and Resistances”. If you’re already involved in the market, you might have heard or read terms like “Nifty50 has got a big resistance at 10,800 points” or “Stock XYZ has a support line at Rs 105”. So, what exactly do the traders mean by these terms in their analysis? We are going to discuss that through this article.

In this article, we are going to discuss what are supports and resistance, their characteristics, and how exactly to use them. By the end of this article, you will have a good idea about these concepts and use them in your trading. Let’s get started.

What are Supports and Resistances?

The Synonym for the word support is “Reinforce”.  Basically, support can be said to be a point of reinforcement. In other words, supports are those points which act as a barrier for the prices, when they start to come down. They can also be said as points, where the downtrend is expected to be paused. And we should see a new surge in buying and demand. In short, supports are those points, where buyers are more forceful than sellers.

support-resistance-basics

On the other hand, Resistances are said to be the point where the supply increases or the longs start getting out of their positions from the market. Therefore, if we were to carefully analyze, supports and resistances can be said as the point of friction or tussle between buyers and sellers. And Resistances, are those points where sellers have higher say than buyers.

Now, once the level of Supports and Resistances (S&R) are identified, they become the point of entry or exit for the trade. The prices either bounce back or correct back, from S&R level or breach these levels and go to the next S&R.

Characteristics of Supports

Here are the key characteristics of Supports while looking into the charts:

  • Supports are those points or levels, below which the market finds difficult to fall. They can also be said as a point of infliction between buyers and sellers.
  • Supports are also the point of Maximum demand from buyers, and even the sellers exit their selling positions from the market.
  • The buyers have a higher say in deciding the levels of support in the market. These levels can also be said to be the mainstay for buyers.
  • Supports, if breached, sees a quick sell-off in the market, and then the next level of support becomes a point of contention.
  • If the levels of support hold in the market, then fresh longs can be initiated, and generally, these trades have good risk to reward ratios.

— Understanding Supports with an Example

The figure below shows the daily chart of HDFC Bank. Through this chart, we get a clear illustration of the concept of supports and the impact on the market, if the supports are respected or breached.

Characteristics of Supports

Figure 1: Daily HDFC Bank chart (Source- Kite Zerodha)

Now, if we carefully look, the market finds very strong support in the range between Rs. 1030 and 1075. The sellers continuously try to breach these levels but to no avail. And after forming a base at these levels, the market starts going up.

And, we see continuous buying momentum in the share price of HDFC Bank. Trend line support is formed in the market by joining three points from where the market is bouncing. In this rally, the share price of HDFC bank moved up from 1030 levels to almost 1250 levels (a near 20 % gain).

And the moment, the price of the shares of HDFC bank breaks the Trend line support, we see an increased selling pressure and the longs unwind from the market. Following this, the share price reaches the initial support levels near dotted lines (Figure 1). And after finding support at these levels, the market starts to rally back and we see continuous buying in the market and it nearly makes a move of 25% from there.

So, if we were to just use simple supports patters while trading the above chart, we would have got a minimum of three trades with a minimum of 15% returns

Characteristics of Resistances

Here are the key characteristics of Resistances while looking into the charts:

  • Resistances are the levels that are defended by sellers. And the market finds it difficult to go beyond that level. It is a tussle point between buyers and sellers.
  • Maximum selling pressure comes from sellers at this point and even the buyers start to exit their long positions at these levels
  • If the levels of Resistance are breached in the market, we could see a massive short covering in the market, up to next resistance levels.
  • Resistances can also be called as points where fresh short positions can be initiated in the market, with good risk to reward ratio.

— Understanding Resistances with an Example

The figure above is a weekly chart of Airtel Limited. Through this chart, we get a clear illustration of the concept of Resistances, and the impact on the market if the resistances are breached.

Understanding Resistances with an Example

Figure 2: Weekly Airtel chart (Source- Kite Zerodha)

The Share price of Airtel Limited had made a new high in the year 2007 and after that, the market had corrected nearly 50% from its highs. And then again, the market made a move up and went up till near 500 levels and started correcting again. And by joining these two points, of the initial high and the recent high, we could form a trend line.

So, now this trend line forms an important resistance in the market. As and when the market made a move up, this trend line acted as an important barrier and the market started to correct back. And the market was able to breach this resistance in Mid-2014 and the share price had a massive short covering. And the market made a move till the initial swing highs of 570 levels. Therefore, this is the power of Resistances, when an important level is breached.

Now, let us understand the concept of swing trades. If we look at Figure 2, we have marked swing trade. Swing trades are those trades that we hold for a longer duration of time, usually for the completion of one full cycle. These are the trades that have a longer holding period. And we generally don’t have a profit target in place, we just keep trailing the Stop losses and ride the wave.

Watch this video to understand the concept of Supports and Resistances better:

Also read:

Closing Thoughts

In this article, we tried to simplify the concept of Supports and Resistances while looking into the charts. Let’s quickly conclude what we discussed today.

Supports and Resistances are important points of significance on charts as we get good entry or exit points for our trades. On one hand, Supports are defended by bulls/buyers and on the other hand, Resistances are defended by bears/sellers. These levels of Supports and Resistances can be used to identify targets for the trade and also for keeping Stop losses for existing trades. As a thumb rule, for a longer trade, look for the immediate resistance level as the target. On the contrary, for a short trade, look for the immediate support level as the target.

July 10, 2020 Technical Analysis, Trading 2 comments
Bank Nifty and Other Scrips Lot Size Changed (After July 30, 2020 Expiry) cover

Bank Nifty and Other Shares Lot Size Changed (After July 30, 2020 Expiry)!

The lot size of all the Bank Nifty Contracts expiring on or after 30th July 2020 has been changed from 20 contracts to 25 contracts. In other words, this means that the lot of Bank Nifty has increased by 25% after July 2020. (Source: NSE Circular)

Let us understand what it means with an example. Assume, if a particular strike Price of Bank Nifty Option was Price at 50 units of Premium. Here, the margin required under the old format was = 50 * 20 = Rs. 1,000. However, under the new contract size, the margin required will be = 50 * 25 = Rs. 1,250

Along with the change in lot size for Bank Nifty, the lot size for 78 other stock F&O contracts has also been revised. The list is as follows:

SymbolPresent lot sizeRevised lot size
ACC400500
ADANIPOWER1000015000
AMARAJABAT8001000
AMBUJACEM25003000
APOLLOTYRE30005000
ASHOKLEY80009000
AUROPHARMA10001300
BANDHANBNK12001800
BANKBARODA54008200
BEL60007600
BHARATFORG13001500
BHEL1040021000
INFRATEL20002800
BOSCHLTD4050
CANBK26005000
CENTURYTEX6001400
CIPLA11501300
COALINDIA27003700
CUMMINSIND9001200
EICHERMOT3035
EQUITAS49007600
EXIDEIND29003600
GAIL53346100
GLENMARK14002300
GODREJCP8001000
GRASIM750950
HDFCBANK500550
HDFCLIFE9001100
HEROMOTOCO200300
HINDALCO35004300
HINDPETRO21002700
HDFC250300
IDFCFIRSTB1200019000
IBULHSGFIN12003100
IOC40005700
INDUSINDBK400800
NAUKRI200250
INDIGO300500
ITC24003200
JSWSTEEL23002700
L&TFH56006800
LT375550
LICHSGFIN13002000
LUPIN700850
M&MFIN16002100
M&M10001400
MARICO13002000
MOTHERSUMI50007000
NATIONALUM1170017000
NCC900021000
NMDC60006700
NTPC48005700
ONGC41007700
PAGEIND2530
PEL309550
PNB830014000
RBLBANK15002600
SRTRANSFIN600650
SAIL1570019000
SUNPHARMA12501400
SUNTV12001500
TATACHEM9002000
TCS250300
TATAMOTORS43005700
TATAPOWER900013500
TATASTEEL15001700
FEDERALBNK70008500
RAMCOCEM800850
TVSMOTOR13501400
UJJIVAN17002200
UPL9001300
VEDL35006200
IDEA98000140000
ZEEL17003000

Source: NSE Circular dated March 31, 2020 on Revision in Market Lot of Derivative Contracts on Individual Stocks (zip)

Implications of Increased Lot Size:

  1. The trading activity on these scrips might take a little hit as the cost of Trading will increase
  2. The Pricing of these contracts will be fair as the Market manipulation will reduce
  3. The Value of Premiums on Options will also reduce to compensate for increased Lot Size

What do you think about this update in the lot size of Bank Nifty and Other Scrips After July 30, 2020 Expiry?  Share your views in the comment section below.

June 26, 2020 News, Trading 3 comments
what is insider trading meaning

What is Insider Trading? And What makes it illegal?

Understanding Insider Trading and its implications: Since the time the first stock exchange was established in the sixteenth century, a lot many people have tried different unethical ways to make money from it. Although a few are able to fool the market and make sustainable profits, however, most gets caught from the governing bodies. One such fraud on which most of the regulatory bodies keep an eagle eye is “Insider’s Trading”. In this article, we are going to discuss what exactly is Insider trading, why it is illegal and how you can protect yourself from it. Let’s get started!

What is Insider Trading?

The stock market is able to work in an efficient way when all the investors have the same information, this creates a level playing field. Here, the investors are rewarded for their analysis and expertise.

Insider Trading throws this level playing field out the window. In insider trading people who have access to sensitive private information take advantage of investors who are oblivious to these facts. Insider trading refers to trades made based on material price sensitive non-public information about the company. 

What is Insider Trading? meaning and concept

 

Insider Trading in India is governed by the SEBI Act of 1992. Any individual who is proved guilty of insider trading can be imprisoned for a maximum of 5 years and fined between Rs. 5 lakh to Rs. 25 crores or 3 times of the profit made whichever is higher. The rules governing such trades and the degree of enforcement vary significantly from country to country.

What forms a part of insider trading?

The timing when the person in question makes the trade is also important. If the information in question is still non-public when the buy/sell of shares takes place it constitutes insider trading. It is also important to note that if the person accused of insider trading is linked to someone within the company or someone who is associated with the company, then both can be prosecuted. Acting on the information does not only constitute trading the share of the company in the stock market. Even further passing on the information is illegal. In India, close relatives of company officials are also considered as insiders.

Case 1: Say an employee of a company shares some price-sensitive information with his father. His father then goes onto share this information with his friend who uses it to profit from the stock market. Here all three involved can be prosecuted for insider trading.

Case 2: A person overhears material information at the cafeteria from employees of a company. He then goes onto profit based on this information. As long as he has no connection to the employees of the company he is not guilty of insider trading.

Case 3: An employee of a company enters into a disinvestment plan with his broker. According to this plan, he would sell his stake in the company over regular intervals over a period of one year. After 9 months the employee is made available with some material non-public information. According to this material information, the employee would make a loss if the shares are held by him. In this case, as long as the employee can prove his trades were part of a preexisting plan he can be acquitted of the insider trading charges.

Unfortunately enough at times, those accused of insider trading make use of ‘Case 2’ and ‘Case 3’ in their defense. Individuals who have brokers trading on behalf of them also claim that they had no idea of the trades taking place as they were acted on by the broker.

Who can be implicated for Insider Trading?

To understand insider trading better it is necessary to understand who can be implicated in insider trading. Generally, insider trading revolves around members of an organization who possess material information. But it isn’t always necessary for you to be a member of the organization to be a part of insider trading. Important decisions that may impact the share price involves parties that may not work within an organization. Say for example A company planning to undergo a merger with another company will involve many third parties like bankers, lawyers, and other professionals who offer their services to the company. If they act on the information they receive they can be prosecuted for insider trading.

The implementation of various decisions taken by the company requires prior approval from the government. Hence government officials too can be incriminated for acting on the confidential decisions they receive while executing their duties.

Insider trading, however, is not limited to white-collar relations. Members of an organization or employees may share the information with friends or family or acquaintances. If this information that is yet to be made public is acted on they will also be prosecuted under insider trading.

Infamous insider trading cases

— Dilip Pendse

Dilip Pendse insider trading

Dilip Pendse served as the Managing director of Nishkalpa, a wholly-owned subsidiary of TATA Finance Ltd. (TFL). As of March 31st, 2001 Nishkalpa made a loss of 79.37 crores. This information was to be made public only a month later on April 30th. This information was price sensitive as it would lead to a fall in prices if leaked. Dilip Pendse was in access to this information due to the role he played within the company.

During this period Dilip leaked this price-sensitive information to his wife. In between this period, 90,000 shares which were held by his wife and a company jointly run by his wife and her father in law in Nishkalpa were sold in order to avoid losses. Dilip Pendse, his wife, and the company jointly owned by his wife and her father in law were found guilty of insider trading.

A penalty of Rs 500,000 was imposed on each of them and Dilip Pendse was banned from capital markets for three years. 

— Martha Stewart

Martha Stewart insider trading

(Snoop Dogg and Martha Stewart on the sets of their TV Show. In 2003 Martha Stewart  was charged for insider trading)

Martha Stewart is a prominent TV personality who has also won an Emmy for her work on the ‘Martha and Snoops Dinner Party’. In the year 2001 Martha Stewart owned up to 4000 shares of the BioPharma Company ‘ImClone Systems’. Her broker received a tipoff that the CEO of ImClone Systems sold all his holdings held in ImClone. The CEO did this as he received information that the FDA was about to reject one of ImClone’s cancer treatment drugs. Shortly after this news became public the shares of ImClone dropped 16% in one day.

Martha Stewart was able to save herself from losses amounting to $45,676. In 2004, Martha Stewart was convicted as the trade was made on the information that the CEO sold his stake, which was non-public info. Martha Stewart and her broker were announced guilty. She received 5 months in a federal correction facility and fined $30,000. The CEO of ImClone Systems was also convicted and sentenced for 7 years with a fine of $ 4.3 million.

— Rajesh Jhunjhunwala

Rajesh Jhunjhunwala insider trading

Rakesh Jhunjhunwala was probed by the SEBI in January 2020 on account of alleged insider trading. These allegations were based on the trades made by him and his family in the IT education firm Aptech. Aptech is the only firm in Jhunjhunwala’s portfolio in which he owns managerial control. SEBI also questioned Jhunjhunwalas wife, brother, and mother in law. This, however, is not the first time that Rakesh Jhunjhunwala has been embroiled in insider trading controversy.

In 2018 too he was questioned over suspicion of insider trading in the shares of the Geometric. Rakesh Jhunjhunwala settled the case through a Consent order mechanism. In a consent order, SEBI and the accused negotiate a settlement in order to avoid a long drawn litigation process. Here an alleged violation can be settled by the accused by paying SEBI a fee without the admission or denial of guilt.

Also read: Pump and Dump- The Infamous and Endless Stock Market Scam!

Other Controversial Insider trading cases

— Foster Winans

Foster Winans insider trading

Foster Winans was a columnist at the Wall Street Journal. Due to the reach of WSJ, the stocks that he wrote about would react accordingly. Winans then began leaking the contents of his columns to a group of stockbrokers who would position themselves accordingly to make a profit.

Winans in an interview with CCR, “One day, I met a stockbroker, Peter Brant, and was going to write an article about him. After a few months, that kind of fell beside the wayside. He one day said to me — that column you write is very powerful, it moves stocks, you are doing a great job, how much do they pay you, isn’t it terrible, only $25,000 a year, with all of the skill and talent that you have, if you told me what you were going to write about the day before it is published, we’d make a lot of money.”

Winans took the deal offered by Peter Brant and was eventually caught by the SEC after being involved in 24 influenced trades over 3-4 months. But in this case, the information was the personal opinion of R. Foster Winans. His defense argued in the courts that although what Winans did was wrong he still could not be considered an insider. This was because the case did not involve any insiders(people within a company or their relatives and connections).

He was still convicted as the information shared with the stockbrokers was not public until his column was published. Winans received a sentence of 18 months in prison which was later reduced.

— Barry Switzer

Barry Switzer insider tradingBarry Switzer was the football coach for Oklahoma in 1981. While at a track meet he overheard some executives talk about some sensitive insider information. This led him to buy shares of Pheonix Resources. By doing this Barry Switzer went on to make a profit of $98,000. Barry Switzer was later acquitted due to a lack of evidence. In this case, Barry Switzer would have been guilty if any of his players or someone he knew was related to the executives present at the track meet.

How to avoid being implicated in Insider trading?

After looking at the above it may be clear that dealing with data that is non-public could be just one step away from being accused of insider trading and hence become a victim of an unnecessarily long litigation proceedings. The following steps help in avoiding this:

-If you are an employee or are dealing with an organization in a role that involves dealing with sensitive data it is important that you are aware of who you share your data with. If you aren’t directly connected with the organization identify your sources ( whether they are in any way connected to insiders). Generally, organization employees and third-party players are required to sign a non-disclosure agreement. 

-Even if you receive data that is important to your trade, verify that the data you have received is public. Do this by checking reliable public sources. If you find yourself in a dilemma it is best to report the information received to the authorities.

-Do not go looking for non-public information about the company from its personnel or those who deal with the company. This will further put you at risk of being investigated if the information is leaked out. You may be accused of insider trading even if you only divulge the info you have received, even if it was overheard.

Also read: Harshad Mehta Scam- How one man deceived entire Dalal Street?

Arguments for Insider Trading being legal

Foster Winans the WSJ journalist argued for insider trading asserting “ The only reason to invest in the market is that you think you know something others don’t.” Arguments have been drawn on who is actually harmed because of insider trading. As your transactions take place with parties that have already decided on the position and want to sell or buy. The Atlantic even described insider trading as “ arguably the closest thing that modern finance has to a victimless crime.”

There have also been arguments made calling to legalize insider trading that involves dealing with negative information. It is because this is the information companies generally keep from their shareholders. Milton Friedman who received the Nobel Memorial Price in Economic Sciences in 1976 said, “ You want more Insider Trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.”

June 23, 2020 Market, Trading No comments yet
INDIA VIX MEANING

What is India VIX? Meaning, Range, Implications & More!

Understanding what is India Vix, meaning & its importance: Ever heard of India Vix? If you’re involved in the market for some time and particularly active in the share market in March-April 2020, then I’m sure that you would definitely have come up with this term “India Vix” at least a couple of times mentioned on different financial websites and channels.

In this post, we are going to discuss, what exactly is India Vix, it’s meaning and how exactly it is important for the traders and investors to understand this term. Let’s get started.

What is India Vix?

India VIX is a short form for India Volatility Index. It is the volatility index that measures the market’s expectation of volatility over the near term. In other words, it explains the annual volatility that the traders expect over the next 30 days in the Nifty50 Index.

The India VIX value is derived by using the Black & Scholes (B&S) Model. The B&S Model uses five important variables like strike price, the market price of the stock, time to expiry, the risk-free rate, and the volatility. India VIX was introduced by NSE in the year 2008, but the concept of VIX is a trademark of CBOE (Chicago Board Options Exchange).

One simple way of understanding India VIX is that it is the expected annual change in the NIFTY50 index over a period of 30 days. For example, if the India VIX is currently at 11, this simply means that the traders expect 11% volatility for the next 30 days. Further, say, if the current index is trading at 9,000 and India VIX trading at 20. So, expected volatility over next year over 30 days will be:

  • Index spot: 9000
  • India Vix: 20
  • The expected downside for the year = 9000 – 20% of 9000 = 7200
  • The expected upside for the year = 9000+ 20% of 9000 = 10,800

Here, the expected range for the year is between 7200 and 10, 800

Anyways, before moving further, let me mention that one should not confuse India VIX with Market Index. Market Index gives information about the direction of the market but on the other hand VIX measures the volatility of the market.

Quick Note: Originally, VIX is a trademark of the Chicago Board Options Trade (CBOE).

Why is India VIX so important?

All the major directional moves in the market are usually preceded by a lot of choppiness or a lot of range play in the market. India VIX plays a very major role in understanding the confidence or fear factor amongst traders.

A lower VIX level usually implies that the market is confident about the movement and is expecting lower volatility and stable range. A higher VIX level usually signals high volatility and lower trader confidence about the current range of the market. A major directional move can be expected in the market and a quick broadening of range can be expected.

For example, during the sub-prime crisis, India VIX was trading at 55-60 (high of 90) levels and the market was in a state of panic and indecisiveness and hence the moves were erratic and hostile. Volatility and India VIX have a positive correlation. High volatility indicated high India VIX and vice-versa.

Similarly before COVID-19. India VIX had stayed below 30 (Since 2014). But since the epidemic disease broke out, the VIX has crossed the 30 level and is trading near 50 levels (trading above 80 for few days) and we have seen Indian equity Index losing nearly 40 percent of its value and is trading near 8000 levels.

So, India VIX plays a major role in understanding the sentiment of the market. But be aware of the fact, India VIX does not give any indication of the directional move in the market, it simply indicates the volatility in the market. So, anyone with a huge investment in Equities should keep a close eye on the movement of India VIX coz a similar movement in the shares of his portfolio cannot be ruled out.

Is there an ideal range for India VIX?

Theoretically speaking, VIX ranges between 15-35. But there have been outliers case of as low as 8(very tight range) and as high as 90 (extreme volatility). If VIX moves close to Zero, then theoretically either the index can double or come to 0. However, usually, VIX has a tendency to revert back to mean.

indiavix chart 2020

The figure above is India Vix chart for the last 10 years. With the current global crisis of COVID-19, the global markets have faced a lot of heat and extreme volatility and all the major global indices have lost nearly 40% from their recent highs and Indian equity market is no exception. With this current level of volatility, India VIX had climbed up to all time high levels of 90 for a couple of days.

And it seemed to be stabilizing near 50 levels about a month ago. The Vix range is still on the higher side, to attain some stability in the market. For stability to return, the global factors will have to improve and the India Vix level should ideally come around 20 levels.

The Current VIX level is 30 (June 2020) and the market seems to be stabilizing for now. But for the long term stability of the market, sub 20 levels of VIX is desired.

What do these extreme Vix levels mean for Options Writers?

India VIX also plays a very major role in the pricing of Options. A higher India Vix levels usually signal more volatile prices for options and a stable range would mean that the options are priced reasonably cheaper.

Simply put, high VIX levels expose option writers to unlimited risk with limited rewards (Premium). A deep in out of money Put/Call option can become at the money or even In the money option in a matter of a couple of trading sessions.

Also read: Options Trading 101: The Big Cat of Trading World

For Example, the stock price of XYZ shares is Rs. 300, and a trader has sold 280 put option contract (2,000 shares) for a premium of Rs. 10 and the contract has still 7 days to expiry. So, with current volatility, the share price can come to Rs. 240 in 2 trading sessions. So the loss for option writer with still 5 days to expiry will be:

  • Strike price: Rs. 280
  • Spot price: Rs. 240
  • Premium Earned: Rs. 10

Here, the loss for option writer: Rs. (240+10-280) i.e., Rs. 30 loss per lot, which is a loss of Rs. 60,000 (2000*30) per lot. Therefore, ideally, the option writer should avoid writing contacts and even if they do, the premium charged should also be higher.

Summary

To summarize, it can be said that India Vix is a silent yet very effective indicator to gauge the range play for Index, which in turn gives us a clear view of the expected movement of the share price.

Historically, large Vix levels have always been followed by a large movement in the indexes and share prices. And even the option pricing, the premiums charged also increase or decrease because of the Vix level changes.

June 19, 2020 Options Trading, Technical Analysis, Trading 8 comments
Trading Psychology - Tensions and Emotions in trading cover

Trading Psychology: Tensions and Emotions While Trading

An overview of Trading Psychology to understand what goes inside the mind of a trader: Trading psychology is the most important aspect of trading even more important than the technical and fundamental aspects of making trades. To be able to control one’s emotion, to be able to think fast on one’s feet and being disciplined, are some of the very key features of this trading psychology that every trader needs to learn eventually.

“I don’t want to be at the mercy of my emotions. I want to use them, to enjoy them, and to dominate them.” ― Oscar Wilde

Taking quick decisions, avoiding panicking, and sticking to one’s informed resolution in times of crisis is what sets a good trader apart from an average one or should I say, the winning one from the losing ones.

Biggest Psychological Tension While Trading

Not maximizing and holding on to a trade for too long, are two sides of the same coin. When I am saying, not maximizing, all I am saying is that when a trade goes in favor, we tend to book our profits too quickly and not maximize the potential. And this is critical because, with the technical and fundamental view remaining the same, there is no reason to book just because something is making money. We should try and squeeze the maximum possible juice out of fruit i.e., the trade.

Similarly holding on too long on to a position and not booking substantial margins even though the market is showing a change in momentum, is another psychological issue with trading. We are always of the viewpoint, what if I book too early. But one should understand that “Profit in hand, is better than profit in books”.

Staying flexible and being open to opportunities around to better the trade price or hedging is an important psychological aspect of trading. As the saying goes in the market, “Bulls Make Money, Bears Make Money, Pigs Get Slaughtered.”

the cycle of market emotions graph

Trading Psychology – Few Important Points to Know

— Avoid Over-Analysis Paralysis

This is the most common psychological trait associated with trading. We tend to over-analyze and over research the trades, before executing them. And which sometimes leads to trade been missed or we don’t take that trade, because some of our technical or fundamental parameters didn’t signal the trade. Too much information sometimes overcomplicates trading.

— The Randomness of Market

We have to accept the fact that markets are random to a large extent. This statement might come as a surprise to many. But we have to understand that our technical and fundamental analysis only works to an extent in the market. And if markets were not random, the technical and fundamental parameters working so far should always be able to predict the market future.

But, that’s never the case. So as long as we are in sync, with the randomness in the market, we should maximize the possibility. Because sooner or later, the randomness will take over and we have to change the parameters.

— Knowing When to Exit

what is factor investing meaning concept more

This skill is as important, as the art of knowing when to enter. Having a firm plan of when to exit is an important ability that every trader should develop. Having the mastery of this skill goes a long way in making the most of the profitable trades and exiting the wrong trades with minimum damage.

The best way to go about this strategy is to exit a part of your position when it makes to a decent profit. Doing this, locks in some profit and it also gives an opportunity to enter again if the markets correct again. And most importantly it gives confidence about one’s trading skills.

— Accepting when you are wrong

To accept when one is wrong is the most difficult art in humans. Similarly, in trading too, if we are able to accept that we have gone wrong in taking a trade, it goes a long way in prolonging one’s trading career. Its a proven fact, accepting a wrong trade, avoids the chain of wrong trades and which goes a long way in preserving one’s trading account.

Also read: 5 Common Behavioral Biases That Every Investor Should Know

— No more FREE internet tips

There are many fraudsters in the market who simply circulate a message (via SMS/email/any other social medium) spreading positive/negative rumors depending on whether they want to sell or buy. One should completely avoid falling for this honey trap, as people might lose a large chunk of their capital by trading this penny or rumor based tips. Traders should always use their informed judgment before entering any potions in the market.

— Have a Winning Attitude

Futures vs Options Trading What is More Profitable

This is an acquired trait over time. The winning attitude develops over time. What we need to understand here is that no trader has a 100% success rate with their trades. It’s our attitude, to do our background research (could be technical or fundamental) on each and every position/trade we take, makes a difference. Lack of discipline while trading, leads to disaster. The positivity with which we enter a trade makes a world of difference in the outcome of the trade.

— No Revenge against the Universe

The Universe here is the universe of trading. An individual trader is like grain of sand on a beach. He/she is simply not big enough to take revenge from the market. Therefore, we should never get into the mentality of taking revenge against the market. One always needs to remember, we are a part of the market and we cannot trade without the market. Moreover, it would not make any difference to the market, if a small trader like you or me is not there in it.

Closing Thoughts

“Every trader has strengths and weakness. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach.” – Michael Marcus

Trading psychology is the most important aspect of trading that every trader needs to learn. In conclusion, we can say that the whole psychological warfare of trading, is the sole pillar on which the world of trading runs. Mastery of one emotional quotient goes a long way in having a long and rewarding trading career.

June 9, 2020 Investing Psychology, Trading No comments yet
SGX Nifty meaning what is it

SGX Nifty Explained – How it affects Indian Share Market?

Understanding SXG Nifty meaning & its impact on Indian share market: If you are an active stock market trader in India, I’m sure that you would have definitely have heard of the term ‘SGX Nifty’. If you open any business news channel, then before the opening of the Indian equity market, all you will see is an hour-long discussion on the SGX Nifty and its implications on the opening of the Nifty for that day.

The importance of understanding this terminology can be seen from the fact that it is one of the most popular hashtags followed or searched over different social media platforms like Twitter, if one wants to have a better picture of the Indian Equity market. In this post, we are going to discuss what exactly is SGX nifty and how it affects Indian share market.

What is SGX Nifty?

The word SGX is an acronym for the Singapore Stock Exchange. Further, Nifty is the benchmark index of the National Stock Exchange (NSE) of India and it is comprised of the top 50 companies listed on NSE. Overall, if we were to add these two constituents, we can say that SGX Nifty is the Indian Nifty trading on the Singapore Stock Exchange. It is an actively traded futures contract on Singapore Exchange.

SGX Nifty Chart

Who is allowed to trade SGX Nifty?

Any investor who is interested in trading Nifty, but is not able to access Indian Markets, finds trading SGX Nifty very good alternative to trade. Even the big hedge funds who have big exposure in the Indian market find SGX Nifty as a good alternative to hedge their positions.

Further, an Indian citizen is not allowed to trade SGX Nifty contracts. For that matter, Indian citizens are not allowed to trade derivatives in any other country.

Difference between Nifty and SGX Nifty?

1. SGX nifty is Nifty futures contract trading in Singapore Stock Exchange and in India, Nifty contract trades on NSE.

2. The contract size of SGX Nifty is different compared to Nifty. In India, we have 75 shares in every Nifty contract Lot whereas the SGX nifty does not have a contract with shares in it. SGX Nifty is denominated in terms of US dollars. Say, if Nifty is trading at 9500, then the contract size of SGX Nifty will be 9500*(2 USD) i.e., 19000 USD.

For example, if the Nifty moves up by 100 points for the day, then make a profit of 100 rupees per share.  So, total profit in case of Nifty will be 100*75 = Rs 7,500. But in the case of SGX Nifty, we will be making a profit of 100*2 = 200 USD per contract.

3. Now, In India, in the case of Nifty, we see Open Interest as the ‘number of shares’ outstanding. But in the case of SGX Nifty the Open Interest shows the ‘number of contracts’ outstanding. Both Nifty and SGX Nifty are highly liquid and a very high volume of trading happens in that.

Also read: What is India VIX? Meaning, Range, Implications & More!

Trading Hours of SGX Nifty

SGX Nifty Futures

(Source: SGX Nifty)

The above figure is the value of SGX Nifty from the website on the Singapore Stock Exchange. It shows the value of SGX Nifty futures traded on SGX. In Singapore Nifty trades in two tranches. One part during the day time and it is denoted by ‘T’ (as seen in the picture above). The other half during the evening time and it is denoted by ‘T+1’. The trades happening in the evening will be considered in the next day settlement prices.

SGX Nifty Trading Timings

(Source: SGX Nifty)

Now, the above picture gives you details about the trading hours of SGX Nifty. The Trading hours mentioned here are Singapore time and the difference between Indian Standard Time and Singapore time is 2 hr 30 minutes. Therefore, we can see that in the Morning (T) session, it trades from 9 am to 6:10 pm Singapore Standard time.

So, in Indian Standard time, the trading happens at SG Nifty from 6:30 AM to 3:40 PM. And the Evening (T+1) session, it trades from 6:40 pm to 5:15 am Singapore Standard Time, which if converted to Indian Standard time will have timings of 4.10 pm to 2:45 am.

Contract Settlements in SGX Nifty

SGX Nifty has two serial monthly contracts and it has Quarterly contracts. The contract expires on the last Thursday of Every expiring month and if the last Thursday is an Indian holiday, then it expires the preceding business day. The SGX Nifty contracts are cash-settled and the final settlement price is derived from the official closing of S&P CNX Nifty.

How SGX Nifty Impacts Indian Equity Market?

Looking at the current global scenario, with the continuous onslaught of COVID-19 pandemic or the rising tensions between US-China over trade deal, we see a continuous inflow of information and news. And these inflow of information has a direct impact on the Global Financial markets.

SGX Nifty still trading way after the closure of the Indian Nifty market, we see an impact of these global news on the SGX Nifty price movement. This further directly impacts the opening pricing of Nifty, the very next day. And that is one of the reasons we see the Indian Nifty market opening at a premium or discount over the previous day’s close.

Note: Most analysts use SGX Nifty as one of the factors to predict whether the market will open higher or lower on a trading session.

Closing Thoughts

The SGX Nifty is a perfect substitute for investors and traders looking to trade in the Indian equity market but are not able to do so. It is a perfect hedging instrument if you are already exposed to the Indian equity market. One unique advantage that SGX Nifty has the longer trading hours compared to the Indian Equity market. And all these points make it a lucrative investment and trading avenue.

May 27, 2020 Market, Options Trading, Trading 14 comments
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