Essential of Trading

By Soumya Ranjan Panda (C.E.O, Smart Finance) .smartfinancein.com

E!Boo" #nternals

T$E%T& SE'E% E()*P+ES

*ORE T,)% -. CO%CEPTS

T/is is a Co0y Rig/t Protected *aterial. %o 0art of t/is E!1oo" is 0roduced, translated to any form it/ out t/e 0rior ritten 0ermission from t/e riter.

Essential of Trading

Contents
Page C/a0ter 23*y $ay of )nalysis C/a0ter 63 Sim0le $ay to *a"e *oney in #ntraday Trade 2.6.2 #nde8 9ecou0ling Tec/ni:ue 2.6.6 ;ann < Fi1onacci Tec/ni:ue to 0redict t/e future C/a0ter 43Sim0lest $ay of Stoc" #n=estment 2.4.2 #ntroduction 2.4.6 #n=estment Basics 2.4.6 Fi=e Stoc" Pic"ing Formula C/a0ter -3 $elcome to Tec/nical $orld C/a0ter 53 Profita1le Future < O0tion Trade Tec/ni:ue 2.5.2 Future and O0tion Basics 2.5.6 O0tion ;ree"s 2.5.4 'olatility and #m0lied =olatility 2.5.- Put A Call Ratio and O0en #nterest 2.5.5 Future and O0tion Trading *odels 2.5.7 Bsing t/e Future and O0tion E=aluator Tool C/a0ter 73 Portfolio *anagement *agic C/a0ter >3 #ntraday Trading Tec/ni:ue 2.>.2 #ntraday Trading #n nifty future using daily =olatility 2.>.6 #ntraday #nde8 O0tion Trade tec/ni:ue using 1inomial 0rice model -2!-6 -4!-? 6>!6? 6@!-. 62!67 4!5 7!6.

Essential of Trading
C/a0ter 2 *y $ay of )nalysis This is my gift to all the investors and traders of the Indian market. In these past few days I have received a bunch of feed back from the readers of my books, seminarians, clients and many technocrats. Different people have different experience with me and with Smart inance. In these years it is my attempt to teach the traders and the investors the noble art of investing and trading. !owever I feel it is practically difficult for an individual like me to train this big mass of traders and investors having different mode of understanding and different approach of understanding. The main aim of this E"book is to give you the #st hand information about the essential knowledge of investing and trading. I have plenty of information flagged in my website like video tutorial, lecture notes on various topics, calculators with illustrated examples etc. I belief knowledge is an asset which need to be distributed among all same time it must be taken in a right spirit. If you are reading this E"book then I personally assure you that this reading will dramatically change your trading skills and belief me this book will make you a winner. $hy I say so% T/e fact is t/at # al ays =alidate my met/ods mat/ematically and /a=e a 0ro0er logic. !ence I have all the rights to &ustify my arguments. The key feature of this E"book is to give you authentic knowledge associated with the concept. I re'uest you not to simply go by my words but &ust read the below mentioned argument. If you are convinced with my ways of thinking then read the remaining part of this E"book or else leave it. # feel t/at t/e major traders and in=estors /a=e only one area of concern t/at is t/ey do not "no /at "ind of action t/ey need to ta"e in /ic/ "ind of mar"et. E8am0le 3 Say on #(th December )**+ nifty closes at a gain of ,-* points and next day on #.th December it opens with a down side gap of (* points then /oint #0 $hether this trend classified as bear day or a bull day. /oint )0 $hich method one should follow to take a call on this day% /oint 10 $hat the trader will do if the trend suddenly changes its direction.

Traders A#n=estors lac" t/e "no ledge of money management 2oney management is the most difficult game. $e must 'uantify our ob&ective and principle. Say for example if I fix my tradable capital as # lakh and my ob&ective is to earn )3 per month having risk appetite to take )3 loss risk then I must follow such type of trade strategies which will be suitable for my parameters of risk appetite and earning expectation rather than &umping into the big ticket trading. Traders /a=e less e80osure to t/e aut/entic literature and e80ensi=e sA tools. 2any traders do not invest in computer, soft wares and books. They used to start investing on technology only after losing a significant capital on trade. TraderA#n=estor acce0ts t/e losses as a mista"e 1ut ne=er in=estigate on t/ose mista"es rat/er indulge in t/e same mista"e again and again. 2any traders do not re"investigate their losing trades thinking that this act will increase their pain. Do not forget that at times to get a 'uick healing you need to bear with the pain. /ractice this, I guarantee4 this is the only method to make you a disciplined trader. *oney ma"es money 1ut traders and in=estors al ays /unt for a magical 0erson /o ill gi=e t/em magical calls. 2any times you would have taken many independent, wise trade decisions. $hich must have rewarded you but you must have forgotten it. 5ou have to analyse those decisions by yourself. It is my final advise that better you stop hunting for magical people and educate your self and take your own trade decision. # acce0t t/at t/e successful stoc" tradersAin=estors are t/e isest 0ersons in t/e orld 1ut t/eir success ill not re0eat for all. I belief success come through hard work, discipline, right decision at right time, research, money management. !ence do all these as your home work and success will automatically come to you. rom now onwards we will only think trading and investing. 6othing other than that. 7nce again I assure you this book will change your trading habit forever.

C/a0ter 63 Sim0le $ay to *a"e *oney in #ntraday Trade Through years of research in this sub&ect I have come with 18 different intraday trading techni'ues. 9ll these techni'ues I have featured in my book called :;ann 2ethod< In all these techni'ues I have gone to the root of the money management and featured the essence of it. =et me define an >Intraday Trade?. :Trader ta"e one 0osition or e80ress /is =ie on a s0ecific ca0ital instrument (stoc", commodityC etc) and ta"e it granted t/at future 0rice mo=ement of t/is instrument ill 1e according to /is c/oice and it ill occur in t/e same day.D 2. In order to 'uantify the intraday trade I will say that the trade has the life till the end of that trading day. The trade may or may not give profit. 6.I have two ways to win this game a. To apply any valid method to predict the future b. To apply any method to protect from any future turn around situation. 4. I must know what the ma&ority of the traders expect the market to behave. -.I must know which technical weapon or method I must use in market. If you analy@e these facts and actively involve them in your decision process then I guarantee that you will win all the trades. In order to simplify your decision process I have devised these 18 intraday trading techni'ues. 9ll my techni'ues are grouped into ) categories 2.6.2 9ecou0ling Tec/ni:ue 2.6.6 ;ann < Fi1onacci Tec/ni:ue to 0redict t/e future

2.6.2 9ecou0ling Tec/ni:ue3 These techni'ues are being devised with the view that I

will not try to forecast the future price and time. I will take a democratically neutral stand on my trade and on the market. The features of these techni'ues are as follows. i. #ntraday Trader is always neutral on market and least bothered about the directional movement. ii. Trader follow the present and assume that the present situation will continue for the day iii. Trader changes his view if the day starts changing and accepts the fact that the past day will repeat. In this section of my development I have devised four most beautiful >Decupling Techni'ues?. Do not go by the look and feel of these techni'ues. 7nce you will start reali@ing the power of these techni'ues then you will never ever loose a single trade. I am going to discuss one of these techni'ues called inde8 decu0ling tec/ni:ue. 5ou can get the video presentation of this method with example from you tube channel http0AAin.youtube.comAsoumyaran&anin . T/is is an intraday met/od /erein # /a=e t/e neutral stand on mar"et and e80ect t/e current trading day ill 1e a mirror of t/e 0re=ious day. T/is met/od you can also use if you e80ect t/e current day ill 1e a de=iant day or a c/anged day of t/e 0re=ious day 1ut you need to c/ange t/e 0ro0ortion of long and s/ort trade.

Be alertEEEEE # am going to discuss t/e 2..F secured #ntraday *et/od Called #ntraday #nde8 decou0ling *et/od. #t is to inform you t/at t/is *et/od is 1eing found 1y me and # am t/e in=entor of t/is met/od. ,o e=er # ne=er guaranty t/e success of t/is met/od. #t is you t/e readers need to test it and find its accuracy. In many days you will observe that two different indices will behave none se'uentially. or example some days you will observe nifty (* indexes will be 1 3 up however 6ifty IT index will be )3 down on the same day and same time. This may be due to different internal or external factors. %ormally traders used to miss t/ese fantastic trading o00ortunities due to t/eir ignorance on t/is 0/enomenon. I have simulated hundreds of examples while developing this trade plan. This is useful in cash as well as in the future segment. 5ou can also construct good short term portfolio based on this concept.

Below mentioned are the procedure I will follow.

#. I will identify two different indices which decouple in a day. ).I will identify four different most active stocks in these two indices. 1.I will identify whether the price actions in these four stocks are trending or trading. 8.I will use any one technical tool to identify the potential resistance and support points of these four stocks. (.If the price actions are trending then probability of higher volatility is eminent and in this &unction I will form 1* 3 to (*3 hedge. ..If the price actions are in a trading band then it indicates less volatility in this case I will form (*3 hedge or less.

In this method hedge corresponds to reduce capital risk. or example in a -(3 hedge If I will buy Cs #**A" worth of share in cash market then I must sell Cs-(A" worth share in the same market segment or vice versa. $hat is the logic behind this principle% In most of the trading days I have experienced that if the price action is trending then traders choice used to give success or else it gives failure. In the trading or the ranging market trader does the mistake. E8am0le3Cefer the IT index and the 6ifty index price on #8th 9ugust )**+ at time ## a.m. 5ou will find in many occasions during the day when the 6ifty was drifting down and IT index was going up.

I made a random choice of Satyam computer and Infosys in IT index and SBI D D= in the 6ifty segment. 5ou can say these four stocks are the key movers and draggers of both the indices. 5ou can take any stock of your choice but keep in mind that the stocks

of your choice must have some dominance on the index at that particular time. I will enter the trade in the dominance period and exit the trade once I observe that the decoupling is vanishing. I will use my #ntraday ;ann Calculator for estimating the support and resistances of these stocks.

Price O1ser=ation Ta1le 2. a.m. to 22 a.m. ,ig/ +o 9+F SB# 56@ 256526 2-?> 27--.> Res2 564 Res6 Res4 su002 su006 su004 2234. a.m. 0rice 545 55? 52> 25.27-5 -.5.7 2-?5 2767 4@-?2--7 25?7 4>524.7 2-?> 2777 -2-

25.7 2567 2575 277- 27?5 2>67 -2> -6> --?

#%FOS&S 277> S)T&)* -2-

In my #st pair of SBI"D= I found that SBI seems to be weaker as compared to the D= because SBI is trading &ust above the support " ) where as D= &ust below the support #. !ence I have decided to sell SBI one share and buy D= one share at ##01* a.m price. In price term also this long and short trade is 183 hedged Ei.e. (#1..A#8+- F#**G18.(*3H. 6ow come to the second pair Infosys"Satyam computer where Infosys is &ust above its resistance # and Satyam computer is &ust below its resistance level #. This seems Infosys looks stronger than the Satyam computer at this movement. I will decide to buy Infosys # share and sell Satyam computer # share at ##01* a.m. price. Below mentioned are the trades I have initiated based on the >index decupling method?.

Trade ta1le Buy 9+F SB# #%FOS&S S)T&)* ( ( 2777 ( 524.7 ( 2( -2:uantity sell 2( 2-?> ( 2 :uantity ( 2 %et 52!2-?> 2777 !-26>@

9round #)01* p.m period I found that both the index are moving in the same direction and the decoupling phenomenon is ending. 9t that time prices of D= , SBI, I6 7S5S and Satyam computer was trading at (##, #8+-, #.-1 and 8#1 and my net trade position was in Cs (A" profit. Take an instance at #01* p.m when the prices of D= , SBI, I6 7S5S and Satyam computer was trading at (#8,#8-I,#.I1 and 8#. and my net trade position was sitting at a profit of Cs1).1(. The closing prices D= , SBI, I6 7S5S at and Satyam computer at 101* p.m. are (**,#8((,#.I8,8#1 respectively . 9t his movement my net profit is Cs8..-*. Conclusion3 7ne interesting thing in this index decoupling method is the maximum capital risk in this trade used to be very less because of the proper balance of the long and short position. The second assumption I made is during the day this decupling will never end at least for few hours from initiating the trade. 6o need to initiate the trades in hurry. Do the proper calculation and then initiate the trade. This strategy will initiate loss if the decoupling phenomenon of both indices will re"couple. #m0ortant 3 a. In this method if the trading day is a trending day or trailing day i.e. indices are making new highs and new lows then choose the most active stocks or dominating stocks in terms of value. b. If the trading day is a range bound days then choose the most active

stocks from the indices in terms of volume.

2.6.6 ;ann < Fi1onacci Tec/ni:ue to 0redict t/e future3 These techni'ues I have devised with the view that I will find the stop loss, target in such a way that it must occur in the real time chart in some future time. The second most important thing is that it must be simple to calculate and mathematically proven. I have given more then )( different intraday trading techni'ues in this section. )s a trader or in=estor you must "no /o is ;annG

$/y /is study is su0erior to ot/er tec/nical toolsG $.9.;ann is t/e fat/er of s ing trading conce0t. ,e imagined t/e entire uni=erse as geometry. T/e sim0lest fact is eart/ ta"es 475 days to re=ol=e around t/e sun. #t tra=els in a 0articular 0at/ it/out any de=iation since millions of years. T/is is /y e are in a 0osition to 0redict t/e summer, inter, and s0ring seasons. T/in" in a different ay. #f t/is 0ractical and aut/entic formula of t/e uni=erse ould /a=e not 1een 0laced in consistence geometry t/en you must not 1e in a 0osition to 0redict t/e future seasonal c/anges. $.9.;ann /as said t/at t/e 0rice of t/e commodity or t/e financial instrument is a num1er and eac/ num1er in t/is uni=erse is associated it/ ot/er num1ers t/roug/ some geometrical relation. ,e arranges t/e natural num1ers 2, 6, 4C.#n different geometrical figures circle, triangle, and rectangle and found t/e common geometrical relations. Based on t/is relation e can 0redict t/e future 0rice and time in an aut/entic ay. T/is is t/e one ay of forecasting t/e future 0rice of a stoc" or commodity /o e=er # do not offer any guarantee of success.

$hether any techni'ue is available for intraday% !ow realistic the ;ann?s and ibonacci method are%

This is a fre'uently asked 'uestion by all the traders. I personally trust on these techni'ues. Belief me these are the purely mathematical techni'ues which I have simplified for you. There are proofs of these techni'ues. It is always important to know, how to use these techni'ues for making a trade decision. In this article I am going to discuss two simple techni'ues used in ;ann and ibonacci study for price forecasting using the intraday price chart of few scripts.

;ann Tec/ni:ue of Prediction In gann?s study we assume that each price movement of a stock is harmonic in nature. In simple terms harmonic means each future price movement is an out come of its past price action. or example if I say Infosys after crossing its resistance level of Cs)*** will touch Cs)1** in near term, then it implies that my incremental harmonic movement will continue till a price target of Cs )1**A" provided the first hurdle point )*** should cross significantly. 6ow in ;ann?s study, we assume that the price moves in a rectangular spiral. $hy it is so% ;ann has said that each number in universe is associated with the other number with some degree relation. !ence he has taken the help of different geometrical figures like triangle, rectangle, and hexagon for identifying the harmonic nature of the price. 6ow without going to the detailed feature of gann?s study &ust apply his first trick /rice to /rice s'uaring action to predict few trades. $hat are the steps we need to follow for applying this techni'ue% Ste0 20 Identify the high and low in a particular time period. Ste0 60 Jompute the degree factors assuming the #+* degree as # Ste040 6ow calculate the #( degree price factor and add it to low. Ksing the

s'uare root formula derive the resistances and same way subtracting the factors

from high, identify potential support. $e have used the same concept for deriving the ;ann calculator. This calculator is a CEE tool available in our website. Ste0 -0 ;ann specifies that the third level of resistance break out or support break out is a confirmation of the trend, keeping the #st level of resistance or support as its stop loss for the current trend. # /a=e done a little modification 1y ta"ing t/e 6nd le=el of resistances and su00orts for t/e trend confirmation it/ sto0 loss 1elo t/e lo 0oint for t/e long trade and a1o=e t/e /ig/ 0oint for s/ort trade.

E8am0le 23 Jonsider the 6ifty future intraday chart on #.th Lune )**+. In the first hour of the trade 6ifty future high" low is 8.#."8(I8 respectively.

)nalysis3 6ow it is my &ob to find the support and resistance and my long and short entry levels. or intraday I will take #( degree &ump as my trigger points. 6ow applying the s'uare root principle in 8(I8 low with #(,1*,8(,.* degree factors I got 8.*(,8.#.,8.)+,8.1I are the resistances for the current trend. Same way applying the s'uare root principle in 8.#. high with #(,1*,8(,.* degree factors I got the supports as 8.*8,8(I1,8(+),8(-*. If I am a long trader then I will make a long entry above 8.#. with stop loss below 8(I8 for a target of 8.1I. If I am short trader I will sell nifty at 8(I1 for target of 8(-* with stop loss above 8.#.. By 26.2. 0.m %ifty future /its -5?@ ell 1elo my entry 0oint. Since the trend was down and it was near to my short entry level I have sold the 6ifty and got the # st target at #.(1 p.m.

E8am0le 63 #.th Lune )**+ SBI high low cash price from #* to ## a.m. is #1.) and #1(# respectively.

By using the above discussed method my resistances are #1(-,#1.1,#1.I,#1-( and supports are #1(., #18I,#181,#11-,#11# and #1)(. The long entry will be made above #1.1 with initial target #1-( and stop loss below #1(#. The short entry will be made at #18I with initial target of #11- and stop loss above #1.). See t/e amaHing result t/is met/od /as gi=en. The day low for SBI is exactly 244>(t/is is t/e 7. degree 0rice target from t/e /ig/ of 2476). Example 10 6ifty spot one hour data from #* to ## a.m on #)th 9ugust )**+ "Its high was 8.18 and low was 8(I+. Ksing this data in the intraday calculator I found that my key supports are 8.**"8(.." 88I+ and resistances are 8.1#"8..."8-1(. 5ou can use this data in the calculator and test its accuracy. 9t ##0*( a.m. it has fallen and found support at 8(.(, ##01* a.m it touched high 8(II and fallen. !ence it is confirmed in the next half an hour nifty was very much within the band of my calculated support # and support ). rom trading point of view if I miss the chance to enter the short trade at 8.## then better in this &unction I will wait or change my data points. Second observation is the bounce from the low 8(.( failed to cross the #st support 8.**. So now the support turns into resistance as per basic technical analysis concept for next half an hour. In this &unction also I can go short with my initial stoploss as 8.## and second stop loss as 8.1# and target as 8(.(. See in the next half an hour 6ifty created new low of 8((- at ##0() a.m. In this example I have used the past one hour high and low points for my observation and calculated all the resistance and support values for the next hour. It is not guaranteed that I will achieve my target or stop loss in the next one hour. It is &ust a mathematical assumption based on my observation. I will suggest all of you to treat this calculator as an alternative software tool as you treat all other indicators and tools. E8am0le -3 Celiance industry high and low in a time period from #* a.m. to #) p.m. on #1th august )**+. It was a trending day for reliance because it was

creating higher high and higher low. 2y Swing high and swing low for this two hour period is )1(1 and )1#( respectively. Ksing these two values on the gann calculator I got the following values0 =ong entry price was0 )11# target Short entry price was0 )11- target )1)I")1)*")1*8"))(. )11I")18-")1.1")8#)

Since it was a trending market for CI= and it was creating the higher high and higher low and the current price is much above my second target point and trending upward. I will use this swing action to enter a buy trade keeping my #st stop loss as )11I which is my key resistance, which turn into the support and my target will be )1.1. I will come out of the trade at )1.1 or slightly below that because this is the 1rd level of target and important resistance point. 9gain I have observed that after touching the high of )1-1..( the price has started retracing back. 6ow I will change my swing low and high. The low as )11I and high as )1-1..(. The stock price )11I is the low which the stock has made &ust before making this high of )1-1..(. 5ou can say this is the high following the low. %otice it carefully t/at # /a=e not ta"en t/e /ourly /ig/ or lo t/e latest lo 0receding t/e /ig/. rat/er # /a=e ta"en

$/y t/is de=iation in 0rinci0leG If the current price action is against the previous trending nature of the price then you need to make this deviation. In the second case scenario if the price continues its trending behavior then also this deviation in principle will come into focus. Ksing these two values )1-1..( and )11I I got Short entry price was0 )1(+ =ong entry price was0 )1(( T/is is congestion 1ecause the difference is only Cs 1 A" so now I will shift my focus to the #st level of target for both the long and short. 9s per my calculation #st long and short targets are )1.1 and )18I. These two prices will act as my new long entry and short entry points. 2ore precisely I will buy reliance above )1.1 and sell below )18I. 2y stop loss for the sell entry will be )1(+")1-8")1I+ and stop loss for buy trade will be )1((")11I")1#8. 7bserve the second part of the calculator which flags the important support and resistance points. 2y entry points also coincide with the #st level of resistance and support. 9s you can observe from the chart at #)01( p.m after drifting to the level of )1.) the stock has a minor bounce back to )1.. and the greater downward action started once it has broken the level of )18I. 2y target level of short entry was )18)")1)."))--.

5ou can say it as a coincident or a mathematical wonder. #.9t #01* p.m. stock touched )18# and bounced back to )18I level. ).9t )0)* p.m. stock touched the day?s low of )1). level. Though ;ann?s other method is to calculate the time action but it is beyond the scope of this calculator. 5ou can read all those methods in my book ;annIs met/od. Conclusion3 This ;annIs calculator is a mathematical application. It is being developed using the price to price s'uaring action of ;ann?s method. It is my advice to all the tradersA investors to treat this application as an informative and educational tool. Fi1onacci Tec/ni:ue to 0redict t/e future #ntroduction3 ibonacci numbers are the numbers of the nature. In ibonacci number se'uence each succeeding number is the sum of its two preceding numbers. The number se'uence #,#,),1,(,+,#1,)#,18,((,+IM is known as the ibonacci number se'uence. $/at is t/e im0ortance of t/ese num1ersG In many natural occurrences this number is present. or example the electrons in an atom are arranged in the suborbital in ibonacci se'uences. The flower petals in most of the flowers are arranged in the ibonacci se'uence. 5ou will find hundreds and thousands of examples of the fibonacci numbers in the universe which is beyond the scope of this E"book. ibonacci ratios are the rational numbers we derive by dividing one ibonacci number with the other. or example alternate ratios are 1A(, (A+, +A#1M. Inverse alternate ratios are (A1, +A(, #1A+M.. Same way from different combinations you will find different ratios. 7ne most interesting fact is that all these ratios in the ibonacci se'uence are e'ual. or example all the alternate ratios are *..#+ and all inverse alternate ratios are #..#+ and so on. Presence of Fi1onacci ratio in uni=erse3 =ike the ibonacci numbers the ibonacci ratio is very much present in the universe and in our human body also. =ike the longest part of the finger bone is *..#+ times the length of the finger. The length of the longest part of your hand is *..#+ time the length of the hand and many more. Fi1onacci Ratio for forecasting 0rice of a stoc" or commodity3 Due to its versatile natural presence and occurrences we find these rational ratios are very important to determine the price trend of a stock or commodity. In any directional price movement it is experimentally proved that the prices which map to the *.)1., *.1+), *.(, *..#+, *.-+. retracement level act as the potential resistance and support point. I will define Cetracement is a phenomenon where the ongoing trend take a halt and the new trend starts against its previous trend. 9ccording to me nothing wrong in interpreting the

retracement as a correction or a bounce back.

,o to inter0ret retracement for ma"ing t/e trade decisionG Nuite simpleO I have segmented the retracement levels into three parts. Segment 23 Bounce 1ac" le=el0 If the price finds the support at (*3 retracement level and resistance at 1+.)3 retracement level or vice versa then greater chance is there that it will go back to its previous trend. Segment 63 9eat/ Hone le=el 0If the price finds the support at -+..3 retracement level and resistance at .#.+3 retracement level or vice versa then less chance is there that it will go back to its previous trend. Segment 43 Range 1ound le=el3 If the price finds the support at 1+.)3 retracement level and resistance at )1..3 retracement level or vice versa then greater chance is there that will remain ranged in that price until and unless it has not given any break out. Based on the above facts and argument the trader used to take trade decision.

,o to initiate trade using Fi1onacci RetracementG Taking the swing high, low and applying the ibonacci ratios on it we will pro&ect the buyAsell entry levels, stop loss and targets. Peep in mind that these targets are the resistances and the supports. Kse the trailing stop loss mechanism for better result. If the current market price of the script is in the J9eat/ HoneD calculated from the swing high i.e. :death @one< for the long traders then go short in the counter. In this case the # st stop loss will be (*3 retracement level and the )nd stop loss point will be 1+.)3 of retracement level and I will keep my target as #..#+ of the retracement level drawn from the swing high. If the current market price of the script is in the J9eat/ HoneD calculated from the swing low i.e. :death @one< for the short traders then go long in the counter. In this case the #st stop loss will be (*3 retracement level and the )nd stop loss point will be 1+.)3 of retracement level and I will keep my target as #..#+ of the retracement level drawn from the swing low. or your understanding we have provided the online ibonacci retracement calculator in our web site .smartfinanceeducation.com . $e have also provided the ibonacci

cluster calculator for your use. Fi1onacci Cluster3 ibonacci cluster are the two most important support and resistance points of a price. In other words if you will draw multiple retracement lines from different highs and lows then you will come across with one or more support and resistance points which will occur fre'uently in all the retracement lines. These two points are called ibonacci cluster. Fi1onacci Calculator E80lained. !ow to use the calculator% #ntroduction3 ibonacci number se'uence is one of the most important number se'uences of mathematics. Its wide presence in many natural occurrences made many analysts to think and include this study in the financial forecasting. In this method of forecasting we will be using few ratios. These ratios are derived from the ibonacci numbers by the way of dividing with each other. The most important phenomenon exhibited by the ibonacci number se'uence is that"these ratios are uni'ue if we follow the uni'ue style of division. or example if I will divide the previous number in the ibonacci se'uence with its next higher number Ei.e. )A1, 1A(, (A+, +A#1M.H then the ratio will be *..#+. This is called alternate ratio. This phenomenon of ratio e'uality does not visible in any of the other number se'uence. The detailed discussion of this number se'uence is beyond the scope of this article. !owever you will find more on this sub&ect in my book JFi1onacci met/odD. Fi1onacci calculator #nter0retation and use3 ibonacci calculator which I have devised for your use is using three most important ibonacci methods called retracement, expansion and the fibonacci cluster. This calculator is a ready"to"use device which any one can use without knowing the ibonacci methods in detail. In order to predict the support, resistance, stop loss, target, buyAsell entry prices. I have used the concept of 1ounce 1ac" 0rice Hone, deat/ 0rice Hone and Fi1onacci turning 0oint 0rice Hone for identifying t/e 0recise 1uy and sell entry le=el. 9ll these price @ones I have described in my book on ibonacci Techni'ue with example. If you have a copy of that then refer it for explanation. In order to use the retracement and the expansion part of the calculator you need to enter two values and the calculator will calculate the most probable support and resistance points with the long entry and short entry prices. In order to use the ibonacci cluster you need to provide three swing high and swing low price points as input to the calculator. Jluster will determine the most important support and resistance for current price movement. $hile choosing the inputs in the intraday

price chart take last one hour swing high and swing low for retracement part. =ast one hour?s three consecutive swing high and swing low you need to take for cluster. E8am0le3 7n ).th September *+ if I will take the 6ifty future high as 8#*I and low as 8*(1 at ##01* a.m. Then the calculator will predict #) resistance and #) support points along with the buy entry and sell entry price with a set of + target levels ) stop loss levels. In this calculator I am using the death @one calculated from the swing low as my buy entry price and same way the death @one calculated from the swing high as my sell entry price. or this particular example we place the buy entry above 8*++ with stop loss 8*+# and 8*-8 and targets 8*I."8#*I"8#)8MThis buy entry price is the median price of death @one price calculated from the swing low and the bounce back price calculated from the swing high. Same principle we follow for calculating the sell entry price. Fi=e Rules To initiate trade using Fi1onacci Calculator3 Rule 23 our Support or four resistance breakouts is considered as the reversal of the trend. If it is against your initiated trade then reverse the trade. Rule 63 Do not reverse your trade until and unless the support") or resistance") holds in the price chart. Rule 43 Though ibonacci techni'ue is silent about the volume part but it is wise to use this techni'ue if the support and resistance breakout happens with rise in volume. Rule -3 Jluster is the most important swing turning point. !ence watch the cluster points carefully for trade decision. Rule 53 Kse the trailing stop loss mechanism in all your trades.

C/a0ter 4 Sim0lest $ay of Stoc" #n=estment 2.4.2 #ntroduction3 In financial market in"order to understand and evaluate any stock the #st basic step we adopt is to see the financial ratio. inancial ratios are derived from one or more financial parameters by the way of dividing one parameter with the other. $ith the help of these ratios one can make the primary investigation on the stocks and its fundamental outlook. These ratios will also provide the comparative analysis of the good stocks to invest from a group of stocks available in same sector. Before going deep into the ratios let me explain few basic terms associated with the financial ratios. 2.4.6 #n=estment 1asics3 Balance S/eet3 Balance sheet of a company is the consolidated information about the assets and liability of the company. This part of the information also contains various figures like the sale volume, net profit, reserve and surplus etc. If you are a non commerce graduate then definitely you will find it difficult to understand the balance sheet. !owever as a trader or investor in the capital market you don?t re'uire knowing the construction and detailed feature of the balance sheet. 7nly little information on balance sheet is enough for our understanding. %et 0rofit3 The profit made by the company during a financial period deducting the taxes and other liabilities is called net profit. Reser=e and sur0lus3 The amount of profit which is not disbursed to the investors by the way of dividend is called reserve and surplus. It is kept in the reserve and surplus book. !owever company can use this capital for the well being of the company and investors with the approval of the share holders of the company. 2any times this capital is being used by the company to issue the bonus shares to the investors. Boo" =alue of t/e s/are3 Book value of a share is defined as the net asset of the company per each ordinary out standing share. In other words you can say each share holder?s value in the company in terms of assets is called book value.

Ratio analysis3 The financial ratios which I am going to explain in the following section are a. E/S EEarning per ShareH 1. /AE E/rice to Earning CatioH c. Debt "e'uity ratio. d. /rice to book value ratio. 5ou may find many more ratios in the financial mathematics but all are not important for our study. 9fter understanding the basic definitions of these ratios if you will take a group of industries from a particular sector and compare their ratio then you will get to know which is the best company to invest4 based on the current market price. 2y aim is not to teach you the theory of these ratios. 2y aim is to make you aware of the best method to choose a stock of stocks. In this article I will explain the various ratios and the next article :Stoc" =aluation and stoc" 0ic"ing using financialsD I will discuss how to choose a stock by using these ratios. a. EPS (Earning 0er S/are)3 E/S is derived by dividing the net earning of the company by the number of outstanding shares of the company. These out standing shares are the general shares. This does not include the e'uity convertable preference shares, bonds or the commercial paper. 7ut standing shares are the tradable shares. 1. PAE (Price Earning Ratio)3 /rice earning ratio is derived by dividing the market price of the share by the E/S. c.9e1t KE:uity Ratio3 Debt e'uity ratio is the total debt of the company divided by the number of ordinary e'uity shares. This Catio exhibits the debt per share holder. d.Price to 1oo" =alue ratio3 This is derived by dividing the book value of the share with the current market value of the share. These four ratios are the key ratios for fundamental analysis. The main &ob of the fundamental analyst is to provide you the information on the growth stock and value stock.

,o to identify stoc"G

/ic/ stoc" is gro t/ stoc" and

/ic/ stoc" is =alue

$hen the stock will be trading at a high premium as compared to its peer companies available in the same sector then we will say it is a growth stock. !owever this does not guarantee that the stock will be in premium forever with respect to its peer companies. Qalue stocks are the stocks which trade at discount with respect to its peer companies as per the financial ratio multiple.

The second attribute of growth and value stock is that the growth stocks will have higher financial ratios and higher pricing and the value stock will have lower financial ratio and lower market price

E8am0le3 or example let us take S9I= and TISJ7 both the companies are in the same sector having E/S as E#8.-*, 1+.)IH and /AE as EI.#+, #-..)H taking the current market price as #1( and .-( respectively.

6ow in these two stocks the Sail is called value stock having low /AE ratio and low E/S. !owever the Tata steel is called a growth stock having high E/S and high /AE ratio. Investor having high risk appetite can choose the growth stock and the investors having low risk appetite can choose value stock. In both the case the period of investment must be medium to long term.

2.4.6 Fi=e 1est stoc" 0ic"ing formula #ntroduction3 Stock picking is a complex and serious act. $hile designing an investment portfolio in e'uity, one needs to examine various aspects in order to choose the stocks. Before going deep in to the technical and mathematical approach of choosing the stock let me explain few basic terms associated with the stock picking. I will also discuss F#'E best known formulas for stock picking. The portfolio irrespective of number of stocks and capital employed is being developed by using following procedure. Take it as an assurance from me that as an investor if you follow these five steps then your portfolio will yield you more. a. T/e nature of t/e Portfolio3 $hether it is a growth portfolio or value portfolio or a hybrid portfolio Ei.e. growth and value stocks together in a common portfolioH 1. P/ases and ma8imum life3 The portfolio can go through different phases like accumulation, distribution and harvesting. Same way based on the investor?s investment ob&ective the life of portfolio must be taken into account for construction of portfolio. c. )ssessment3 This is the place where the investor assess his portfolio to examine whether the base ob&ective or goal of constructing the portfolio is satisfied or not. This is a place the investor needs to see the performance of various portfolio components over a time period. 9ll the above things do not have any direct link with the stock selection. !owever it is better to keep in mind the above mentioned facts. Formula 23 Buy t/e stoc"s /a=ing lo PAE ratio. This is a common and most talked about formula in investors? community. =ow /AE stocks used to yield more as compared to the high /AE stocks. 5ou need to see some other facts before grabbing a low /AE stock. If the future earning of the company is suspicious and that result the fall in the current market price of the stock then low /AE will not increase the chance of a de"

rating in the stock.

E8am0le3 Take the case of Tata Steel and S9I=. Though the current /AE which is I,#- based on the current prices of the stock as #1( and .-( suggests S9I= is a better investment stock as compared to Tata Steel but I will suggest to buy Tata Steel. $hy% S9I= is a government controlled company having less freedom and lacks global presence. !owever Tata steel has global presence and better market presence. 6ote that in this analysis I kept my thoughts silent on the ;rowth and Qalue part of the investment.

Formula 63 Buy t/e =alue stoc" or gro t/ stoc" /a=ing lo ratio and /ig/ reser=e and sur0lus.

de1t A e:uity

Investor having long term outlook in any counter can stick to this concept. The reserve and surplus will come to the investors in the form of bonus shares or in the form of dividend. !ence the reserve and surplus is always good for the investor?s future. DebtAe'uity ratio is a parameter which signifies how the company?s profitability is being exposed to the interest rate risk. If the company has a fat debt book then any time the interest rate rises the company has to meet the interest rate needs and it will have direct impact on the profit of the company. Second case if the company management is conservative in its approach then they will raise minimum debt from the market and this will also arrest the growth of the company. I conclude my discussion by saying that lower the debt e'uity ratio lower is the growth of the company and the future is protected from interest rate risk. But the future is not protected from the competition risk or growth risk. Formula 43 Buy t/e stoc" /a=ing good trac" record of gi=ing 1onus s/ares to /is in=estors. Investors always have greater expectation from their company. The management?s greatness to distribute the accumulated wealth in the form of bonus share always brings more number of shares to the market and invites more new investors into its investor?s camp. This also one way brings more democracy to the company in the form of new independent directors. In other words greater the democracy means greater transparency in the business and policy making. In this case the long term investors are the winners in all

aspects.

Formula -3Buy stoc" /a=ing lo di=ided 1y annual EPS gro t/).

PE; ratio (i.e. 0rice to earning ratio

/E; ratio is the best parameter for choosing the value stocks. This ratio measures in terms of the value how far the current market price is &ustified. =ower /E; ratio signifies that the current price movement is not &ustified with respect to the earning growth. !ence it is a good buying opportunity for the investors. Formula 53 Buy 'alue stoc" 1eta. it/ /ig/ 1eta or gro t/ stoc" it/ lo

Beta is a factor which measures the price movement of individual security with respect to the price movement in the index. !igh beta stocks used to rise or fall more as compared to the index and vice versa. Jontrast to my above formula the value stocks always have low beta and the growth stocks have high beta. In any case if you find the divergence occurred in this rule then you can say some kind of great change is going to take place in the value stock and use this opportunity to buy the stock. Second case0 If any growth stock after a prolonged period of correction shows the signal of low beta then you may say the valuation is fair and the stock is in strong hand. Kse this opportunity to buy the stock.

C/a0ter $elcome to Tec/nical $orld #ntroduction35ou must have some knowledge or deep knowledge in technical analysis. In this chapter I am not going to discuss the age old concept of patterns, moving average or oscillator. I strongly belief as a trader you must know the facts and finding and the secrets of the technical analysis. In simple words it is the study of past occurrence to predict the future event. I have made many changes in technical studies and featured them in my book on technical analysis volume #, ), 1. !owever I have not changed the very definition or the fundamental attribute of these studies. ew of these studies I am going to present you in this e"book. Pi=ot 0oint3 This is the simplest method in the technical stuff. $e calculate the pivot support and resistance points by providing the high, low and close price in the calculator. The formula used to calculate the pivot resistances and supports are as follows. Cesistance 1 G !igh , )RE/ivot " =owH Cesistance ) G /ivot , EC# " S#H Cesistance # G ) R /ivot " =ow /ivot /oint G E !igh , Jlose , =ow HA1 Support # G ) R /ivot " !igh Support ) G /ivot " EC# " S#H Support 1 G =ow " )RE!igh " /ivotH 2any traders used to argue that these pivot points never work in real life. !owever a little change in this used to produce the ama@ing result. I made the following changes to find out best result out of this. a. or intraday trade I have taken the hourly high, low and current 2arket price. b.In the ( minute price chart I have taken the longest candles high low and

close and found the result. 9fter making these two changes in the input I found this method has produced ama@ing result for me for taking the trade decision.

E8am0le3 on #+th December )**+ around #).1* p.m. I found the 6ifty longest candle happen at #)0#* p.m. in the ( min price chart. The high was )II* low )I+8, )I+. was the price at #).1* p.m

%o using t/ese =alues on t/e 0i=ot calculator # got /ivot point G)I+...* Cesistance #G)I+I.1* Cesistance )G)II)..* Cesistance 1G)II(.1* Support #0 )I+1.1* Support )0 )I+*..* Support 10 )I--.1* Cefer the data after #)01* p.m. after finding the support at )I+. the index penetrate the resistance 1 i.e. )II( and touched the high of 1**8. If you observe the volume then you will find that at )II1")II. level maximum volume get traded. This signals that the resistance and support calculated from the longest candle produced the potential swing points. I will advise you to follow the pivot calculator with this modified approach. 5ou will find many more applications of the technical tools with the modified approach on my books on technical analysis. 7nce again I will 'uote that none of the studies in this universe is wrong. 7nly we the people should have the inability to interpret and use it. 9s a trader or investor try to use the tools. !owever always have an attitude to experiment on these tools.

C/a0ter 5

Profita1le Future < O0tion Trade Tec/ni:ue

2.5.2 Future and o0tion 1asics3 #ntroduction3 uture and options are the two trading instruments available in the capital market for risk management. $hen we speak about the risk in the capital market, they are of two types0 9. capital value risk B. time value risk. In stock market the way the price of certain stock used to appreciate same way the chance of decay also not ruled out. To manage the above said risk, we take the help of futures and options. To be a wise trader in the future and options market you need to follow the strategic trading mec/anism. The key benefit of the strategic trading is you know the maximum loss what the position can incur if it goes against you. Same way you also knew the maximum profit what you can get if the position favors you

$ith the help of our 7nline uture and 7ption Jalculator you will get the information about )8 different uture and option strategies for one stock or index of your choice. The calculator will also inform you the maximum loss and profit you can get from each strategy at different levels. If you want to learn more about the future and option strategies then follow my book named :*asterIs "ey to Future and O0tionsD . In this E"book I will discuss all the basic issues related with the future and options trading. 9lso the trading techni'ues. I will advise all the users to read this book once or twice before using the calculator.

This is the finest 'uote I use to give it to all my seminarians :Only the attitude of learning the good literature and openness in the mind to accept the new concepts will make you a successful trader or investor. No ones advise or recommendations will act cent per cent accurate and no one can make you the winner in this market Future3 uture as per the stock market definition is a contract between the buyer and seller to settle or execute a trade in some future date at a pre agreed price. or example if you bought #** shares of Tatasteel at (-( with the condition that the trade will be settled 1 months from now then it is called a future contract. 7nce the contract is formed then both the parties need to obligate the contract till the end of the contract period in daily basis by the process of *ar" to *ar"et *argin procedure. Cefer the previous example of Tatasteel. If Tatasteel falls by Cs#*A" today then for #** shares you need to pay #**F#*GCs#*** to the seller. This amount Cs#***A" is called the mark to market margin. 7ne most important thing is this trade is going to happen in some future date so both you and the seller need to pay some initial margin on the trade value to the person who regulated this trading activity. In our case the stock exchange and the broker is regulating the trade hence you need to pay the margin to your stock broker. O0tion3 7ption is nothing but the non obligated future contract for the buyer. !owever it is an obligated contract for the seller. The basic difference is both the parties can execute the contract in different price strikes by paying and receiving a token amount called premium. If the underlying stock or index associated with the option goes in the favour of the buyer then the buyer has the right to exercise the contract or ask the seller to buy or sell the shares at a particular price mutually agreed by both in some past date. !owever if the trade moves against the buyer of the contract then the buyer do not have to obligate the contract and the maximum loss he can suffer is the amount of premium which he have paid to the seller. 7ptions are classified into two categories based on their exercise nature like Euro0ean and )merican. urther more based on the strike price with respect to the underlying stock or index price it is being classified as in t/e money, at t/e money and Out of money. The buying right options are called call o0tions and the selling right options are called

the 0ut o0tions. Totally . types of options are available.

2.#n t/e money call o0tion3 #f t/e stri"e 0rice of t/e call o0tion is lo er t/en t/e underlying stoc" or inde8 t/en it is called in t/e money call o0tions. E8am0le3 If Celiance industry share is trading at )#** then the call option strike of )*(*, )*** are called in the money call option. 6.)t t/e money call o0tion3 #f t/e stri"e 0rice of t/e call o0tion is e:ual to t/e underlying stoc" or inde8 t/en it is called at t/e money call o0tions. E8am0le0 If Celiance industry share is trading at )#** then the call option strike of )#** is called at the money call option. 4.Out of money call o0tion3 #f t/e stri"e 0rice of t/e call o0tion is /ig/er t/en t/e underlying stoc"Ainde8 t/en it is called out of money call o0tion. E8am0le3 If Celiance industry share is trading at )#** then the call option strike of )#1* is called out of money call option. -.#n t/e money 0ut o0tion3 #f t/e stri"e 0rice of t/e 0ut o0tion is /ig/er t/en t/e underlying stoc" or inde8 t/en it is called in t/e money 0ut o0tion. E8am0le0 If Celiance industry share is trading at )#** then the put option strike of ))** is called in the money put option. 5.)t t/e money 0ut o0tion3 #f t/e stri"e 0rice of t/e 0ut o0tion is e:ual to t/e underlying stoc" or inde8 t/en it is called at t/e money 0ut o0tion. E8am0le0 If Celiance industry share is trading at )#** then the put option strike of )#** is called at the money put option. 7. Out of money 0ut o0tion3 #f t/e stri"e 0rice of t/e 0ut o0tion is lo er t/an t/e underlying stoc" or inde8 t/en it is called in t/e money call

o0tions. E8am0le0 If Celiance industry share is trading at )#** then the put option strike of )*(* is called out of money put option.

The option premium always has two components. ). #ntrinsic =alue B. Time =alue. Intrinsic value only exists for the in the money call options and in the money put options. Intrinsic value is the direct money value factored in the option premium. or example if 6ifty is trading at 8(** and 6ifty 88** call option is trading at #(* then you can say it has Cs#** Ei.e. 8(**"88**G#**H as intrinsic value and Cs(*A" as the time value. 2.5. 63 O0tion ;ree"s O0tion ;ree"s are the mathematical factors derived from the option premium and the underlying asset price or time or from other factors. The commonly used ;reeks are delta, gamma, theta and Qega. The definition these parameters I will define below however the detailed discussion on ;reeks you will find on my book :2aster?s key to futures D options< 9elta3 It is defined as the rate of change of option premium with respect to the unit change in the underlying price. E8am0le0 If nifty is trading at 8*** and the 8*** ce is trading at Cs#(* then delta is defined as the rate of change in option premium with unit change in nifty. 2ore precisely if nifty change by (* points then what is the 3 change you will see in the option premium. !owever the mathematical interpretation is 'uite different. The delta of a call option is less than or e'ual to ,# and the delta of the put option is less than e'ual to "#.Same way the delta of a future is always #.

;amma3 It is defined as the rate of change of delta with respect to unit change in the underlying price. 2ore precisely I can say gamma defines how the delta of an option changes as per the movement of the underlying. E8am0le0 If I say gamma is *.# then you can interpret it for unit change in the underlying price the delta of the option changes by #*3. 'ega0 It defines the unit change in the option premium with #3 change in the volatility. E8am0le0 If the Qega is defined as (3 then you can say for each #3 change in the volatility will bring (3 changes in the option premium. T/eta3 it is defined as the 3 change in the time value of the option for unit change in the time. E8am0le 0 If theta is *.*) or )3 for a particular option then this can be interpreted as for each one day we near towards the expiry we will loss )3 of the time value associated in the option . 9ll the ;reeks which I have discussed above and their interpretation are correct but the mathematical procedures to calculate and interpret these ;reeks are bit different. 2.5.4 'olatility and #m0lied 'olatility3 'olatility is the most ambiguous term in capital market. I always say that the mystery of volatility is still unfolded in the context of capital market. $e define the volatility as the :annuali@ed standard deviation of the price change<. I have given a brief introduction on the volatility and the logarithmic mathematical procedure to calculate the historic volatility in my book :2aster?s Pey to uture and 7ption<. In this article I am going to describe few important issues associated with the volatility. #.The increase in the volatility will result higher premium for the options. 6. Increase in volatility will result rise in the margin re'uirement 4.Increase in volatility brings more uncertainty in the market and results more loss for traders. -.The decrease in volatility lacks participation, results less premium in

options and signals the change in the market direction on the near future.

Cefer the trading strategy section of this article to know more about the strategy one must follow in different volatility conditions discussed above. #m0lied =olatility is the actual volatility associated with the option premium at particular time. Though many successful method is available to calculate the implied volatility. I always recommend Brenner and Subramaniam formula for calculation of implied volatility. Though many other method like 6ewton rapsons interpolation method and bisection method also highly recommended for calculating the Implied volatility 2.5.-3 Put A Call Ratio < O0en #nterest3 /ut AJall ratio is defined as the number of put options divided by the number of call options available at a particulate time. /ut call ratio is the most sensitive parameter for identifying the mar"ets future direction. 6ow take the #st case when the 0ut call ratio is rising. This signifies that number of put option contracts is in rise. It has following interpretations. a. The future traders are hedging their long positions against the put options. b. The traders are buying the put option anticipating the market to fall c.The traders are forming the covered put strategy against their future short positions. In all these above cases the directional anticipation is negative. 2eans maximum people expect the market to come down significantly from the current level. The )nd case when the 0ut call ratio is falling. This signifies that the number of call option contracts is in rise. It has the following interpretations. a. The future traders are hedging their short positions against the call options. b. The traders are buying the call options anticipating the market to rise. c. The traders are forming the covered call strategy against their future long positions. In all these above cases the directional anticipation is positive. 2eans maximum people expect the market to go up significantly from the current level.

7nly from this date it is difficult to predict the directional movement of the market. $e need to analyse the open interest, volatility and some of the technical factors like moving averages to make a formulated decision. O0en interest is defined the number of open contract at a particular point of time. $hile deriving the 7I Eopen interestH one buy and sell contract is consider as open interest one.

If the open interest is on rise with rise in the put call ratio and the volatility is higher than the past #* days weighted average volatility along with the sensitive moving average prices are acting as the ma&or resistances then this confirms the market undertone is negative and vice versa. If the put call ratio is unchanged with rise in open interest then the confidence is in the direction of the market and ma&or positions are un"hedged. In this case put call ratio can be avoided for analysis and the trader needs to follow the technical indicators along with the volume to derive the decision on the trade. !owever in such a scenario the directional trend is suspicious and may not hold for a long time. 2ore about this sub&ect you will find in my book :2aster?s Pey to future and option<.

2.5.5 Future and O0tion Trading *odels 2any different methods are followed while forming the future and option trading models. !owever it is being classified into three categories. a. Japital Cisk 2odel EJC2H b. Qolatility Cisk 2odel EQC2H c. Time Cisk 2odel ETC2H These models are my own innovated models .These trade models I have formed by doing extensive research on this sub&ect. Since these works are the essence of my trade secrete I want to keep it away from the public domain. !owever you will find all these models in my book. The brief introductions of these models are as follows.

In capital risk model we need to give importance to the maximum risk appetite of the trader and derive a combination of trade strategy which will not result loss greater than the risk set by the trader. Same way in the QC2 and TC2 the volatility and time are given importance. rom the base strategies we classify. uture longAshort with putAcall option long, )A# and (A) call and put spread strategy, iron condor strategy and many more are the QC2 strategies. Jovered call, butterfly strategies and many more are the TC2 strategies. 6o specific strategies fall under the JC2. In JC2 many combinations are being formed keeping the capital risk as the prime ob&ective. To learn more about the individual strategy internals refer my book on futures and options :2aster?s Pey to future and option<. I am going to give you the idea to get >..F return on your ris" ca0ital if the index moves down by -3 from the current level. On 64rd Se0tem1er .? when 6ifty was trading at 8)(* plus I have observed that the 8#** put option for 7ctober expiry was trading at Cs#8(A" and 8*** put option of 7ctober expiry was trading at Cs ##*A" . Same time 8)** call option of 7ctober expiry was trading at Cs#I(A" and 81** call option of 7ctober expiry was trading at Cs#8(A". Based on the above said inputs I have formed the following strategies.

The 6ifty bear spread in the strike of 8#** and 8*** has loss risk of Cs1(A" and profit of Cs .(A". The nifty bull spread 8)** Je and 81** Je has loss risk Cs (*A" and profit Cs (*A". The market internal suggests above 8).( 6ifty may touch 88** level and below 8#(* it may touch 1+(* level based on the ibonacci retracement.

If you take a capital risk of Cs#-(**A" on the bear spread by the way of forming #* bear spreads and capital risk of Cs #)(**A" on the bull spread by the way of taking ( bull spread then -3 downward movement of 6ifty will award you Cs ))***, and (3 up move in 6ifty will result you Cs1(**A" as loss keeping the volatility as 1(3 and time till )nd week of 7ctober.

%o on 67t/ Se0tem1er .? when the 6ifty falls below 8*** I got the following out comes. 8***, 8#** put was trading at Cs)8*A" and Cs#+(A". 8)**, 81** ce was trading at CsI)A" and Cs.*A". !ence the net /A= is derived as follows0 /rofit in 8#** put option long G E)8*"#8(HR(*R#*GCs8-(**A" =oss in 8*** put option short G E#+("##*HR(*R#*GCs1-(**A" =oss in 8)** call option long G E#I("I)HR(*R(GCs)(-(*A" /rofit in 81** call option shortG E#8(".*HR(*R( GCs )((**A" %et 0rofit is L Rs@?..A!

$hen I will decide whether to hold the strategy or exit, 'uite simple in the above example I have encountered nifty is &ust below 8***. So 8*** put option short is resulting more loss because of higher time value. If I will wait for a level below 1I** then my bear spread may result higher profitability keeping my bull spread losses bit higher than my current loss. 9ll in all my profit will be higher than the current net profit. !ence I conclude that any rational approach in deriving the D7 strategy will always give you good return. 5ou need to have patience and persistence to follow these wonderful combinations. 2.5.7 Future and O0tion E=aluator3 ,o to use t/e Future and O0tion calculatorG 5ou need to input three callAput option strike price and premium. Same time you need to input underlying future price and lot si@e. The calculator will simulate and give you the out put in the form of 6- different strategies it/ t/e ma8imum loss 0rojection and 0rofita1ility in eac/ le=el. 5ou need to choose the strategy having good risk reward ratio. 2eans for each one rupee of loss risk what is your reward. In this calculator we have used following strategies. #.Future long it/ 0ut o0tions0 In this you need to buy one future and buy one put

option of the desired strike. E8am0le3 Buying 6ifty future at 8(** with at the money put option cover of 8(** Cs#**A". The benefit of this strategy is that the trader gets involved in the bull market with limited exposure. That is if 6ifty falls from the level of 8(** after the trader has initiated the position then the maximum loss the trader can suffer is the extent of time value in the put option. ). Future s/ort it/ call o0tions0 In his you need to sell one future and buy one call option of the desired strike. E8am0le3 Selling 6ifty future at 8(** with in the money call option cover of 88** Cs#.*A".The benefit of this strategy is the trader get involve in the bear market with limited exposure. That is if 6ifty raise from the level of 8(** after the trader has initiated the position then the maximum loss the trader can suffer is the extent of time value in the call option. In our case the time value in the call option is Cs.*A" per one unit. 2ultiply it with the lot si@e to derive the exact amount of loss in the strategy. 1.%et de1it 1ull s0read0 In this you need to buy a lower strike call option and sell higher strike call option. E8am0le3 Buying the IDBI I* call option at Cs 8A" and selling the I( call option at Cs )..*. In this strategy the trader has maximum loss of Cs 8"Cs)..*GCs#.8* per unit and the profit of CsI("CsI*"Cs#.8G Cs1.. per unit. 2ultiply it with the lot si@e to derive the net profit and the loss. 8.%et de1it 1ear s0read0 In this you need to buy higher strike put option and lower strike put option. E8am0le3 Buying 6ifty 8(** put option at Cs#.*A" and selling 88** put option at Cs##*A". In this strategy the trader will have maximum loss of Cs (*A" per unit and profit of 8(**"88**"(*G Cs (*A" per unit. 2ultiply it with the lot si@e to derive the net profit and loss. (.6A2 and 5A6 call s0read 3 #n this you need to buy higher strike call options either ) lots or ( lots and sell lower strike call option ) lots or ( lots. E8am0le3 Buy ) lots of 6ifty 8(** call option at Cs ##(A" and sell one lot of 88** call option above Cs#.(A". this strategy is called )A# call spread. If you will do the same with (0) lot si@e then it is called (A) call spread. or net profit and loss calculation refer Can&an?s book on futures and options named :2aster?s key to future and options.< ..6A2 and 5A6 0ut s0read 3 In this strategy one need to buy lower strike put options ) lots or ( lots and sell higher strike put option )lots or (lots. E8am0le3 Buying )lots of 6ifty 88** put option at Cs++A" and selling one lot of 6ifty 8(** put option above Cs#)*A". This strategy is called )A# put spread. If you will do the same with (0) lot si@e then it is called (A) call spread. or net profit and loss calculation refer my book on futures and options name :*asterIs "ey to future and o0tions.D

In the future and option calculator after giving + inputs you will get the access to all )8 strategies formed with different option pairs and future. 9fter simulating this process observe t/e ma8imum loss column and t/e 0rofit column to identify which strategy is awarding more profit as compared to the loss and act accordingly.
=earn more than hundreds of strategies from our book named :2aster?s Pey to uture and 7ptions<.

E8am0le 23 If I am taking Celiance industry future in to account and I have the following information in hand on #-th September )**+. a. The lot si@e of the contract is -(. b. uture is trading at #+-(. c. The nearest >in the money call option? of strike #+.* is trading at a premium of Cs .(A". d. The nearest >in the money put option? of strike #+I* is trading at a premium of Cs .)A". e. The >out of money call option? which follows the in the money call option of my choice are of strike #+I* and #I)* are trading at a premium of Cs 8*.1( and Cs1)A". f. The out of money put option which follows the >in the money put option? of my choice are of strike #+.* and #+1* and are trading at Cs (* A" and Cs8*A" respectively.

6ow using this set of data in the D7 strategy evaluator we got )8 different strategies formed in different combinations. Since the stock is in down trend. 9ssuming the stock to fall further down I found all the bear spread combinations has good risk reward ratio. 7ut of which #+.* and #+1* put option strike has #0) risk reward ratio i.e. it has maximum loss risk of Cs-(* A"and profit potentiality of Cs #(**A". Same way the #+I* and #I)* call option bull spread also has max loss of Cs .).A" and profit of Cs#.).A".

Same way if you expect the script to move up by #*3 from the current level then (A) call option in the #+.* and #+I* pair also has good risk reward ratio of max loss CsI++)A" and profit Cs1).88A". Same time none of the put option strategy has good risk reward ratio. But good risk reward opportunity exists in future longAshort with call or put option.

,o to ta"e a neutral stand on t/is 0oint of time to form a trade 0lanG 7ut of all these possibilities I will choose (A) call strategy of the #+.* and #+I* pair having maximum loss of CsI++)A" and profit Cs1).88A" and take a future short with #+.* call option long. 2y view is if the stock moves #*3 down from the current level then I will not be making any loss or profit. In contrast if the price moves #*3 up from the current level then I will be making profit of Cs1).88A" in the (A) call spread and my loss in the future short and #+.* call option will be Cs 1-(*A". Similarly you can form many combinations with neutral stand on the market. MResults 2 on 2?t/ Se0tem1er 6..? The synopsis of the strategy is I will take (A) call spread in #+.* and #+I* call option pair. 9nd I will sell reliance industry above #++* and buy #+.* call option .(. or the smoothness to form a good neutral strategy I always advise to keep two different trading accounts for flexibility. If you have only one trading account then it will be difficult for you to initiate this strategy. 6ow when Celiance Industry has moved up by 83 from its previous day close to a level of #I8*. Then this neutral strategy resulted the following out come. /rofit in #+I* call option E-+"8*HR-(R( GCs#8)(* A" =oss in #+.* call option EI-".(HR-(R)GCs8+** A" /rofit in #+.* call long EI-".(HR-(R# GCs)8** A" =oss in future short E#I8*"#++*HR-(R#GCs8(** A" %et ProfitL Rs 2-65. NRs6-..!Rs-?..!Rs-5..LRs>45. A! MResults 63on 2@t/ Se0tem1er 6..?

6ow when reliance industry has moved up by 83 from its previous days close to a level of #I8*. Then this market neutral strategy resulted the following out come. /rofit in #+I* call option E#(#"8*HR-(R( GCs8#.)(A" =oss in #+.* call option E#+(".(HR-(R)GCs#+***A" /rofit in #+.* call long E#+(".(HR-(R# GCsI***A" =oss in future short E)*8*"#++*HR-(R#GCs#)***A" %et ProfitL Rs -2765 NRs@...!Rs26...!Rs 2?...LRs6.765 A!

C/a0ter !7 Portfolio *anagement *agic #ntroduction3 The art of portfolio management is 'uite difficult and complex also. 7ver these years after learning from failures and success I have devised few simple tricks for portfolio management. To my knowledge the portfolio management is being divided in to two types. Portfolio classification and management3 9. The Investment /ortfolio B. The Trading /ortfolio Investment portfolio is a place where in the Investor /ark his money in shares, bonds, mutual funds etc to get the medium term to short term benefits. In the context of this book I will talk about the construction procedure of investment portfolio in Shares. It is too simple I have earlier describe ive best stock picking formula &ust give )* 3 weightage to each formula and construct the portfolio. I will assure you that this method will award you very good gain. The trading portfolio has the life span of one month to three month. In this you need to take formulated actions and follow disciplinary steps. If you have portfolio value more than five lakhs then follow these steps. a. 5our portfolio must have one (A) spread either bull spread or bear spread or butterfly or longAshort iron condor. b. 5our trade portfolio must have one covered callAput with wide leg bear spread.

c.5ou must form few bull spread or bear spread with #*3 gap between the strikes after a #*3 fall or rise in the market.

Do remember always " orm the option spread, covered call or put strategy in trading portfolio. The proportion and weightage of these strategies will vary based on the market condition and situation. 5our trading portfolio must be designed in such a way that in each #* to #(3 directional move must award you the profit. Do not expect too much from the trading portfolio. 7nce the portfolio gives profit, encase it. I used to discuss many interesting models in my seminars. If you find the opportunity to &oin me in any program then do not forget to take a note of those sample models. Jertainly I will not provide those things in this free book because of my commercial compulsion.

Conclusion3 I feel this E"book will solve the purpose of understanding the basic concept of trading and investing. I have taken a mission to educate all the traders and investors the art of investing and trading. To be a part of this mission you no needs to invest anything &ust distribute this E"book to all your friends especially to the peoples who are new to this market. In future based on the users demand I will upgrade this book with new concepts.

C/a0ter > #ntraday Trading Tec/ni:ue 2.>.2 #ntraday Trading #n nifty future or any inde8 future using daily =olatility 3 7ver the years the Indian traders have reali@ed that profiting in the nifty future trading is one of the best bet. !owever it is 'uite experienced that many day traders never make any success in nifty intraday trade. =earning little simplest techni'ue can make some one a winner in the nifty intraday trading. I am going to narrate one most important and the simplest principle and trick for nifty intraday traders. #nter0ret t/e daily =olatility. It is the parameter which will gives you the most likely move the nifty future can swing in a day. In this case the term >swing? means high and low difference in a day. Then the next 'uestion is how to find the volatility. In my book on utures and options I have given the simplest method to find the volatility using the logarithmic mathematical procedure. If you do not have the book or you do not wish to calculate the volatility then the other procedure left out is refer the daily =olatility column given in the 6SE site against the 6ifty future f Do 'uote section. 5ou may get a figure #.)1 for Ith 7ctober )**I price 'uote in the bottom of the page. In other words it says the nifty future has the potentiality to generate #.)13 returns today either in the buy side or in sell side. or example if nifty is trading at (*** it will generate (***F#.)13G.#.(* point return. T/is small arit/metic information is sufficient enoug/ for me to ta"e a ise trade decision. 6ow it is the time to migrate to a more realistic example. 7n I th 7ctober )**I at #*08( a.m. I found the nifty at 8III. 9t that time the prior swing has recorded high (*)# and low was 8I-1 and the daily volatility was #.)13. The previous days? closing was (**#. Since the daily volatility is a derivation from the yearly volatility I will calculate the return points from the previous days closing which is (**#F#.)13G.#.(#)1 round it to .) points. The next big thing I can do is I will take the clue from the mid point of high and low of the current day. 9s per my data the mid point is 8II-Ei.e. E(*)#,8I-1HA)H. 9s per the recorded data the nifty high and low has created a swing of 8+ points Ei.e.(*)#" 8I-1H. 2y current price 8IIIsuggest I am &ust above the midpoint Ehence I have a chance to scale .)").G1. point from here in upside or 8* point down from here to complete the calculated return of .) points. The ). points is nothing but the difference between the low and the current price.

%o t/e last jo1 is to deri=e a trade decision. !ere the concept of cycle will get focused since my return is .) points as per the volatility and every completion of .) points will start a new cycle. It is often observed that if the stock trade above the mid point then it has the most likely chance of going up and in my case 6ifty is above 8II-Emid point H and I will buy nifty at current price of 8III for target (*1(Ei.e. 8III,1.H. Same time I will put my stop loss as 8II-").G8I-#. If the up side target is achieved then my next target will be in the )nd cycle termination point of (*1(,.)G(*I.. similarly the )nd cycle of the 6ifty will be 8I*IEi.e. 8I-#".)H. In between the 8I-* and 8I*+ I will find one target at the mid point of it Ei.e. E8I-#,8I*IHA)G-@-. Hthe )nd target will be the mid point of 8I8* and 8I*IEi.e. E8I8*,8I*IHA)G-@6-.5H. Same way the intermediate target of the upside move for )nd cycle can be calculated. 6ow as per the calculation I have entered the buy trade and the stop loss is triggered and given me the opportunity to enter the short trade of )nd cycle. 5ou may surprise to see that that nifty lo as -@64..5 on Ith 7ctober )**I. # too /a=e t/e ans er /y t/e 6nd cycle /alted at -@64G But it is 1eyond t/e sco0e of t/is article. For your information # ill once again inform you t/is =alue is calculated /en nifty ere :uoting at -@@@ and /a=e neit/er made any of t/ese calculated /ig/ or lo . This same trick can me applied to all the stocks &ust by referring its daily volatility and applying the mid point concept on it. #t ill yield muc/ refined result if you will apply my mid point method as describe on my 1oo" on ;ann met/od under the 18 intraday techni'ue section. 5ou will be in a position to calculate many intermediate target points and most likely reversal points using midpoint method explained in the book. In Smart finance we always experiment and teach you the simplest method which is easy to understand and follow. !owever stock market or commodity market or forex market has different price tags and each method has its limitation and can me applied only on selected group of price tag. These refined techni'ues we teach in seminar programs. !owever many of these techni'ues are featured in our published books. Try to use the above discussed techni'ue in 6ifty uture and experience the success.

2.>.6 #ntraday #nde8 O0tion Trade tec/ni:ue using 1inomial 0rice model Introduction0 many people want to trade in option for intraday due to its low capital re'uirement and huge profit potentiality. !owever it is being experienced that the option buyers used to lose money very often. The reason is 'uite simple traders &ump into the option trade without knowing the answer of the following 'uestions. I will re'uest you to find the answer of these 'uestions then &ump into the option trade for intraday. Jertainly I will give you the valid mathematical answer for the below mentioned 'uestions. 9. $/ic/ stri"e o0tion to trade for intraday in niftyG B. $/en to trade in o0tions and /en not to trader in o0tions for intradayG J. Bse our 1inomial o0tion calculator (only free tool a=aila1le in e1 till date)G 9.,o to initiate o0tion 0ositional strategyG =et us start the discussion from the #st point :$/ic/ stri"e o0tion to trade for intraday in nifty%< this method is not limited to nifty option it is useful to all stock options too. $hile making a choice of strike to trade in option we often find the following problem. 9. Lust In the money and at the money call options of nifty used to have high time value and has greater risk to trade for intraday. B. Deep out of money options have less chance to appreciate in comparison to the &ust in the money options. !ence it is not suitable for intraday trade. Simple mathematical approach to choose a right strike for trade0 a. ;o to the www.6seIndia.com b. Jlick on the get 'uote under the future column c. ;et the 'uote for nifty d. In the bottom find the daily volatility e. or #)th Lanuary it was #.*8 f. ##th closing price was ()(..#* as per the volatility principle explained by me in the article :section 2.>.2!0age !-6<. g. The high to low range will be (8... for the day.

h. !ence I will see nifty at (1#* or at ()*# for #)th Lanuary )*##. i. ,ence 56.. and 54.. stri"e o0tions eit/er call or 0ut is im0ortant for me as a trader. For intraday trading 0oint of =ie . &. The midpoint of 542. and 56.2 is 5655.5. will decide the trend. /rice above ()((.(* will scale maximum till (1#* and below ()((.(* will scale till ()*# under this volatility condition. $/en to trade in o0tions and /en not to trader in o0tions for intradayG 9s per the above discussion I will have maximum price range (8... for intraday. #. If current high, low difference is less than )-.11E(8...A)H point then time has not come for trading in the chosen strike options. ). If the current price is above (1#* or below ()** then strike chosen by me to trade in options is not correct. 1. If current opening is above ()((.(* but below (1#* then good time to trade in (1** ce option 8. If current price is below ()(( but above ()*# good time to trade in ()** put option (. If the current price is above the #..#+3 growth retracement level of last settlements high and low then do not trade in call options for intraday.E to know why #..#+ revisit the ibonacci principleH .. If the current price is below the #..#+3 decay retracement level of last settlements high and low then do not trade in put options for intraday.E to know why #..#+ revisit the ibonacci principleH ,o to use 1inomial o0tion calculatorG 6ow I have following information I will do intraday trade only in ()** or (1** strike call or put option. 6ifty has a chance to go up to (1#* or to ()*# /rice above ()((.(* trends is in favor of the buyer /rice below ()((.(* trends is in favor of the sellers.

/rice range set for the day based on volatility is approximately (8... points I need to calculate the trend confirmation point0 Lust use the price point ()((.(* in the binomial option calculator it will give you the buying entry point and selling entry point. I will buy ()** call option if nifty cross above ()-*.1*E*.)-) 3 retracement from ()((.( to (1#*H and buy (1** put option if nifty fall below ()8*.-* E*.)-) 3 ibonacci retracement drawn from ()((.( to ()*#H $hy so% Since it is the option which is &ust becoming deep in the money it will have less time value component. %o # need 4 t/ings. #. /rice of ()** call option at ()-*.1* Ethis is my entry priceH ). /rice of ()** call option at ()8*.-* Ethis is my stop lossH 1. /rice of my call option at (1#*Ethis my maximum targetH Similarly # need t/e 4 t/ings for t/e 0ut o0tion. #. /rice of (1** put option at ()8*.-* EThis is my entry priceH ). /rice of (1** put option at ()-*.1* Ethis is my stop lossH 1. /rice of my put option at ()*#Ethis my maximum targetH %o # ill use t/e follo ing information in t/e 1inomial o0tion calculator3 Jurrent price is mid point ()((.(*, Strike price ()** I will input the current option premium Ethis will be used to calculate the actual volatility in the option and actual volatility will be used to calculated the target and stop loss for the optionH #*( when nifty was trading at ()(* on #)th Lanuary )**I. I will choose the call option. In volatility field I will entry any positive number S(*. EThis will be used only once for reference to calculate the actual volatilityH. I have entered (* Days till expiry will be the number of calendar days. I have entered #It has given me the following out put E I have got ().-.-* and ()81.1* since I am using the ;ann angle proportion instead of the ibonacci proportion. !owever ;ann proportion is more accurate as compared to the ibonacci proportionH Buy ()** ce at ### when nifty will be at ().-.-* for target ##IT(#+*, #)-T ()I1,

#88T(1#.. Since I know nifty in upside can scale to (1#* I will keep my final target below #88. Stop loss for the call option is ++ 6ow keeping all other information as same I will change the strike to (1** and will select (1** put option. This too has given us the information buy (1** pe at ### when nifty will be ()81.1* for target ##+ T()1#"#)(T()#I"#1IT(#I(. since I know nifty may scale max till ()** I will keep my final target below #1I. Stop loss will be I) for this entry. Jurrently both strike options at #*( and nifty is at ()(*. I will wait for my entry to come in order to initiate the position. rom the above I know to buy nifty ()** ca at ### for target #88 stop loss ++ and (1** pe for target #1I and stop loss I). If you wish to buy ) call and # put then your maximum profit at (1#* will be E#88" ###HF#**"E###"+*HF(*G#-(* 2ax loss E###"+*H F#**, E#1I"###H F(*G #-** at ()** level. By simulating other option strategy with different strike one can make wonderful money using this calculator. Ot/er 1enefit of t/is 1inomial o0tion calculator to identify t/e mis!0ricing of o0tions3 #1th Lanuary0intraday volatility #.*1. /revious day close ()*+.I*. !ence price range set for the day is ((.).. Kpside target are ().8.#*, down side target (#(1..8. 2id point is ()*I. ()** call and ()** put will be best choice. Since nifty has less chance to go to (#** or (1**. 9t that time nifty was at (#I*. I have used current price as ()*I, strike as ()**, selected call option, entered the call premium as +.. I have been advised to buy ()** ce at I1 T())#, stop loss -8 T (#I..-( target #** at ()11, #*. at ()8(,#)# at ().I. I have been advised to buy ()** pe at I. T(#I., stop loss +* T ())# target #*# at (#+8, #*- at (#-1 and ##I at (#8I. Since the current price of ()** ce and ()** pe are +. and I* respectively (#I* this says it is mis"priced. 9s per the calculation call option must trade below -8 and put must above I.. !ence buying ) put and # call at this moment is advisable. .

!ence binomial option calculator of Smart inance will also inform you the miss pricing of the option. #f you /a=e read t/is article seriously from start to end you must 1e in a need to get t/is calculator. 9o not orry # /a=e de=elo0ed t/is calculator for you. #t is FREE to use. #t uses simulation 0rocess to find t/e real time =olatility and does all t/e calculation for you. &ou just need to feed t/e =alues as ad=ised 1y me. # am 2..F sure it ill /el0 you in ma"ing money in o0tion trade. 5ou can access to this calculator by visiting http0AAwww.smartfinancein.comAreal"time"option"calculator.php Ekeep in mind you need to register yourself to use this toolH