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Sowmya Kamath Delhi Edition: October 2011
How many times have you bought a stock on someone's advice to make a quick buck and waited for months, may be years, to just recover your cost? Share trading, experts warn, is a risky game. However, it's possible to play it smartly and make a quick buck as well, they say. Sandeep Nayak, executive director and chief executive officer at Centrum Broking, says, "The main attraction of trading is that people feel they can make quick money. But there are no free lunches. Trading requires a lot of discipline." Should you invest in gold or silver at current high prices? While traders do make as well as lose money, whether this activity suits you depends on your financial position. "Once you do your financial planning in detail, you know what your commitments are, as well as your risk appetite," says B Gopkumar, executive vice president, Kotak Securities. TYPES OF TRADES You can trade in shares and commodities. However, in India, retail investors mainly trade in stock futures and options due to sheer volumes. Trading means buying and selling a stock the same day or holding it for just 2-3 days. The former is called intra-day trade. The latter is called swing trade. Positional trade generally involves taking a longer position and holding a stock for 2-3 weeks. MAKING MONEY Profits depend on risk management. "I have been in the market for 10-12 years and I have seen that people do make money by trading shares," says Centrum's Nayak. Safety tips for dealing with market volatility This depends to a large extent on how much capital is available, how many opportunities you can explore and your knowledge of technical analysis. "The returns depend on your risk appetite, how much money you invest and how many of your trades turn out to be profitable. You can make 3-4% in a day or even lose money," says Gopkumar.
SKILL SETS While any recipient of the so-called 'hot tip' can trade, making money consistently is possible only when you have sufficient knowledge of the markets and skills for technical analysis, which is the science of forecasting prices based on historical data.
CASE STUDY 1: Niraj Dalal EDUCATION B.Com., M.Com., CA TRADING SINCE May 2007 WORKS WITH Rare Enterprises, a proprietary asset management firm SINGLE DAY MAXIMUM GAIN : 27% SINGLE DAY MAXIMUM LOSS : 10% PREFERS : Trade in derivatives and stocks LEVERAGE : 3 times the capital, or 1:3 LIMIT : 5 stocks and 2 indices FREQUENCY OF TRADE : Depends on market conditions Niraj tried his hands at accountancy and management consultancy before getting interested in the markets. He joined Rare, an asset management firm, in June 2006 and took up trading seriously in May 2007. He is passionate about trading and does not focus too much on the long term. WORDS OF WISDOM For every good trader, there is a time when he forgets whether he is trading to make money or to prove that he is right. When he focuses on the latter, that's when disaster strikes.
The software for technical analysis is available on the internet for free, but with limited features. Professional software capable of highly detailed analysis comes at a price. One should either have knowledge of technical analysis and the market or consult the relationship manager of the brokerage firm, says Gopkumar. Stock exchanges, such as the Bombay Stock Exchange and the National Stock Exchange, offer courses in technical analysis. Another institution which offers such courses is Online Trading Academy. "People should trade only if they can take risk, control emotions, set targets and book profit/loss at the target point," says Harikrishna Makwana, education director, Online Trading Academy.
TRADING TIPS While one can get many trading tips, their execution is important. Derek Zelek, master instructor at Online Trading Academy, says, "It's a battle of emotions. Trading is simple, but not easy. You have to be disciplined." The importance of discipline in share trading cannot be obverstressed. That is because in most cases, when people are making money, greed makes them wait for more, and so they don't book profits. When prices fall, fear makes them sell fast. These situations can be avoided if they know when to book profit/loss. If losses are not a deterrent and the market's roller-coaster movements give you a high, here are a few habits and skills that can help you stay on the right track. These are useful for day traders as well as positional traders. Discipline: The key to success is a stop-loss order. Stop loss helps a trader sell a stock when it slides to a certain price. Suppose you buy shares of company A at Rs 100 and set a stop loss at Rs 95. When the price falls to Rs 95, the shares will be sold automatically. This means you have limited your loss to Rs 5. While entering a trade, you should be clear about how much loss you are willing to accept. Skill: Trading is a skill, says Derek. "You have to learn what not to do along with what you should do. You should also know how to spot amateurs and trap them and how to take positions. Also, you should be quick to get in and very quick to get out," he says. A lot of amateurs in the market buy at a wrong point. A skilled trader identifies such people and takes an opposite position to trap them. Planning: One should identify a few stocks and focus on them. Minimum capital: Only those with a capital of at least Rs 2 lakh can trade for a meaningful gain. However, this capital should not be borrowed and should not be part of your core savings. People can also trade with less, but volumes are important. So, a certain minimum capital is a must. Stock volumes: A stock should have enough volumes for it to be tradable. According to Zelek, it should have a minimum daily average volume of 500,000 shares. For those just starting, trading Nifty-50 stocks is a good idea, he says. Price range: What should you do with a share which has high volumes but not much price movement? You should prefer shares with a minimum price range of Rs 10. This means the average difference between a stock's intra-day high and intra-day low should be at least Rs 10.
CASE STUDY 2: Bharat Bhagrecha EDUCATION Commerce graduate TRADING SINCE 2005 TRADING PORTFOLIO SIZE Rs 25-30 lakh SINGLE DAY MAXIMUM GAIN : 9% SINGLE DAY MAXIMUM LOSS : 2-3% PREFERS : Trade in cash stocks to derivatives LEVERAGE : Rarely, about a quarter of the total capital MAXIMUM STOCKS TRADED IN A DAY : 3-4 FREQUENCY OF TRADE : Depends on market conditions Bharat has been a keen follower of the markets since childhood as elders in his family were serious investors. Bharat set up a partnership firm dealing in electronic items before becoming a franchise of a brokerage firm in June 2005. He trades with only 25% of his money. WORDS OF WISDOM Always stick to stop loss. Never go against the market trend and never mix your trading portfolio with your investment portfolio. See an opportunity in every market move. Timings: Look for the most volatile market timings. Derek says 9.30-11.30 am is a good time to trade in Indian stock markets. Volatility: Any stock with a positive beta of 1 or above is good. A beta of 1 means the stock will move in line with the market. If the market falls 2%, the stock will also fall 2%. "One can look at a maximum beta of 2 or 2.5, not more than that," warns Derek. One can find a stock's beta in the trading software. Supply-Demand: One has to know the supply and demand of individual stocks. If the number of shares up for sale is more, one should not buy the stock, and vice versa. To know if the sell quantity is more or the buy quantity is more, one cannot rely on the bid and ask numbers available on the screen. Only a technical analysis can help identify the supply and demand in individual stocks, says Zelek. News Flow: Never trade on news which is out in the market. It takes a few minutes for a stock price to adjust to any news. Average out: When the price of a stock starts falling, people buy more to average out. In trading, it's a strict 'No'. "As a professional trader, I would never average out. It's a losing trade. The trade is going bad. I would rather wait for the right time to enter again," Makwana says.
Do you think you can immediately start trading with all these tips? The answer is "NO". One needs to develop a few skills, including the ability to understand technical analysis. "Trading is a simple process, but not easy," says Zelek.
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