TUTORIAL FOR TRADERS

1. Price Mechanism..............................................................................................................2

2. Risk ....................................................................................................................................2

3. Timings the Market..........................................................................................................3

4. Usage of Stop loss for Lowering Risk...........................................................................3

5. Trend Tracking .................................................................................................................4

6. Sectorial Trading..............................................................................................................5

7. Market Sentiments ...........................................................................................................5

8. Disciplines required for trading :...................................................................................6

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Price Mechanism
The movement in the share price depends on the demand & supply of a particular stock.

The price discovery is the outcome of the fi ght between bulls and bears. Thus, the price of the
share does not move in linear fashion, it moves in zig-zag fashion. If the demand of the share
increases then it results in increase in share price and if the supply increases then it results in
downward movement of share price. The typical movement of share price is shown in the
diagram below:

Chart 1: Share price Movement

Risk
Where is the risk element? One of the most important aspects associated with trading is the risk
element. The risk for the stock should always be kept in mind before entry and exit in the stocks.
This helps one to protect the capital.

The risk involved in trading consists of two types of risks:

§ Risk A :Systematic Risk

It is the risk inherent to the entire market or entire market segment. Also known as "un-
diversifiable risk" or "market risk." Interest rates, recession, political instability and wars etc
represent sources of systematic risk because they affect the entire market and cannot be
avoided through diversification.

§ Risk B :Unsystematic Risk

Company or industry specific risk that is inherent in each investment. The amount of
unsystematic risk can be reduced through appropriate diversification. It is also known as
"specific risk", "diversifiable risk" or "residual risk". This risk is price sensitive.

For example, news that is specific to a small number of stocks, such as a sudden strike by the
employees of a company you have shares in, is considered to be unsystematic risk.

The relation between Risk A and Risk B:

Markets/Price movements are also driven by sentiments. Thus if the overall sentiments or
factors relating to Risk A are higher then there a negative reaction. Even a good event/ news in

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 a particular stock can act negatively on the overall sentiments associated with the stock and the
stock may fall.

I.e. IF RISK A > RISK B, the price of the stock will not move positively.

Timing the M arket

There are a lot of factors that together determine the entry and the exit levels of the stocks.
Some of the factors are the support, resistance, volume, patterns, open interest, breakouts…
and other technical parameters used to determine the stock movement. Fundamental and news
based entry and exits are also determined.

§ Entry

It’s always important to make an entry near the correct price and exit near the correct price so
as to avail the maximum benefit from trading/investing. Generally our Research Team gives call
once the trend (upside /downside) is getting confirmed.

Sometimes it happens that after a trading/ positional call is given investors/traders tend to
monitor call for its movement for sometime before entry, but by the time we enter into the call,
call is already made a movement. Thus our entry level is higher (buy) and lower (sell) after the
given call. Therefore we end up getting less profit.

So we need to follow buy/sell call instantly as soon as we get it from research team. This is
because the demand/ supply of the stock increase as soon as the call is given and an instant
reaction on the stock price takes place.

§ Pre-decide Your Exit Points

We should keep pre-decided exit points to make profits.

Our objective should be simple which is shown as follows:

1. To decide on the time frame of the stock

2. The percentage of return we expect (realistic return should be chosen)

A Realistic Return is summarized below:

Time Frame Exit at % ( good

enough) Return
Intraday Above 1%
3-4 days >3%
Week >5 %

Usage of Stop loss for Lowering Risk

We should always keep stop losses for trading so as limit our losses.

There are three types of stop losses which we can use to trade:

§ Technical stop loss

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 Our research team recommends calls on the basis of technical associated with the stocks,
so the stop loss is given considering the technical support level of the stock, so while trading
we should always keep in mind the technical stop loss.

§ 2. Trailing stop loss

We should always keep training stop loss. This helps traders to contain their profits on
sudden change in market movement.

The trailing stop loss is explained with the following example.

In the chart which is shown above the call recommended is BUY At 139 with stop loss at
137 . Then if the stock moves up to 142 then we should update our stop loss to 140, so it
means that we should trail the price and correspondingly update stop loss so that profits
which have earned gets protected and as soon as the stock (if it moves down) hits the our
new stop loss we sell the stock at new stop loss (140).

§ Financial Stop loss

Financial stop loss is the price up to which we can sustain our loss on the higher or the
lower side. The financial stop loss helps us during volatile markets; this helps us to keep us
in the move for a stock on which we have convention.

We should always keep in mind the technical as well as financial stop loss while trading.

§ Disadvantages of Technical Analysis

One of the disadvantages of technical analysis is that the support and the resistance levels
are watched by all in the analysts. Thus it creates a higher demand and supply at the given
technical levels in the short and the long term.

Trend Tracking
It’s always important to keep an eye on the trend of the market. It means that though we get very
good call on the particular stock but if the market sentiments are not good then the stock will not
move, it means that stock is having systematic risk (i.e. the risk which we can not avoid). So it’s
always important to check the market trend before trading.

Research Call

§ Buy: Sentiments are positive

§ Sell: Sentiments are negative

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 § No Action: Market in range bound

Sectoral Trading
As we know the stock market is always impacted by the news/events. The impact of particular
news is interpreted related to the particular sector by our research team, they then informs us
about the price movement. This helps us to benefit from quick movement in the stock prices.
The trader can choose a stock of his like in the sector and trade in the same.

Market Sentiments
Market Sentiments – Greed, Fear & Hope

§ Greed, Fear and Hope

The market is driven by just two emotions: fear and greed. In the investing world, one often
hears about the juxtaposition between value investing and growth investing and although
understanding these two strategies is fundamental to building a personal investment strategy
thus it is as important to understand the influence of fear and greed on the financial markets.

§ Greed’s Influence

Often investors get caught up in greed ("excessive desire"). After all, most of us have a desire to
acquire as much wealth as possible in the shortest amount of time. In the month of Jan 2008
before the market fall, Investors got greedy, fueling further greed and leading to securities being
grossly overpriced, which created a bubble. It burst in Jan 08 and kept leading indices
depressed.

§ Fear's Influence

Just as the market can become overwhelmed with greed, the same can happen with fear ("an
unpleasant, often strong emotion, of anticipation or awareness of danger"). When stocks suffer
large losses for a sustained period, the overall market can become more fearful of sustaining
further losses. But being too fearful can be just as costly as being too greedy.

§ Hope’s Influence

The third sentiment is the hope. In this the investor/ traders keeps hoping that the price will
move in his favour in the near term. He thus holds n to his position.

§ The Importance of Comfort Level

Fear and greed relates to the volatility inherent in the stock market. When investors lose their
comfort level due to losses or market instability, they become vulnerable to these emotions,
often resulting in very costly mistakes. Thus it’s very important to avoid getting swept up in the
dominant market sentiment of the day, which can be driven by a mentality of fear and/or greed,
and stick to the basic fundamental of investing. There’s a fine line between controlling your
emotions and being just plain stubborn. Thus it is very important to re-evaluate your investment
strategy from time to time and allow yourself to be flexible to a point, and remain rational when
making decisions to change your plan of action.

§ Conclusion

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 Sticking to sound investment decisions while controlling your emotions, whether it is greed or
fear, and not blindly following market sentiment is crucial to successful investing and maintaining
your long-term strategy. Our stock markets also take large swings due to psychological reasons
and provide enough opportunities of profit booking and re-entering at lower levels. If one will
have control over greed and fear then money will just flow in. One only need to shed fears when
market is low, and need to control greed when market is high by booking profits partially at least.
By just overcoming fear and greed one can make so much money in the market, which is
probably neither possible elsewhere nor by any other means.

Disciplines required for trading:

§ Strict to stop loss

§ Quickly book profits

§ Never overtrade

§ Avoid averaging

§ Ensure that Scrip / Contract is enough liquid

§ Avoid “Khabar” based trading

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