RESILIENCE

2021
A guide to thriving in
a chaotic market
RESILIENCE
2021
TO OUR
FRIENDS,
For our fifth birthday, we have received a
beautiful gift from you. We’ve crossed
half a million monthly active users on
Market Pulse. That’s half a million traders
and investors like you who have tried,
tested, and trusted Market Pulse over all
other stock market apps out there. This
means the world to us, and we’d like to
say ‘thank you’ with a little return gift.

In this e-book, we’ve curated five articles

carrying expert insights to help you
navigate the markets with knowledge,
confidence and persistence. Inspired by
extraordinary stories of resilience from
the natural world, the book explores
strategic analysis, risk control, sound
investment practices, and the
psychologies that shape trading behavior.
We hope this collection will serve you well
in 2021.

On behalf of the Market Pulse family, we

thank you once more, and wish you a
happy and kind new year. Rest assured,
we’re working to make it a powerful one
for you.

Warmly,
Amit Dhakad & Hiral Jain

Founders,
Market Pulse
RESILIENCE 2021

THE RESILIENT
SEA TURTLE

Sea turtles have roamed the

world’s oceans for over 100
million years. They’ve
survived the asteroid that
wiped out the dinosaurs, and
a marine extinction that
killed almost half their
species. In the last 200 years,
human activities have
ravaged marine life with
increasing brutality. The sea
turtle has shown great
resilience in this perilous
environment by developing
incredible survivor strategies:
it can slow its metabolism, go
months without eating, skip
nesting season for a decade,
and switch nesting beaches
in strenuous times.
RIDING TRENDS &
FINDING BENDS:
CONTROLLING RISK
IN A STRONG
TRENDING MARKET
2020 was the year that left most investors and
traders revisiting their well-oiled strategies.
Many participants scrambled to get used to the
new market condition. While larger one-way
rallies were the norm, countless market
strategists were unable to resist the temptation
of calling it a market-top, only to get stopped
out of their short positions. Valuations were so
exorbitant that fundamental investing
presented little scope other than waiting on the
sidelines, wishing for the elusive correction.

Amidst these uncertainties, one section of

investors and traders made hay while the
markets shone. Trend is your friend, until it
bends — an old trading adage was the new
name of the game. This brought its own
challenges, as exiting the stock correctly
became more crucial than entering it. Since the
trending nature of the market looks like it’s here
to stay, it is wise counsel to be armed and
trained in important tools, so we may swim with
the flow as long as it persists.
 TRAILING STOP LOSS: HOW TO RIDE
THE TREND

Targets in trading can either be fixed or moving,

and while trading trends, moving targets are
implemented by using trailing stop loss. While
trailing a stop loss, we trail a position giving
some room for any short-term unfavorable
moves, such as abrupt price shocks. The stop
loss is updated every time the instrument closes
higher than the previous close in the direction
of the trade.

Day 5
Day 4 Day 6

Day 3

SL for Day 6

SL HIT
Day 2

SL for Day 4 & Day 5

Buy trade entered
Day 1
at the end of Day 1

SL for Day 3

Stop-loss for Day 2

Exhibit 1: Use of trailing stop-loss to exit a long trade

As we see in exhibit 1, for a long trade, the

stop-loss (SL) level will update at the end of a
green candle formation; given the green candle
has closed higher than the previous green
candle. In other cases the SL remains at the
previous level. Therefore any position is exited
only when SL is hit, while it is left to run as long
as it moves in a favorable direction. Long and
strong rallies or sell-offs are best captured this
way.
 ATR: THE KEY TO CREATING A
TRAILING STOP LOSS

This brings us to the second challenge: where

must the SL be placed so that trades are given
ample room to gyrate, without giving back most
of the unrealized profit? This is an ideal juncture
to introduce ‘Average True Range’ or ATR, an
excellent concept to tackle this problem.

ATR is computed in two steps.

First, take the Second, compute a

highest of 3 ranges moving average of a
(called True Range, TR over a set
TR) that are timeframe (n) to get
computed as: ATR

Difference between
High and Low

Absolute of the
difference between
High and Previous
Close

Absolute of the
difference between
Low and Previous
Close

SUPERTREND: IT’S NOT CALLED

SUPER FOR NOTHING

With ATR at our

disposal, we now
need an indictor that
creates a trading
signal using that
value. Meet the
Supertrend indicator.
You can locate it on
the indicator section
of the Market Pulse
App.
Exhibit 2: Supertrend Indicator settings pane
Supertrend indicator setting pane has 2 fields
which a trader can customize.

Period Multiplier

This field denotes This field can be A larger multiplier

the time period for used to choose any gives more room to
computing the appropriate prevent any large
moving average of multiple of ATR, e.g. stray moves to hit
True Ranges 2ATR, 1.5ATR the Stop Loss level
but leads to giving
Smaller period Multiplier controls a larger part of the
would lead to ATR the extent of profit back if hit
reacting faster to aggressiveness in
the changes in ATR by modifying A smaller multiplier
prices and vice the room available gives much less
versa for the stock to profit back when
gyrate before it hit but is more
resumes moving in susceptible to
the desired noises and stray
direction moves of the
instrument.

Since the Supertrend Indicator has its basis in

volatility, this method outperforms any fixed
point Stop Loss system which is static for every
market condition. While any method of entry
can be used along with a method of trailing by
Supertrend to exit the position, Supertrend may
also be used to enter a trade, with favorable
risk-reward entries. One can use Supertrend
indicator to enter the reverse trade whenever
the previous trade hits Stop Loss, forming a
Stop-And-Reverse trading system.
 SUPERTREND IN ACTION: HOW IT
WORKS IN A TRENDING MARKET

Let us see how Supertrend performs in riding

the rallies in a risk controlled manner to get a
clear understanding.

Reliance Industries was one of the major

contributors in pulling Nifty50 back after it hit a
52-week low of 7511 in late March, 2020.

Supertrend Configuration- Period: 14 Multiplier: 2

Exhibit 3: Day chart of Reliance Industries

During the time period beginning 25th March,

2020, going up to the end of 2020, a total of 5
trades were triggered, leaving the last sell trade
open which was carried forward into 2021. Each
green arrow generated on the Market Pulse
chart is a buy signal, and each red one is a sell
signal. At every buy signal, the existing sell
position (if any) is covered and a long position is
entered, and at every sell signal, the existing
long position is closed and a new short position
is created. The ability to ride a trend and enter a
position at low risk points can be seen clearly in
exhibit 3.
Supertrend Configuration- Period: 14 Multiplier: 3

The IT Sector also lent NIFTY a helping hand on

its path to recovery. Case in point: TCS.

Exhibit 4: Day chart of TCS

The IT Sector also lent NIFTY a helping hand on

its path to recovery. Case in point: TCS.

During the same time period (25th March, 2020

to the end of 2020) Supertrend triggered 4
trades (Market Pulse plots the arrows on every
signal change) with the last one still open and
hugely profitable. With a larger multiplier,
almost the entire trend of TCS (exhibit 4) is
captured with fewer trades as compared to RIL.
Word of caution here: while it might look
immensely tempting to use a higher multiple of
ATR to keep the signal generation low and ride
the entirety of the trend, each Stop Loss can
erode a large part of unrealized gains if hit.
Supertrend Configuration- Period: 7 Multiplier: 3

Exhibit 5: Day chart of Tata Steel

The metals sector is notorious for violent swings

as much as for moving in cycles, which lasts for
years but also creates opportunities for traders
and investors alike. Tata Steel is one such stock
that is part of Nifty50 as well as the Nifty Metal
Index. Let’s use the default settings on
Supertrend Indicator on this stock.

Post the covid-triggered market fall, 3 trades

were triggered by Supertrend on Tata Steel.
While 1 sell trade ended in no profit or loss, the
other 2 were profitable with the final trade still
running with huge unrealized gains (exhibit 5).
On closer observation, one finds that the buy
position first went all the way to 438, only to
eventually get closed ~10% lower at 399 (when
the position was closed and a sell trade was
initiated). This is a realistic level of the kind of
erosion that unrealized gain can witness, on
using a higher multiplier in the quest to ride
larger trends with fewer signals.

The power of Supertrend to ride larger trends

while entering them at very low risk points is
quite magnificent. This commendable
indicator should rest in every trader’s arsenal,
whether it is used for day, swing or positional
trading.
RESILIENCE 2021

THE
UNSTOPPABLE
BAOBAB

The African baobab predates

mankind and the splitting of
the continents over 200
million years ago. It can live
up to 5,000 years, with the
oldest known specimen
being 2500 years old. Thriving
unfettered in chaotic
conditions across 32 African
countries, baobabs can
persevere through fire, shoot
to heights of up to 30m, and
grow a colossal trunk of 11m
diameter, 50m
circumference, and 1,20,000
litres capacity. In peak dry
season when the entire land
is parched, the baobab
produces one of the world’s
most nutrient-dense fruits,
earning the name ‘tree of life’.
FOUR AWESOME
OSCILLATOR
STRATEGIES: STAND
TALL IN EVERY
SEASON
ORIGIN OF THE AWESOME

The Awesome Oscillator was developed by Bill

Williams, a visionary trader who combined
psychology with technical analysis to come up
with what is now known as Chaos Theory.
According to his theory, Williams believed
fundamental analysis or technical analysis alone
cannot guarantee steady profitable results in
the market as it is a nonlinear dynamic model.
Trading is a psychological game and the best
way to become successful is focusing on two
significant aspects: self-knowledge, and
understanding of the five dimensions of market
structure.

The Awesome Oscillator is the momentum

dimension of the market structure defined by
him.

Most traders today employ either one of these

following methods to select their trades:

Catch tops and bottoms, or

Trade with the momentum

If you prefer the latter method, i.e. if you’re a

momentum trader, then using the Awesome
Oscillator is a great strategy to deploy to catch
some of the best trades.

Let us understand the construction of this

indicator and the different ways it can be
interpreted to create trading strategies.
 CONSTRUCTION

AO calculates the difference of a 34 Period and 5

Period Simple Moving Averages.
The Simple Moving Averages that are used are
not calculated using closing price but rather
each bar's midpoints i.e (High + Low)/2

The fact that it's based off of the average of high

and low makes it stronger in markets that have
more regular movements and more regular
candle sizes.
If you're trading in a market where candle size
varies a lot then the awesome oscillator may not
be the best for these markets because it's going
to skew those moving averages.

So if you see this image, the Awesome Oscillator

is designed to have values that fluctuate above
and below a Zero Line. The generated values are
AO Oscillator is plotted as a histogram of red and green bars.
plotted as a
histogram of red A bar is green when its value is higher than the
and green bars previous bar.

A red bar indicates that a bar is lower than the

previous bar.

The awesome oscillator isn't bounded by two

values. It doesn't have to stay between 0 and
100 since it is the difference between two
moving averages, and just the difference can go
as high as it needs to or as low as it needs to,
based off of that zero point.
 TRADING STRATEGIES

Now let’s check out 4 strategies associated with

awesome oscillator:
They are:

Zero Line Crossovers

Divergences

Twin Peaks

Saucers

The first two strategies are signals, that you

would combine with other indicators (preferably
trend following signals like moving averages
etc.) and should be used as confirmation and
not stand-alone strategies.
ZERO LINE CROSSOVER

The simplest signal is when the value of the

oscillator crosses the zero level. This gives us two
easy-to-follow trading signals:

Crossing from Crossing from

negative to positive is positive to negative is
a bullish (buy) signal - a bearish (sell) signal -
the histogram crosses the histogram crosses
the zero line from the zero line from
below to above. above to below.

The two trades shown above have produced

very contrasting results. The Buy trade has
produced 2900 points of profit on the Nifty and
still going strong, whereas the Sell short trade
was exited at a loss of 514 points.
PRICE AND MOMENTUM DIVERGENCE

As with most Similarly, if the price

momentum sets new lows and the
indicators, divergence AO fails to follow suit,
between the price this is a bullish
and the momentum divergence.
can also be a useful
clue as to what's No signal is set in
going on in the stone. Remember to
market. always combine this
with other indicators
For example, if we see for confirmation.
the price making new
highs, but the AO
indicator fails to make
new highs, this is a
bearish divergence.
TWIN PEAKS PATTERNS

The twin peaks

strategy is an effective
strategy for technical
analysis as it
combines the
divergence strategy
and the zero line
crossover, creating a
standalone strategy
that can be traded
using the awesome
oscillator.
Here’s a step by step guide on how one can
implement this strategy.

Buy Signal

Check if the Awesome The AO should have The AO must cross

Oscillator (AO) is two swing lows where above the zero line
below zero. the second low is when we place our
higher than the first. buy trade.
This strategy requires A bullish twin peaks
you to look for two signal has the peaks
peaks on the same below the zero line,
side of the zero line. for which the second
An additional peak must be higher
requirement is that (less negative) than
the reversal between the first peak.
the peaks must also
be on the same side
of the zero line.
Place your stop-loss Take Profit can be
below the most varied depending on
recent swing low your timeframe and
which should also risk profile:
align with the second
When the
swing low of the AO
histogram turns
twin peaks pattern.
negative, or
Posts a negative
twin peaks pattern
As the Awesome
Oscillator Histogram
Posts Two/Three
Consecutive Red
Bars
One could also use a
trailing stop loss
method to ride the
trend

A bearish twin peaks signal is the opposite of

this - the two peaks must be above the zero line.
Likewise, the second peak must be lower than
the first peak, and then followed by a red bar.
 SAUCERS

This strategy searches for quick changes in the

momentum and requires a specific pattern in
three consecutive bars of the AO histogram, all
on the same side of the zero line. A bullish
saucer requires all three bars to be on the
positive side of the zero line. The construction
you are looking for is a red bar, followed by a
smaller red bar, followed by a green bar. One
could also look at modifying the twin peaks
strategy exit to three bars and ride the ongoing
trend if a saucer appears on the AO.

A bearish saucer requires all three bars to be on

the negative side of the zero line. The
combination needs to be a green bar, followed
by a smaller green bar (i.e. less negative in
value), followed by a red bar.
 WARNING SIGNALS

When you’re using The AO is not bound You can use this on
the AO, avoid using on on the upside and your intraday as well
illiquid charts as the downside like most of as daily charts.
value of the oscillator the other oscillators,
can get skewed to hence avoid picking
high fluctuations. This absolute values as a
works best on highly reference to go
liquid large cap stocks against an ongoing
and indices. strong trend. With
rapidly moving
markets now, a major
expansion of the AO in
one direction usually
signals a strong trend
emerging, so if you
choose to be
contrarian, do so
cautiously and with
proper stop losses to
protect capital.
RESILIENCE 2021

THE
INDESTRUCTIBLE
CAMEL

Camels can go six months

without food and several
weeks without water,
surviving on the fat reservoirs
in their humps. When they
tank up for the next dry spell,
they rehydrate faster than
any other mammal, drinking
113 liters of water in just 13
minutes — a feat that can
spell instant death for any
other animal. From scorching
deserts to frigid mountains, a
camel can patiently tide over
harsh extremes including
temperature ranges of +50°C
in the day to -40°C at night,
without breaking a sweat.
TRADING FEARS:
CALM AND
COLLECTED WINS
THE RACE
How did you feel the last time you entered a
trade?

Were you excited to jump in or felt a fear of

losing and hesitated to enter?

What happened when you exited?

Were you overjoyed with a profit or ashamed

with the loss?

Look at the market as an ocean, where all these

tides of feelings and emotions of millions of
traders converge. These emotions have
manifested in market bubbles and panics
driving prices way beyond where they might
otherwise rationally belong. It’s highly likely
then, that the key to your success in the markets
depends on how you understand and control
these emotions.
 BEFORE TRADERS LOSE TO THE
MARKET, THEY LOSE TO THE MIND.

All traders, specially beginners, easily

underestimate the importance of mind in
money. Most traders are quick to jump on an
emotional rollercoaster the minute they enter a
trade — they either agonize in fear or glow with
pleasure. In doing so, they compromise an
essential prerequisite of winning: the
management of their emotions.

This faulty self-management leads to poor risk

management and careless losses. Many end up
shocked to find that strategies that do really
well in paper trading fail miserably when put to
the test with real money. Fear sets in, takes a
comfortable window seat in the mind, and
begins to drive traders to make even more
mistakes and unforced errors. This unbridled,
spiraling fear pushes a startling majority of
beginners to quit trading in the first few
months.
 THE PSYCHOLOGY OF FEAR

Fear can be defined as an unpleasant feeling

triggered by the perception of danger (in your
case, trading losses). The danger can be real or
imagined. When it comes to trading, fear can
arise as we debate whether to enter, stay in, or
exit a position. The idea of trading losses is
always uppermost in our minds.

Trading fears can be broadly classified into four

categories:

Fear of Fear of
losing missing out

Analysis paralysis: Skepticism at a new trend emerging

you over-analyze
but fail to pull the Jumping in to catch the current trend
trigger and take a without giving heed to price
trade
A sense of greed and envy at the stock going
Low confidence in up without you on board
your own ability
Blindness to downside risks

Fear of a winning Fear of

trade turning going wrong
into a loss

Locking in quick Greater concern for the analysis being right than
profits once a trade the trade going right
turns profitable
Desire to be the perfect trader — an impossible
Equating net worth end.
to self worth and
missing out on
some of the best
moves in the
market
 THE BIOLOGY OF FEAR

Emotions arising from fear, including fear of

missing out, uncertainty, greed and insatiability,
are modulated by a group of neural networks
deep within the brain called the limbic system,
controlled by the amygdala or the brain’s
emotion centre.

But don’t banish this part of the brain just yet —

the limbic network plays a significant role in
learning. We need emotions in order to learn
and survive. For instance, doing something that
activates negative emotions can make us less
likely to do it in the future, protecting us from
future loss and increasing the odds of future
success.

When we experience emotions we can’t control,

though, it can lead us head first into bad
decisions. Therefore while we may not be able
to dispose of all fear, we can learn to manage it
intelligently so that it doesn’t overwhelm us and
destroy our trading accounts.
 FROM MIND OF FEAR TO MIND OF FAITH

You could train for hours on how to maintain

zen-like calmness in markets, but all that theory
would go flying out the window once you're in
front of a trading screen for ten minutes. Your
only friend in this case is persistence; the
determination to move from a fearful mindset
to a state of self-belief, confidence and faith.
Easier said than done, indeed. But here’s a good
place to start.

Think big
picture

Traders tend to attach far more importance to

an individual trade than to the long-ranging
performance of their account. This deepens the
state of fear in their minds. To overcome this,
you, as a trader, must shift focus from putting
too much weight on your current trade and
understand that trading is a probability game
that you can only ace over time. As tempting as
it may be, try not to fret about results. Make a
conscious choice to focus on the process. If you
believe your strategy will be profitable over a
period of time, then give it time, and build the
confidence to take the trades that come up
based on your analysis.
 Cultivate a
sense of control

Studies show that one of the most effective

methods of countering the negative footprint of
fear and stress is to cultivate the belief that you
have a sense of control over your immediate
environment and over the choices available to
you. If you cannot believe it, pretend. Rehearse
the very conditions that you fear happening,
and rehearse what you will do in those
situations. Training yourself to handle fearful
situations can be habit-forming, and habits can
change the circuitry of the brain. For example,
taking a loss is part of trading. Even before
entering a trade, you must be prepared to lose,
and determined to patiently stay the course, no
matter what.

Practice
mindfulness

Watch out for stress. Oftentimes, our unforced

trading errors can be linked to periods when we
are experiencing undue distress. Even small
amounts of physical and cognitive stress can
negatively affect financial decision making.
Being mindful means to keep an open mind,
cultivate the ability to stay present, and harbor
no concern or judgement about how you are
doing in the moment. Building a daily
meditation practice helps reduce stress and
anxiety. Sometimes, just taking some time off to
pause and rest the mind can vastly improve
your decision making.
 Trade within
your means

Pioneer trader Jesse Livermore tells a story

about a man who was very nervous. When his
friend asked him what the matter was, he said:
“I can’t sleep.”
“Why not?” the friend asked.
“I am carrying so much cotton that I can’t
sleep thinking about it. It is wearing me out.
What can I do?”
“Sell down to the sleeping point,” replied the
friend.
The moral of the story is to avoid doing anything
that interferes with your sense of composure
and keeps you up at night. Trading is hard
enough; don’t make it any harder by allowing
the chemicals in your brain to join forces in the
fight against your success.

Keep a
journal

One of the best methods to maintain discipline

and remain calm is to journal your trades and
keep proper records. Plan your day, write it
down, and follow it. Do not change your plan
during trading hours.

The goal of a trader is not merely to make

money, it is to trade well. Successful traders are
those that have learned to manage fluctuating
emotions and persevere in the game, never
giving in to fear.

In this article we have tried to present a gist of

things to help you identify, confront and
resolve the fears you may be facing as a trader.
However, making these conscious changes is
going to be an uphill task for you, requiring
effort and a willingness to change. You can be
sure that such a clear and purposeful shift in
behavior can and will propel you to the next
level in your trading journey.
RESILIENCE 2021

THE AGELESS
OCEAN QUAHOG

The ocean quahog, also

called Arctica Islandica, is the
oldest known animal to have
ever lived, with a famed
specimen named Ming
having recorded a lifespan of
507 years. It is the last
surviving species of a family
of clams that dates back to
the Jurassic era. Known for
their remarkable longevity,
ocean quahogs sport shells
with intricate age-lines that
can reveal not only their own
timeless history, but also the
sea’s temperatures and salt
content from 300 years ago.
THE
FORGOTTEN
WORLD:
REVISITING
PRECIOUS
METALS
WEIGHING THE STATUS QUO:
EQUITIES V/S PRECIOUS METALS

In what has been a phenomenal year for

equities markets the world over, investors and
traders are left divided across two broad
categories - the ones who rode the bull run
reaping spectacular profits, and those who cried
over overvaluation and waited on the sidelines
hoping for a massive correction. The markets
never corrected to the extent the latter had
been waiting for, and is still left waiting in a
further overvalued market. Traders and
investors in either categories are faced with a
pertinent question: What lies in store in 2021?

India witnessed a big leap in retail trader

participation during the onset of the pandemic
and the March 2020 crash that followed. Nifty 50
slumped as low as 7,583.6 on March 23rd, and
the massive rally thereon ensured that it closed
at 13,981.75 on Dec 31st — a growth of nearly
~84% from its 2020 low. On a YoY basis however,
Nifty 50 barely rose by ~14.9% and Sensex rose
by ~15.55% in 2020. On the other hand, gold
prices rallied nearly 24.55% and silver rose by
~47.14% through 2020 alone (in USD terms).
 PRECIOUS METALS: A SHINING
ASSET CLASS

Let’s explore a few reasons why precious metals

make up an asset class worth considering.

Portfolio Hedge against A lifeboat in

diversifiers inflation turbulent waters

Investing in equities To put it plainly, A safe haven implies

across sectors or inflation is a period an investment vehicle
financial products when prices in an that either increases
(stocks, mutual funds, economy continually in value or at least
ETFs) does amount to soar upwards, which retains its current
diversification. naturally curbs the value in times of
However, in the event purchasing power of extreme events, or
that equity markets consumers and when a major
show significant erodes the value of a uncertainty hovers
weakness, a negative currency. This is a over financial
impact is bound to be vicious circle: fearing a markets, leading to a
seen across equity price rise, consumers prolonged tryst with
products and sectors. tend to hoard volatility. Precious
During such times of essentials and other metals (especially
turbulence, commodities, which gold) have proven
diversification across in turn escalates the time and again to be a
asset classes becomes demand further, refuge for investors
crucial, and causing a steeper during economic
investments in price rise. During such turmoil. After all, gold
precious metals like times, while stocks has been around
gold and silver come tend to give since time
to your rescue, acting somewhat similar immemorial, hailed as
as portfolio returns, an investor’s a storehouse of
diversifiers. net profits take a sure increasing value. And
hit, for a part of his while a rising number
gains is lost to of miners are
inflation. While the extracting gold as the
value of INR falls years pass by, it could
during an inflationary never lead to a
trend, the price of devaluation in the
precious metals like yellow metal.
gold, on the other
hand, tends to
increase or stay
largely constant at the
least, turning gold
into a fine hedge
against inflation.
 THREE KEY AVENUES TO INVEST
IN GOLD AND SILVER

GOLD ETFS 01

What is it? Advantages Limitations

Gold ETFs are 1. Gold ETFs come 1. Investors who do

exchange-traded under the jurisdiction not hold a demat
funds that replicate of SEBI and attract account, cannot
the movement of gold regulatory audits invest in gold ETFs.
in the domestic This limitation often
market. They provide 2. High liquidity; can leads such investors
a fine opportunity to be bought or sold just to opt for gold mutual
diversify an like stocks funds.
investment portfolio
and are a bonus for 3. Gold ETF units are 2. Tracking error is a
investors intending to available in various reality while investing
thump inflation. denominations to suit in an ETF. Gold ETFs
varying investment are no different.
needs Returns from gold
ETFs may not be exact
4. Taxation benefits; when compared to
no Wealth Tax, GST or the corresponding
Securities Transaction movement in
Tax (STT) levied domestic gold prices.
TRADITIONAL/PHYSICAL FORM 02

What is it?

Precious metals like

gold and silver can be
held in physical forms
such as coins, bars
and jewellery.

Advantages

1. Easily portable

2. Tangible and
purposeful with
regards to jewellery

3. Cultural
significance; coins are
considered auspicious
gifts in some
communities

Limitations

1. Theft risk

2. Additional costs;
making charges,
design costs, storage
costs etc.

3. Less liquid than

their electronically
held counterparts

4. No SIP-like feature
DERIVATIVES 03

What is it? Advantages Limitations

Gold and silver can be 1. Potential for high 1. Investors in gold

traded in the form of returns futures are often privy
derivative products to rollover cost over
such as futures and 2. Trades can be their position. Thanks
options. entered basis the to volatility, rollover
range of your capital; costs can sometimes
for quantities as low exceed the theoretical
as 1gm of gold and 1kg cost of carry.
of silver
2. Being a derivative
product, leverage can
ensure that you may
end up losing more
than your initial
investment.

3. Volatility spikes like

the ones seen in
March 2020 can lead
to a sharp increase in
margin requirements
and investors may
struggle with liquidity
to fund the additional
margins.
 2021: THE OUTLOOK

As with any other investment, there are certain

key factors that could help you assess an
opportunity to trade or invest in precious metals
in 2021, considering the broad dynamics of
today’s times.

Movement of
the Dollar Index

In simple terms, the US Dollar Index measures

the value of USD in the context of a basket of
other currencies which are major trading
partners of the United States. The strength of
the US Dollar as a currency has a strong
correlation with gold prices. Prices of precious
metals tend to go down when the US Dollar
Index rises, i.e. when the dollar strengthens, and
move upwards when the USD Index falls.

Chart extracted from: TradingView

The above chart tracks the DXY (US Dollar Index)

on weekly candles. At around 90, the US Dollar
can be seen at a long-time support zone. It
would be interesting to track whether this
support level is breached or whether the DXY
bounces upwards from here. If we witness a
downward breakout hereon, gold prices could
soar higher. Conversely if the support zone
remains intact and the DXY strengthens, then
we may likely see a correction in gold prices.

Developments
around
government
stimulus

2020 witnessed a pandemic that spread far and

wide with catastrophic impacts - right from loss
of life to rising unemployment to small
businesses going bust across the world. To
counter such times, several governments have
boosted spending to revive their economies. The
U.S. alone has spent more than $3 trillion in its
battle against covid. If the U.S. Federal Reserve
or the U.S. Government pump in further cash
through any policy reforms, unemployment
benefits and stimulus packages, equity markets
may remain a favorite amongst traders. This
may in turn adversely impact gold and silver
prices.

Uncertainties of
the pandemic

In the extreme event that the pandemic

worsens further, leading to greater
uncertainties, precious metals may turn out to
be a safe investment and as such prices for gold
and silver may see a rise.
 2021: TECHNICAL VIEW

Chart extracted from: TradingView

The XAU/USD chart shown here tracks the

movement of gold prices in terms of USD on
weekly candlesticks. On the long-term horizon
across nearly the past decade, we see a
double-top formation around $1950 levels. It will
be crucial to observe if gold prices surpass and
sustain above the current double-top level of
$1950. If prices hold well above this level, it
would be a fair indication that gold prices are
headed upwards. On the other hand, if prices
fall below this level, a strong long-term support
could be seen at the $1550 levels.

In one way or the other, precious metals have

always represented a coveted breed of assets,
right from ancient times. The uncertainties
brought about by the pandemic, along with
easier access to newer investment avenues in
gold and silver, have refocused investor
attention on precious metals all over again.
While it will be crucial to keep a vigilant eye on
price movements in gold and silver, there's no
denying that diversifying your portfolio by
investing in precious metals shines with an
allure all of its own.
RESILIENCE 2021

THE ENDURING
EMPEROR PENGUIN

Emperor penguins are the

largest penguin species
standing 45 inches tall. They
possess the deepest, longest
dive for any bird, reaching
1850 feet deep and staying
under for a record 32
minutes in some of the
world’s coldest, most
unforgiving seas. They brave
sub-zero Antarctica armed
with a double layer of
feathers with a density of 70
feathers per square inch,
large fat reserves, and small
beaks and flippers. For nearly
3 months a year, these loving
creatures travel for over
80km, defying all odds in
search of food, and never fail
to return to break bread with
their kin.
POWER TO
PASSIVE
INVESTING:
BUILT FOR
THE LONG
HAUL
In his book “The Power of Passive Investing”,
Richard A. Ferri draws a vivid analogy between
the active-versus-passive investing debate and
the high-octane street gang rivalry of the Jets
and the Sharks from the 1961 musical West Side
Story. Although no visible swords are drawn on
Dalal Street, Ferri’s metaphor is bang on the
money. When we look at the market share of
passive index-based funds out of total money
managed by funds, we find that it grew from a
mere 5% in 1995 to a staggering 51% of the $8.5
trillion U.S. equity funds in 2019. In India too,
although still young, the trend is clocking
considerable speed thanks to growth drivers
such as Employees' Provident Fund
Organisation (EPFO) and Securities and
Exchange Board of India (SEBI).

MARKET SHARE OF
PASSIVE INDEX-BASED
FUNDS

51%
2019
$ 8.5
TRILLION
U.S. EQUITY FUNDS

5%
1995
 THE FAILURES OF ACTIVE

What lies behind this radical shift? Passive

investors will be quick to point to the disastrous
track record of active managers, of
overpromising and underdelivering on market
returns. Here’s a deeper look at what’s not
working.

The strategy The numbers The process

doesn’t fly don’t add up makes no sense

Over the last few It is a well-known fact A serious

decades, active that any excess return wastefulness attached
advocates have been from winning active to active investing is
plagued by, and funds is already well the cost of lost
acting upon, the below a fair payout. To opportunities. In the
misconception that add insult to injury, case of investors that
they have the ability the more active you actively select stocks,
to outsmart the are — that is to say, buy, sell and monitor
market. However the more you churn their portfolio to make
evidence shows that your portfolio, the profits, the active
the probability of an more money you end route requires them
active fund beating up shelling out in to spend close to
an index fund cuts, commissions 10-20 hours a week
irrevocably drops over and charges that go tracking the market.
time. In other words, straight into your From the point of
even the best active asset management view of achieving
managers are not fees. one’s financial goals,
likely to win the this time could be
game. Their spent a lot more
once-established productively to secure
practice of generating better returns another
alpha — a measure of way. This is a huge
how well an hidden cost and
investment strategy defeats the long-term
has outperformed an nature and purpose of
index fund — no investing.
longer delivers on its
promise.
 THE SHIFT TO PASSIVE

In contrast, passive investing puts its faith in the

long-range view of the market, involving a
methodical investment strategy that imitates
an index. Research proves that low-cost index
funds and ETFs that track market benchmark
funds beat most actively managed mutual
funds. Particularly for those who can’t afford to
spend hours watching the market, the passive
approach delivers a low-risk, low-cost, smart
and transparent way to diversify.

As a general rule of thumb, 90% of active

investors tend to underperform the market. This
means that even a purely mathematical person
has nothing better than 10% odds of winning.
Clearly, active investors can fall in either bracket.
But by simply choosing not to take on the perils
of the active way, you are already outperforming
90% of active investors.

The Majority of Active Managers Underperformed Passive Benchmarks

FUND COMPARISON PERCENTAGE OF

CATEGORY INDEX UNDER-PERFORMING
U.S. EQUITY FUNDS
10-YEAR (%)

All Large-Cap Funds S&P 500 89

All Mid-Cap Funds S&P MidCap 400 93

All Small-Cap Funds S&P Small Cap 600 93

Source: S&P Dow Jones Indices LLC, CRSP. Data as of June 30, 2018. The fund returns used are net of fees. Past
performance is no guarantee of future results. Table is provided for illustrative purposes.
 KNOWING THE RISKS

The rich The stars The active

get richer get eclipsed rise again

Because of the almost The stock market As the unintended

automated nature of exists to efficiently consequence of more
passive investing, allocate capital to the and more investors
benchmark indices most profitable engaging in passive
like Nifty 50 are businesses. This is strategies, large active
consistently further skewed within management
overvalued. Most ETFs the weighty indices, opportunities stand to
get concentrated in where a default emerge in the short
the primary index imbalance occurs term. Albeit in the
which attracts the when capital gets long term, passive still
largest capital flows, distributed equally wins as it delivers
leading to across the board, returns over a longer
overcrowded large neutralizing the period of time.
cap stocks. outperformers.

The only way to avert these potential dangers is

to exercise due diligence. Passive investing is
not a substitute for diligence. Investors must
allocate capital across asset classes intelligently
to start with, invest systematically to protect
their capital at all times, and wisely monitor and
moderate the size of their investment based on
current market conditions.
 GOING PASSIVE

While passive investing offers up several

runners like insurance, deposits, index mutual
funds, etc., ETF has become the quintessential
passive product, delivering low-risk, low-cost,
efficient diversification.

Investors, specially millennials and first-timers,

are faced with myriad investment choices but
limited savings to start investing with. ETF's
solve that. They trade for a fraction of the price
of the underlying index, making them a great
choice for beginners who are just getting their
feet wet.

NIFTY
INDEX 14,000 No matter where you
choose to invest, there
is always some risk. If
the stock market as a
Index ETFs
available at 1/10 OF NIFTY
OR
1/100
OF NIFTY
whole takes a turn for
the worse, your index
ETFs will likely fall as
well. But in general,
1 unit of ETF
costs as little as
1400 INR
OR
140
INR
index ETFs are much
less risky than holding
individual stocks.

In the final analysis, disciplined passive

investors who can power through temporary
downturns will ultimately reap steady
index-based returns.

While active chases the mirage of beating the

market, passive chooses to buy the market.
With this simple switch of the lens, passive is
not just investing in the future. It is building
the future of investing.
Follow us on
https://www.facebook.com/marketpulseapp

https://twitter.com/MarketPulseHQ

https://www.youtube.com/channel/UCZPAyh6JjGwCPY_bEpnKUqQ

https://www.instagram.com/marketpulseapp/

Disclaimer: All views expressed in this e-book are personal views of the
analysts and do not reflect the views of Market Pulse. The views expressed
are meant for education purposes only and are not recommendations
towards any investment decision.