Very good Trading Tips in Stock Market

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Stock markets have always been elusive to the common mans’ dream of earning quick bucks. They are like a child’s play ground requiring courage, zeal to excel and being a step forward than your competitor. However discipline is paramount and synonymous to success. A disciplined investor knows how to limit losses and maximise profits.

The ingredients of success in a stock market are very basic namely surplus money, risk appetite, intuitive skills, rational approach and a flexible strategy.

Anyone can earn money if he can predict the trend and take a position accordingly. However, the art of trading or investing may not come naturally to one. We need to practice in order to develop the art. We need to be chivalrous, understand the market makers psychology and out-smart him.

Asset Allocation: implies balancing your exposure in various asset classes of Equity and Derivatives. One may invest 80% of their portfolio’s worth in Equity and the remaining 20% in Options (Derivatives). As the risk appetite increases and the understanding of market dynamics unfolds, the % of asset allocation may be tilted but not beyond 60% equity and 40 % Derivatives.
To elaborate more on the Strategic part of investments I shall quote an example.

Nifty50 is composed of stocks of top 50 most reliable and consistent Blue chip companies of India. Nifty50 is a diversified index and thus has companies from different sectors like FMCG, Oil & Gas, Metal, Realty, Bank etc. The fluctuations in the index may be because of Market news, Sector specific news, Stock Specific news. One sector may go up leading the Nifty50 index higher whereas some other sector may pull the index down. Herein you may have the following kinds of trading strategies.

BUY in EQUITIES & SELL IN OPTIONS (PUT) – This is known as hedging. One may adopt such a strategy if he’s not sure of the market direction. The net profit/loss is very minimal. However if the trend is certain then the trader may square off his loss making position to reap profits.

WHEN MARKET IS RANGE BOUND – When the market is trending in a small range and not giving any break-out in either direction, it is better to stay put. However, if one still wishes to try his luck then he may buy Options both Call and Put – OUT the MONEY. Always have both positions open no matter what the index levels are. For example if Nifty is trending in a range of 2700 – 2900 then the strategy could be somewhat like this.

When spot Nifty is at 2750, one may buy 2900 Call and 2700 Put.

When spot Nifty goes up-to say 2820, 2900 call will give you profit but the 2700 Put will give loss. Book profit in the 2900 Call partly and buy 2800 Put. 2700 put will be in loss but is acting as a hedge so keep it.

If Nifty reverses from 2820 level and comes down to 2730, your 2800 Put as well as 2700 Put both shall give you good profits. Book profit in 2700 Put completely and part profit in 2800 Put. At this point in time when Nifty is at 2730, you have 2900 call in loss and 2800 Put in profit. You have already booked good profit in both Put and Call. Always have both positions open and keep the exposure to bare minimum. Value of Put should be equal to value of Call at all times but be tilt if trend is certain.

RESULT SEASON – When the result season is on, the markets are never going to trend significantly in either direction. The reactions are going to be mixed. The sentiments on a bearish day may not necessarily continue the succeeding day and vice-versa. Strategise by taking a hedge position in a certain stock. Buy Call as well as Put (Out the Money). For example if the Nifty Index has been beaten down completely because of bad results of a high ‘BETA’ company, the index has fallen more than it should have. You may buy Call (OUT the MONEY) of a strong but unexpectedly beaten down firm and just to hedge buy Nifty Put (OUT the MONEY).

The profits earned should be reinvested suitably to maintain the asset allocation ratio. Always remember that ‘Discipline’ is synonymous to success in the Stock Market. For any queries please email to Abhinav5884@yahoo.co.in

The above article is a brief for people who understand the terminologies of stock market.
Forth coming article – “Stock Research Techniques – Fundamental & Technical”