How to place Buy & Sell orders, Limit orders, the concept of margin and why it is so deadly for traders

I received an email recently from a reader asking me to do a post on How to place the trades on ICICI Direct platform. While I admit having never really used the trading software offered by ICICI or most other brokers, I have extensively used  Zerodha’s Pi and predominantly Sharekhan’s Trade Tiger and continue to do so. I do believe that while trading platforms offered by various brokers might be different in terms of functionality, the basic trade set up process(Entering & exiting trades) should mostly be quite similar and straight forward.

Set up your Market watch list

Once you populate your ‘Market watch’ window with your favorite stocks, you just have to highlight the stock you want to Buy(or Sell) from that list. This is what it should somewhat look like:

Press F1 for Buy(or Right Click and select ‘Buy Scrip’)

It will bring up a window like this:

 

 

 

Now, for eg. you want to buy 100 shares of KCP Ltd stock at a price of 153.00, you would then have to enter the price and quantity in the corresponding boxes(see below). Make sure that the ‘Product Type’ is ‘Investment’ and click on ‘Place’. During that trading day, if/when the market price of KCP comes to 153.00, the buy trade would get executed and you would have bought 100 shares of KCP stock.

 

 

 

Press F2 for Sell(or Right Click and select ‘Sell Scrip’)

The Sell window would look like this:

 

 

 

Please note that this is the same step for setting a stop loss and/or Profit booking.

In this case, for eg. you want to book a profit when the price reaches a target of 161.00. Upon entering the sell price and quantity information into the corresponding boxes and clicking ‘Place’ would square off(sell) the existing 100 shares of KCP Ltd at a price of 161.00.

Similarly, follow the same method(F2) for setting a stop loss of 152.00 but this time under the ‘Validity’ drop down menu, you can choose the MyGTD option and choose the last trading day of the month so that the stop loss stays in the system and you would not have to set the stop loss every day manually.(Not all brokers offer this facility; you may have to manually set up stop loss every morning – One of the main reasons why I use Sharekhan as my broker)

 

 

 

I hope the process of executing buy/sell trades or setting stop losses on your trades is clear from the above.

Now, to particularly address the questions:

Whether to use Margin(Leverage) or not?

Margin is like a loan offered by brokers to get you to trade a much larger position size than you should. Most brokers offer up to 10 times margin or more. Simply put if you had Rs.1,00,000 in your trading account, utilizing the 10x margin means you can buy stocks worth Rs.11,00,000 while your actual trading capital is only Rs.1,00,000.

What does this mean in terms of your profits/losses?

Margin is a double edged sword, meaning Profits and losses will be huge when you use margin. From the above example, if you are utilizing 10x margin to enter a trade, it means you have actually entered a position worth Rs.11,00,000 and a 1% loss on a single trade will translate to a loss of Rs.11000(which happens to be 11% of your actual trading account balance – 11% of Rs.1,00,000)

Consequently a string of losses in the market(which is very common) can wipe out your entire account. Worse yet, if the stock price has moved quickly in the opposite direction, you may even end up having to pay more than what you have in your trading account to your broker. This concept is known as a ‘Margin Call’.

Hopefully by now you can see why this is such a dangerous facet in trading. In the end, trading with Margin is completely a personal choice. However, since this post is mainly for newbies to trading, my advice would be to Not get tempted by the margin offered by your broker.  To reiterate, margin is a concept invented by cunning brokers to trap novice retail investors to throw away their hard earned money. I would even go on record to say that margin trading is not suitable to even advanced traders and as such margin can be utilized by only intraday traders and I am certainly not one. I am yet to see a trader who doesn’t follow Risk management in trading and is still consistently  profitable.

Market order or Limit Order?

I am a swing trader and by virtue of that I determine areas of supply & demand on multiple time frames and wait for price to reach these pre determined levels. If the particular stock is trading at these very levels, I enter positions at the ‘Market Price’ but then if these levels are slightly away from the current market price, I generally place pending orders(Limit order).

I strongly believe that traders can definitely take emotions out of trading by implementing trades with a ‘Set and Forget’ strategy. After I analyze the charts and determine that I want to take a position, the orders to get in and out of these trades is almost always an automated process with my positions being triggered by a Limit order for buying, stop loss & profit booking.  Since my style of trading is short term positional or swing trading, I always take delivery of shares and since I would have already set up stop loss and profit target in the trading software, I allow the market to do its thing and let the trade either trigger the stop loss or profit target. Once you have identified a good trade set up with a healthy risk reward ratio and the correct position size, letting trades close out on their own is the best way to keep emotions out of trading.

My sincere hope is for the trading community to realize the truths in the world of equity trading and internalize these very important concepts and by way of today’s article only hope for a better yearly trading performance. My long term ambition is to contribute to your trading positively.

A Trade unfolding in KCP – You just got to Love Consolidation patterns in a Strong trend

KCP Ltd has gathered a bit of steam since December last year and right now the area at which it is currently trading is every pull back trader’s dream – To be able to participate in the next wave up from a point of correction(key support as highlighted in the daily chart below).

I feel there is an abundance of swing trading opportunities in the market all the time. Swing traders in India need to analyze the share market objectively to make a killing.

kcp short term trading opportunity

I am Buying:

KCP Ltd @ 153.00
Stop Loss: 152.00
Target: 161.00
Risk: Rs.1.00 per share
Reward: Rs.8.00 per share
Risk/Reward ratio: 1 : 8

Position Sizing: Suppose your trading capital is Rs.1,00,000. I usually recommend(and personally use) a Risk of 1% of the account balance per trade. Therefore, 1% of 1,00,000 would be a risk of Rs.1000 on this trade.

How many stocks of KCP Ltd should you buy?

Risk of Rs.1000 divided by Stop loss(in Rupees) of Rs.1.00 means 1000 shares of this stock should be bought.
Thereby, if the trade doesn’t work out, the total loss from this trade would be capped at Rs.1000
On the flip side, should this trade be a winner it would result in a total profit of Rs.8000(Target of Rs.8.00 per share x 1000 shares)

UPDATE(15/01/2018 18:28): The stock never came near the Buy Limit Price of 153.00, thereby the trade did not trigger. Instead the stock just went straight up and made an intraday high of 160.00, just short of the target 161.00. Therefore at this point I have cancelled the Buy limit order.

Yet another low risk/high reward trading opportunity in PPAP Automotive with x6 times profit target

In recognition of the most favorite past time of a majority of traders, of trying to search the internet for the ultimate stock market trading strategy, earlier this month I had published an educational article on Risk Management to be successful at share market trading in India. As significant as this concept is, the idea is to consistently apply this knowledge in your each and every trade to be a profitable trader. Hopefully by now, you have understood that instead of wasting time in a never ending quest for trading strategies, there is a lot of merit in the application of this vital concept and practically trading with a proper well defined risk/reward ratio and position sizing. Now, its time to apply it to your trading!

In the first two weeks of January, at least in the scrips I was tracking from the Nifty 200, stocks were mostly correcting and I could witness some profit booking from the December end high’s. I found some trade set-ups in the process and one such opportunity looks to be in PPAP Automotive.

From the daily chart of PPAP Automotive below, note that on the 1st of January, the stock made a high of 723.10  and the weeks that followed witnessed bearish price action. Well, actually it was more of a profit booking and there by price has corrected to the short term support level of 666.00. From the price action on this chart, I have no reason to believe that the bullish trend in this scrip has come to an end.

PPAP Automotive Short term trade January 2018

So, considering this as a correction & hence an opportunity to buy from a pull back at an excellent risk/reward ratio :

I am Buying:

PPAP Automotive @ 668.00
Stop Loss: 660.00
Target: 714.00
Risk: Rs.8.00 per share
Reward: Rs.46.00 per share
Risk/Reward ratio: 1:5.75

Position Sizing: Suppose your trading capital is Rs.1,00,000. I usually recommend(and personally use) a Risk of 1% of the account balance per trade. Therefore, 1% of 1,00,000 would be a risk of Rs.1000 on this trade.

How many stocks of PPAP Automotive should you buy?

Risk of Rs.1000 divided by Stop loss(in Rupees) of Rs.8.00 means 125 shares of this stock should be bought.
Thereby, if the trade doesn’t work out, the total loss from this trade would be capped at Rs.1000
On the flip side, should this trade be a winner it would result in a total profit of Rs.5750(Target of Rs.46.00 per share x 125 shares)

UPDATE(15/01/2018 18:47): Unfortunately, this trade did not work and our Stop Loss of 660.00 got hit and a loss of Rs.1000.

Why is Risk Management the only ‘Holy Grail’ in trading?

What if I told you that you could instantaneously become a profitable swing trader simply following sound money management rules in your trading? Yes, it is possible. Executing your trades with the right Position Sizing corresponding to your account balance & taking only the most obvious trade set-ups with a healthy Risk/Reward ratio is the only known ‘secret’ for consistent profitability in the markets. These are two of my favorite concepts in trading and they are so because I believe they hold the power to make or break your trading career. The real beauty about these concepts in trading is the fact that when you apply them diligently to ALL your trades, they are inherently built with the right tools for a trader to become successful and that includes automatically fixing erroneous trading habits. I have seen a handful of traders who have previously struggled to be profitable, turn their trading around following the exact same methods and this is true even if you believe you have a half decent trading system.

Nothing is possibly more important in trading than preservation of capital. While a system based on trading from support and resistance levels and also exiting trades at these very levels makes for an excellent trading system, in the absence of rules for ‘position sizing’ and ‘risk reward ratio’ no matter how good a trading methodology is, the results will be very erratic and a string of losses can erode the profits and/or your trading capital.

In the next section I will demonstrate how a Solid Risk/Reward ratio coupled with an appropriate position sizing will lead to a consistent return on your investment year on year.

Account balance = Rs.1,00,000

Number of trades per Month = 4

Risk / Reward per trade = 1:2

Risk per trade = 1% (Rs.1000)

Reward per trade = 2% (Rs.2000)

Assumed winning percentage = 50%

Assumed losing percentage = 50%
———————————————

4 Trading opportunities in a Month translates to 52 trades in a year =

52 x .50% winning trades = 26 winning trades
52 x .50% losing trades = 26 losing trades

26 x 2000 = Rs.52,000 profit by way of winning trades
26 x 1000 = Rs.26,000 loss by way of losing trades
———————————–
Total profit = Rs.26,000 (26% return Annually)

So, as you can see even with an accuracy of just 50% traders can expect to make 26% per annum which is very decent considering fixed income products in India do not offer more than 8% Returns annually. For the sake of simplicity, I have not considered executing newer positions on your compounded account balance.

The other variables in the above calculation which can substantially increase your returns are your ability to find higher risk/reward trades for eg. Finding trading opportunities with a potential Risk/Reward of 1:3 or 1:4 and/or increasing the risk % per trade to 2% or a combination of both which will lead to even more returns. For traders who are comfortable risking 2% per trade the returns will DOUBLE. I personally do not risk(nor recommend) any more than 2% per trade.

Realistically, with a decent price action trading strategy, you could be making near about 5% per month or 60% annually on your trading capital. All of this while keeping your risk constant at 1% of your account size per trade which means, no matter how large your trading account might be, the risk at most on any given trade would only be 1% of your account balance which should be very comfortable. As you become proficient with this style of trading and generate consistent returns over several months, even when you are trading much larger accounts, simply knowing that the maximum you can lose in any trade is just 1% will automatically make your decision making process a lot more comfortable. A lot of professional traders(myself included) trade this way following sound money management principles and risk no more than 2% of their account balance per trade.

To conclude, the application of these very same rules worked for me and there is no reason they wont work for you. Following money management rules automatically inculcate patience and discipline in a trader and it isn’t without a reason they are considered the corner stone to trading and if you were to build a strong foundation of trading price action along with applying these rules you can also be a consistently profitable trader.

Did you Know?

If you risk 1% of your trading account for every trade, you will need Seventy-Two(72) Consecutive Losing trades to lose 50% of your account.

Buy ADF Foods – Breakout & Consolidation at Monthly Support

As the year 2017 comes to an end, here’s a recap of the trades we took in the month of December. At first we had the ‘PPAP Automotive’ short term swing trade that we exited at our pre-defined target level with a Profit of +2.9% of account balance and then we also have an ongoing trade in ‘Pennar Industries’ which has been lingering in the 68.50 area for the last few days while our target is 70.00. For those of you who are willing to wait for the trade to hit the target level of 70.00 can possibly wait for a few more days and for others wanting to end this year on a real high, you can exit right now at CMP(66.50) and your profit from this trade would be +2.2% of the account balance.

Due to the anticipated lack of trading volume over the New years, I was not hoping to enter a trade for a few days. But a good trading opportunity in ‘ADF Foods’ has come knocking and I rarely pass up on such almost ‘sure shot’ trades 🙂

From the Monthly Candle stick chart of ‘ADF Foods’ below, note that I have identified and plotted the Monthly resistance, basically an area from which price has fallen to a lower level. For our purpose, the monthly resistance line is drawn, connecting the Highs of the months, May & June this year which happens to be approximately the 315.00 level.

Technical Analysis of Monthly time frame candle stick chart of ADF Foods

In the current scenario, as you can see from the Daily chart below, since the price broke out higher than our ‘Monthly Resistance’ of 315.00, there is a strong possibility that this level will now act as a ‘Support’ in the near term and hence a long position can be entered from this level for a target of nearly Rs.340.00

Daily Candle stick chart of ADF Foods - Buying Range

Buy ADF Foods @ 315.80
Stop Loss: 303.80
Target: 337.40
Risk: Rs.12.00
Reward: Rs.21.60
Risk/Reward ratio: 1:1.8

Position Sizing: Suppose your trading capital is Rs.1,00,000. I usually recommend(and personally use) a Risk of 1% of the account balance per trade. Therefore, 1% of 1,00,000 would be a risk of Rs.1000 on this trade.

How many stocks of ADF Foods should you buy?

Risk of Rs.1000 divided by Stop loss(in Rupees) of Rs.12.00 means 83 shares of this stock should be bought.
Thereby, if the trade doesn’t work out, the total loss from this trade would be capped at Rs.1000
On the flip side, should this trade be a winner it would result in a total profit of Rs.1800(Target of Rs.21.60 per share x 83 shares)

UPDATE(15/01/2018 18:37): After execution of this Buy trade on 29/12/2017, the stock hardly made any directional movement and finally after two weeks the stop loss has been triggered.

Pennar Industries at Major support

The current price level of Pennar Industries can be easily deemed to be a ‘Sell zone’ until you zoom out and look at the bigger picture.It is very rare to not be able to tell the trend from the higher time frames. This is what I see on the Monthly chart:

From the Monthly chart of Pennar Industries above, it is quite apparent that movement above 60.00 was largely restricted and once price broke above the major resistance of 60.00, it made a new high of 78.00 and the current retracement from that high is back to the age old support level of 60.00(previously resistance) which I consider an excellent level to Buy.

Scaling down to the daily chart, even though we have had intense bearish price action for the past several weeks, it seems like this would be a good point to enter to ride another wave up in line with the dominant monthly trend. I was able to fine tune my entry at 61.00 and placed a stop loss at 58.50 which is right below the big blue 19th October weekly candle’s low.

Buy Pennar Industries @ 61.00
Stop Loss: 58.50
Target: 70.00
Risk: Rs.2.50
Reward: Rs.9.00
Risk/Reward ratio: 1:3.6

UPDATE: This recommendation hit our target and our profit from this trade is 3.6% of the entire trading capital. Check the Performance Tracker page.

Buy PPAP Automotive

PPAP Automotive is a fundamentally strong company that has been registering new highs since a magical cross over and a vital breakout took place back in 2014. Recently the stock made a high of almost 600 in the current month and since then there has been a retracement to the high of November. This very correction back to the short term daily resistance area(now support) of 548.00 has opened up a short term opportunity to get a trade with a healthy Risk Reward ratio in line with the dominant uptrend.

Price Action Buy Trade for PPAP Automotive

Buy PPAP Automotive @ 548.00
Stop Loss: 531.00
Target: 598.00
Risk: Rs.17.00
Reward: Rs.50.00
Risk/Reward ratio: Almost 1:3

Position Sizing: Suppose your trading capital is Rs.1,00,000. I usually recommend(and personally use) a Risk of 1% of the account balance per trade. Therefore, 1% of 1,00,000 would be a risk of Rs.1000 on this trade.

How many stocks of PPAP Automotive should you buy?

Risk of Rs.1000 divided by Stop loss(in Rupees) of Rs.17.00 means 58 shares of this stock should be bought.
Thereby, if the trade doesn’t work out, the total loss from this trade would be capped at Rs.1000
On the flip side, should this trade be a winner it would result in a total profit of Rs.2900(Target of Rs.50 per share x 58 shares)

UPDATE: This recommendation hit our target and our profit from this trade is 2.9% of the entire trading capital. Check the Performance Tracker page.