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10 Steps to Being Profitable in Intraday Trading

10 Steps to Being Profitable in Intraday Trading
20/06/2019

Is it possible to be consistently profitable in intraday trading? Now that sounds too simplistic but you need to understand that intraday trading is less about risk taking ability and skill and a lot more about how you manage your risk. In intraday trading, you start with the premise that you need to protect your capital and then start trading. To consistently make profits in intraday trading over a longer period of time, you need to start off with simple things like documentation, setting limits and managing risks. Here are the 10 steps to focus on.

10 steps to intraday trading

  1. Have you created your trading rule book and if not, then start the process right away. The trading rule book basically lays down all the rules and regulations for your intraday trading. This includes questions like - the loss you are willing to take, the capital depletion you can afford, preferred risk-reward ratio etc. It is your trading constitution book which you must adhere to.

  2. Define your maximum loss at various levels. Define how much of your capital you are willing to lose. At that point, you must stop trading and get back to the drawing board. You must also define the maximum you are willing to lose in a day. If that loss occurs in the first one hour, then have the discipline to shut your terminal for the rest of the day.

  3. In any intraday trade, stop loss is the Holy Grail whether on the long side or on the short side. Normally, stop losses are linked to support and resistance levels but can also be set at your affordability level. Stop loss must be a part of your order and not an afterthought. Secondly, when the stop loss is triggered, just close the position and don’t try to average it.

  4. In intraday trading, always work with a reasonable profit target in mind and be flexible about it. These profit targets must also be imputed in the system as part of a bracket order so that once the stop loss or profit target is triggered; the other leg automatically gets cancelled.

  5. Buy on hope and sell on reality. As an intraday trader, you largely deal with expectations. Once the street knows about it, there is hardly any trade left in the stock. If you are trading based on news flows, you will have to initiate the trade based on expectations and then book your profits when the actual announcement is made.

  6. You can’t outsource charting and research as an intraday trader; you need to do it all by yourself. If you are an intraday trader, the basic route to being successful is to be your own chartist. It is not too complicated and a few basic rules are good enough for you to consistently trade intraday.

  7. Ensure that you are in control of your open positions. Don’t have too many positions open at one point of time as they can be hard to track. This is a mistake intraday traders often commit. Your mental bandwidth only allows you to track a limited number of positions in terms of fundamentals, charts and news flows.

  8. A very important rule in intraday trading is “doing nothing” and it is also an intraday strategy. Quite often, when you look back, it is the most profitable strategy. Intraday trading does not mean that you must either be long or short at all points of time. When the market is too confusing or volatile, take a conscious call to sit out of the market.

  9. As an intraday trader, you are most likely to be successful if you stay close to the market trend. The trend is your friend because it always has a story to tell you. When the market shows a trend it is your job to listen to that message and trade accordingly. At the end of the day, the market is collective wisdom and is always smarter than you. Once you develop that humility in intraday trading, you are on the profitable path.

  10. Documenting and recording may look like mundane jobs but they are the core for your successful intraday trading. Start maintaining a trading diary. It is not just a record of your trades and the logic, but also a daily end-of-day evaluation of how it fared. Make notes on where you went wrong and how you could trade better. Over time, your intraday trading skills gets fine-tuned!

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5 Key Rules for Successful Investing in Stock Market

5 Key Rules for Successful Investing in Stock Market
20/06/2019

Stock market investing is as much a mind game as it is about skill and experience. In fact, it is a lot more about the gut than about the brain. However, investment is for the long term and hence cannot be totally impetuous. There has to be a body of knowledge underlying your investments and that comes from some basic rules. Let us look at five such basic rules that can guide your investments in the stock market.

Always try to diversify your risk; it is not just about returns

The best of investors and traders diversify their risk because there is really no choice. This is an age-old wisdom and means you must not put all your eggs in one basket. Smart investing is about hedging your risk and the first step is to diversify your portfolio. Warren Buffett may have made all his money on a handful of stocks but even he looked at risk at all points of time. For investors, avoid too many stocks of the same type or the same sector or the same theme. More diversified the portfolio, less vulnerable you are to specific cyclical shocks. A diversified portfolio gives you a better chance of being profitable in the long run.

Investing need not be forever, but at least have a 5-year perspective

Warren Buffett once said that even if he bought a stock and the markets shut down for 10 years he would not worry. He may have exaggerated, but the bottom line is to take a long term approach to stock investing. Investors have made huge amounts of money by taking a long term approach to quality stocks. The long term returns on stocks like Infosys, HDFC Bank, Havells, Eicher, Escorts are all classic examples. Markets can be notoriously volatile in the short to medium term, so unless you can think about the next 5 to 10 years don’t even start investing. Typically, you only earn profits on a handful of stocks and that is not possible with a myopic approach.

Smart investing is all about managing your liquidity

It has happened so often to most investors. When markets peaked and started correcting, you held on hoping for a bounce. Then when markets bottomed you were stuck in shares. At some point, you did not have the heart to take a loss and that created liquidity problems for you. The bottom line is that you must have cash handy when opportunities arise in the market at lower levels. At that point don’t get stuck with MTM losses. This is where the best of investors falter. So hold your profits long and cut your losses short.

Focus on stocks you understand, even if you have to miss some stars

In one of his annual newsletters, Warren Buffett mentioned that Amazon and Google were two of the biggest stories that he had missed out. That was largely because Buffett was never comfortable investing in technology stocks. Of course, it is a different issue that Apple is among his largest holdings today. But the moral of the story is that it does not matter if there are 5 trends in the market you do not understand. Rather, you must just focus on the 2 trends that you perfectly understand. That is what matters. Don’t go too much by themes and hot trends. Instead, focus on the business model of the company and its prospects.

Finally, you stand a better chance if you let your head rule your heart

Two common sentiments in the stock market are fear and greed. The irony is that most investors tend to become greedy when they should be fearful and get fearful when they should be getting greedy. You are willing to buy at 28 P/E but not at 14 P/E and when it comes to selling, it is the other way round. Such emotions normally cloud your judgement. That is where you need to let your head rule over your heart. Take decisions based on hard numbers and cold calculations. You can never perfectly be on target in stock market investing but going by hard facts and dispassionate analysis largely reduces your risk and gets you a better deal.

Stock market investing is based on some basic and simple rules.  Just understand the business and buy for the long term. Returns will follow as a corollary!

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7 Quick Tips to Choose the Best SIP Plan

7 Quick Tips to Choose the Best SIP Plan
20/06/2019

SIPs give you the advantage of matching outflows to inflows and also proffer the benefit of rupee cost averaging. But even in SIPs you need to make a selection. Here is how you should go about investing in a systematic manner.

Step 1: Set out long term goals and tag SIPs to goals

For those who are planning for retirement or for child’s education, the best way is through equity SIP. SIPs work best when they are designed around equity funds. But for SIPs to be meaningful, they must be tagged to a long term goal. You can have multiple SIPs tied to a single goal or a single SIP tied to multiple goals. This induces discipline in your SIP investment as you know the purpose and hence tend to be glued to it over the long term.

Step 2: SIP on products based on your risk-return trade off

You can do SIPs on equity funds, debt funds or even liquid funds. That entirely depends on your goal, the time horizon and the criticality. If the tenure is shorter then you must rely on a liquid fund or liquid plus funds. SIPs on equity funds work best when the goal is for the long-run like beyond 7 years. Ideally, structure these long term goal SIPs on diversified equity funds or multi cap funds. Sectoral and thematic funds are best avoided.

Step 3: What is better – direct plan or regular plan?

You need to make a conscious choice depending on the extent of advisory support you are looking at. In direct plans you do not pay the distribution and trail fees. Hence the total expense ratio (TER) is 100-125 basis points lower and therefore the returns are higher. You need to evaluate the cost benefit analysis. Another midway is to opt for direct plans and then rely on an independent advisor to partner you through the goals.

Step 4: Equity SIPs are for long term

Equity SIPs are not for instant gratification. In a longer time-frame, SIPs make the power of compounding work in your favour. For example, if you try 3-year equity SIP, you could be disappointed as the cycles may not work in your favour. The longer your SIP sustains the more rupee cost averaging works in your favour. In the event, the cost of acquisition is brought down and the returns are enhanced.

Step 5: Make a conscious choice of funds for SIPs

All equity funds in the market may appear to be equal. Get the right framework to select funds for your SIP. For starters, look at the pedigree and the AUM of the fund. Secondly, avoid buying into funds where the fund management team changes too often. This leads to inconsistent investment philosophy. When you look at returns for comparison, focus less on absolute returns and more on risk-adjusted returns and the consistency of returns.

Step 6: Decide on a fixed SIP amount and stick to it

Investors often debate if they should increase the SIP amount when markets correct and reduce when markets go up. That is a lot like timing the market. It is difficult and also does not add value. In SIP the whole idea is that you allow time to work in favour of your cost and the compounding to work in favour of your returns. Invest in a good SIP and don’t try to time the market.

Step 7: Benchmark SIP performance with index and the peer group

These are two different issues. You invest in a SIP so that you get the benefits of active fund management since index returns can be earned through an index fund. Your equity SIP must outperform the index fund SIP by a reasonable margin on a sustained basis. That is when you know that the fund manager is doing her job. You look at the peer group to assure yourself that your fund manager is not out of sync with reality.

Don’t treat your SIP as an all passive affair. There is a method you can apply for profitability!

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Is Your Demat Account Safe From Fraud? Know How To Safeguard It

Is Your Demat Account Safe From Fraud? Know How To Safeguard It
20/06/2019

Your demat account is your gateway to stock ownership. In fact, it is a lot more. You can hold shares, bonds, ETFs, gold bonds and even your mutual funds in your demat account. The demat account is a statement of ownership and SEBI mandates that it is compulsory to have a demat account in your name before trading in equities. This demat account is linked to your trading account and your bank account. When you buy shares, the bank account is debited and the demat account is credited with shares. On the other hand when you sell shares, the demat account is debited and the bank account is credited. As an electronic stock ownership account, the demat account requires protection and care. Here is how you can safeguard your demat account.

Keep your DIS booklet safe and under lock and key

The Debit Instruction Slip (DIS) booklet is the demat account equivalent of your bank cheque book. Normally, each time you sell shares you must sign the DIS mentioning the name and ISIN of shares sold, number of shares sold in words and figures and sign in the appropriate column. Hence you must ensure that you don’t leave your DIS booklet lying around and never leave your signed DIS booklet with your broker or anyone else. Make it a point to never use loose DIS slips. Insist on a pre-printed DIS booklet with your Demat Account number printed. This problem is largely obviated in online trading accounts as you normally give a power of attorney (POA) to your broker to debit your demat account when shares are sold. When you sign the POA with your broker, insist on signing a limited purpose POA rather than a general purpose POA. In the former case, the DP can only debit your account for the settlement related transactions. This makes it a lot safer for you.

Do a regular reconciliation of your demat account

SEBI rules make it mandatory for the DP (NSDL or CDSL) to send you an SMS intimation when the shares are debited to your demat account. In case you find debits for any shares not authorized by you, immediately bring it to the notice of your broker and your DP. Demat leaves an audit trail so it is very easy for the DP to locate how and where the shares were transferred. If you are a regular trader, you must do the reconciliation of your contract notes, trading ledger and demat account at least once every week. As the saying goes, “eternal vigilance is your best defence”.

Ensure to regularly update your Mobile / Email with the DP

Quite often investors are not vigilant enough to immediately inform the DP in the event of change of email or mobile number. This is very important. If you change your mobile number and don’t intimate the DP, then the debit intimations may go to the old contact number and you may not even be aware of it. The same applies to your residential address also. These small things can go a long way in improving your safety quotient.

Use the freeze facility when you are not going to use the account

This is one of the common cases of fraud in demat accounts. Quite often people travel abroad and leave their demat account unattended. During this period, you may not get intimations as your local phone may not be in use. Under these circumstances you can give a signed application to the DP to freeze the demat account. When the account is frozen, the demat account can continue to receive corporate actions like dividends, bonus and splits. It is only debits to the demat account that are barred. The only limitation is that you can only freeze the entire DP account. Freezing of specific shares is not permitted. However, the process is quite simple and once you are back, the account can be immediately de-frozen. The freeze facility is something you must use when your demat account is likely to be idle for long. It can go a long way to protect you.

Remember, the demat system has been designed with a lot of checks and balances internally. A little bit of care from your side will contribute towards making the demat account safer. It is your wealth after all!

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How Equity Can Help You Retire Rich?

How Equity Can Help You Retire Rich?
06/07/2019

When you talk of equities, you normally hear the stories of how stocks like Wipro or Havells have created wealth over the years. For example, an investment of Rs. 1,000 in Wipro in 1980 would be worth nearly Rs.60 crore today. Similarly, and investment of Rs.1 lakh in Havells in 1997 would be worth Rs.32 crore today. There are scores of other similar stocks like Eicher Motors, Escorts, TVS Motors, TTK Prestige, Symphony etc which have multiplied anywhere between 50 times to 200 times over time. But, let us first shift to the core idea of why we are discussing all these stocks when we talk about retirement.

The 3 considerations in retirement

Irrespective of when you plan to retire, it is always better to start planning early. That is what retirement planning is all about. Here are the 3 key considerations.

  • You need to take a long term approach towards planning your retirement because that is when the power of compounding works in your favour. The longer you hold on to quality investments, the more the returns compound and increase wealth.

  • Retirement is all about making small money work hard. That is only possible through equities. For example, an equity fund can give returns of around 13-15% on an annualized basis. You can’t plan your retirement with a 6% liquid fund.

  • For planning your retirement, risk is as important as returns. You can argue that equity is high risk but if you look at quality portfolios of equities, they tend to almost negate downside risk if equities are held for a period of more than 7-10 years.

But, how can equities help us compound retirement corpus?

It is hard to fathom the power of compounding but we can grasp that better with a hypothetical illustration. Let us look at how yields and time make a huge difference to your retirement corpus creation. Since lump sum investments are not practical for most people, let us assume that the investor does a monthly SIP of Rs. 5,000 under different options.

Investment

SIP Period

Annual Yield

Total Outlay

Final Value

Wealth Ratio

Liquid Fund – 1

10 years

6%

Rs.6 lakh

Rs.8.24 lakh

1.37 times

Liquid Fund – 2

20 years

6%

Rs.12 lakhs

Rs.23.22 lakh

1.94 times

Equity Fund - 1

10 years

14%

Rs.6 lakh

Rs.13.11 lakh

2.19 times

Equity Fund - 2

20 years

14%

Rs.12 lakhs

Rs.65.82 lakh

5.49 times

Two things are evident from the above table. Firstly, the liquid fund with similar monthly contribution over 20 year has a lower wealth ratio compared to equity funds over 10 years. That means higher yield matters and that is only available in equities. Secondly, the equity fund creates a higher wealth ratio over 20 years than over 10 years and that underscores the importance of long term holding. Therefore, retirement plan must focus on a diversified equity portfolio held over the long term.

Equity versus equity funds; why not both?

Quite often investors get confused whether they should opt for equity funds or direct equities for their retirement plan. Equities can give you multi baggers but selecting multi baggers is not a cakewalk. That is where equity mutual funds can offer a trade-off. But the best way is to combine the power of direct equities and equity funds. Here is how!

  • Equity funds should be used for retirement hygiene factors; that means you need to run your home and your regular expenses post retirement and it has to be predictable. Here equity funds can play a much bigger and meaningful role.

  • How about the add-ons post retirement. For example, you may plan a vacation or may want to pursue other aspirations or may want to extensively travel. These are add-ons which you can plan with direct equity investments. Do your research and stick to quality stocks for the long term.

The fact is that retirement planning must be a lot more nuanced. Either ways, being a long term goal, your focus must be on the power of equities. Nothing gels with long term retirement goals better than equity investments.

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How to Choose the Best Demat Account?

How to Choose the Best Demat Account?
06/07/2019

You may actually wonder, what is there to choose between demat accounts? After all, it looks like a plain vanilla account where you can hold your shares. But you must do your homework before opting for your demat account. Here are some factors to consider before opening your demat account.

Ideally keep your trading account and demat account at the same place

This is no statutory requirement as you are free to have your trading account and demat account with different brokers. It is more about your own convenience. Normally, brokers open trading-cum-demat account together; so this should not be a real issue. The only issue is if your broker does not have a DP license? Then you need to ensure that once you sell shares you submit debit instruction slip (DIS) to your broker on time. If the DIS gets delayed, it can result in short delivery and lead to auction losses for you. When your broker and DP are the same, this entire process becomes simple and seamless.

Know: Difference between Demat Account and Trading Account

Today, demat is about technology so check the tech specs

When you open a demat account it is normally a 2-in-1 account and the entire process should be seamless. It should not only be cost effective and simple, but also ensure a smooth process. Most brokers offer you access to your trading account and demat account through a single platform. The funding of bank account, credit to demat, debits to demat and credits to bank account - all happen seamlessly. The DP must have a robust technology platform that ensures the same. Focus on a DP that is able to deliver a tech-smart solution.

Compare the costs of demat with competition

There are various costs to a demat account. Annual maintenance charge (AMC) is billed to you each year. This is normally based on the value of shares in custody and ranges between Rs.500 to Rs.800 per year. DPs cannot charge you for credit of shares but each time you sell shares and the shares get debited from your demat account, the DP pays a charge to NSDL or CDSL. This charge gets passed on to you. In addition, DPs also charge you for physical statement, duplicate statement or more frequent statement of holdings / transactions. If DIS gets rejected, DP charges you a penalty. There are also additional costs for dematerializing shares and also when the demat request form gets rejected due to technical errors. Add up all these costs for the complete picture. You must save on costs without compromising on quality of service.

Check the service standards of the DP in the market

A DP must be judged based on the quality of the regular and ancillary services provided. For example; how long does it take to get your physical shares dematerialized? Do corporate actions get credited to your demat account automatically? How efficiently does the DP deal with issues like pledge, lien, and customer complaints, among others? Check with other customers and with the market grapevine before zeroing in on your DP.

Finally, do a reality check on the DP image in the market

At the end of the day, choosing a DP is about the service standards and the customer orientation that they bring to the table. A DP that takes care of the small hygiene factors is worth going for. For instance, be careful of having a demat account with a DP which has a lot of service level complaints pending with SEBI. That is not a very good sign and shows lack of attention to quality. Ensure that there are no regulatory investigations or inquiries pending against the DP. Social media can be a two-edged sword but you must scan social media and discussion forums for negative feedback about their DP services. Quite often, social media tends to hype things up but like in most cases there is rarely smoke with fire. You may not act on it but it can be a useful input point.

The whole idea of these checks and balances is to ensure that you don’t end up with the wrong DP. You can at least make a smart choice to begin with!

Important Links:

1.  Types of Demat Account

2.  Documents Required to Open a Demat Account

3.  Benefits of Demat Account