The Ultimate Rules for Options Day Trading SuccessNSE:BANKNIFTY
Introduction
If you want to be a successful options day trader, it's not just about having a good strategy. You also need to develop your expertise, seek guidance when needed, and be dedicated to your goals. To do this, you need to be disciplined and follow some options day trading rules. These rules can help you avoid common mistakes and take away the guesswork. Here are some rules that every options day trader should know and if you use them in a disciplined manner then they have been proven to help beginners become winning options day traders.
Some important rules are :-
Rule 1 Setting Realistic Goals for Options Day Trading
One of the most important rules for success in options day trading is to have realistic expectations. Options trading is not a way to get rich quickly, but it can be a profitable career if you put in the time and effort to learn and master the craft. You need to be prepared for a learning curve and be willing to stick with it even when it gets tough. You should also expect losses, as no strategy can guarantee gains all the time. Good money and risk management can help minimize losses.
Rule 2 Start Small to Grow Big
When you're new to day trading options, it's important to be cautious. You're still learning about options trading and the financial market, so take your time. Don't rush into things, even if you're excited. Start by practicing with paper trading and then move on to smaller options positions. Gradually increase your positions as you become more familiar with day trading options. This approach helps you minimize your losses and develop a systematic method for entering positions.
Rule 3 Know your limits
You may be tempted to trade as much as possible to develop a winning monthly average but that strategy will have the opposite effect and land you with a losing average. Remember that every options trader needs careful consideration before that contract is set up. Never overtrade and tie up your Capital.
Overtrading will make money for your broker not you.
Rule 4 Get Prepared Mentally, Physically, and Emotionally for Options Trading
To succeed in options day trading, you need to take care of your mental, physical, and emotional health. This means getting enough sleep, eating a healthy diet, exercising regularly, avoiding excessive alcohol and smoking, and reducing stress in your environment. These habits will help you stay alert and focused throughout the day. So, take the time to care for yourself and perform at your best every day.
Rule 5 Do Your Homework Daily – Plan your day
Before the market opens, study the financial environment and news to develop a daily trading plan. This is called pre-market preparation and it's essential to stay competitive and align your strategy with the day's conditions. Develop a pre-market checklist that includes evaluating support and resistance, checking the news, assessing volume and competition, determining safe exits for losing positions, and considering market seasonality.
Rule 6 Analyse Your Daily Performance
Track your options day trading performance daily to notice patterns in your profits and losses. This will help you understand why you're gaining or losing money and fine-tune your processes for maximum returns. Reviewing your daily performance will also help you make long-term decisions for your options day trading career.
Rule 7 Pay Attention to Volatility
Volatility is how likely the price will change over time in the financial market. It can be good or bad for an options day trader, depending on their goals and position. Many factors affect volatility, like the economy, world events, and news reports. Straddle and strangle strategies are helpful in volatile markets. There are three types of volatility: price, historical, and implied. Price is based on supply and demand, historical looks at past performance, and implied predicts future performance.
Rule 8 Use Option Greeks
Greeks are measures that help to determine an option's price sensitivity in relation to other factors. They are represented by letters from the Greek alphabet and are used in complex formulas to determine option pricing. Despite their complexity, Greeks can be calculated quickly and efficiently, allowing options day traders to use them to improve their trades for maximum profit.
Delta, Gamma, Vega, Theta, Rho
Learn about option greeks from here
I hope you found this helpful.
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Keep Learning,
Happy Trading!
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5 Books that changed my life In this video, I discuss 5 books which made me the trader I'm today.
Here , I discuss priceless books for traders who want to learn in depth technical analysis .
I also talk about a very good book for traders who want to learn pre defined strategies without knowing much about technical analysis.
And, lastly I discuss about a must have book for options traders.
Let me know which book changed your life?
Cheers .
5 Tips For Managing Losing Trades (It Happens To Everyone)Losing trades happen. They are a part of the journey. There is simply no such thing as a trader or investor who wins all the time. All the famous investors or traders you know have LOST many times in their careers. It is perfectly normal. Did you know the famed hedge fund manager Ray Dalio lost everything in his 30s? He went broke. He had to start over from scratch.
This post will address what losing trades really mean and how to deal with it.
Before we begin, let us state the obvious:
- Be careful of people who claim they don't lose.
- Avoid people who flaunt win rates or success rates that are simply not possible.
- Losing trades happen to everyone! You are not alone.
Now, let's talk about what bad trades mean and 5 tips for managing them:
Number 1: A losing trade is different from a bad trade
The most experienced traders are well aware of their risk before they ever place a trade. Each losing trade is a small component of a bigger process that relates to a system, plan or strategy that has been thoroughly tested and studied. A losing trade is a calculated event for experienced traders. They defined their risk, position size, stop loss, and profit target. 🎯
A bad trade is very different. A bad trade implies someone risked their hard-earned money with no plan or process. A bad trade is reckless and indiscriminate trading. This often happens to new investors or traders who do not yet understand the time, studying, and research that goes into making a rock-solid plan. Be sure to remember the difference between a calculated losing trade and a bad trade with no plan or process.
TradingView Tip: there are several ways to get started with a plan, system or process. Paper trading, backtesting and/or working with proficient traders who give valuable feedback are all ways to get started. Don't risk your money without first doing research.
Number 2: Every losing trade provides data to get better
As we've mentioned several times now, losing trades happen to everyone. But remember, losing trades are also filled with insightful information and data. You can learn a lot from analyzing losing trades. 🔍
At the end of each trading day, week or month, experienced traders will analyze their losing trades in detail. What patterns are appearing? What do they share in common? Why did they happen? With this information, a trader or investor can adjust their strategy based on what they've uncovered.
Number 3: Do not let losing trades impact your health
Your mental and physical health are just as important as your financial health. Do not let losing trades impact either of those.
If your system is breaking down or several losing trades are starting to impact your emotions, step away from the computer or phone. Turn everything off and walk away. The markets have been open for hundreds of years and are not going away. When you're ready to come back, they'll be there.
Get up, get some fresh air, and get back in the arena when you're ready.
Number 4: Share your experiences with others
Traders and investors across the globe want to learn from your stories and losing trades. These are invaluable experiences that we all share in common. Social networks allow you to chat, share, and meet people who are going through similar things. We can all learn from each other.
Sure, the temptation to share your winners or act like the best trader who ever existed is tempting 😜 - but it's clear we learn together and get better when we share lessons from the loses. This is where the deepest insights are found, and together, it's where we can grow as a community of traders all trying to outperform the market.
Share and ask for constructive feedback!
Number 5: Keep Going
Markets are a game of learning, relearning, and progressing forward. New themes, trends, and stories appear and disappear daily. The journey is long and it never stops. When implementing your trading plan or investing plan, it's important to do it with the long-term in mind. One or two losing trades in a single day or week is a small fraction of what's to come many months and years down the road. 🌎
Keep going. Keep building. Keep refining your plan. Study the data.
We hope you enjoyed this post!
We hope you learned something new or informative!
Please leave any comments below and our team will read them.
- TradingView ❤️
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Trading Mindset - Tips for TradersTrading is an art that requires a strong mindset. Having the right mindset is essential for success in trading. The right mindset can help you avoid making emotional decisions, stick to your trading plan, and ultimately achieve your trading goals. In this blog post, we will discuss the importance of having the right trading mindset and how you can develop one.
The Importance of a Trading Mindset:
A trading mindset is the mental attitude you have towards trading. It is your overall attitude, beliefs, and emotions towards trading. Having the right mindset is important for several reasons:
1. Avoiding Emotional Decisions: Emotions can cloud your judgment and cause you to make impulsive decisions that can lead to losses. Having the right trading mindset can help you avoid emotional decisions.
2. Sticking to Your Plan: Having the right mindset can help you stick to your trading plan, even when the market is volatile or when you are experiencing a losing streak.
3. Improving Discipline: Trading requires discipline, and having the right mindset can help you develop discipline and stick to your trading rules.
4. Achieving Your Goals: Having the right mindset can help you achieve your trading goals by keeping you focused and motivated.
Developing a Trading Mindset:
Developing the right trading mindset is not easy, but it is possible. Here are some tips to help you develop the right mindset for trading:
1. Set Realistic Expectations: Set realistic expectations for yourself and your trading. Understand that trading is not a get-rich-quick scheme, and it takes time and effort to become successful.
2. Focus on the Process: Focus on the process of trading rather than the outcome. Focus on following your trading plan, managing risk, and improving your skills.
3. Accept Losses: Accept that losses are a part of trading and learn from them. Do not dwell on losses, but use them as an opportunity to improve your trading skills.
4. Practice Patience: Trading requires patience. Learn to be patient and wait for the right opportunities to enter and exit the market.
5. Manage Emotions: Manage your emotions while trading. Do not let fear, greed, or other emotions cloud your judgment.
6. Maintain a Positive Attitude: Maintaining a positive attitude is essential for success in trading. Believe in yourself and your abilities, and maintain a positive outlook, even during challenging times.
In conclusion, having the right trading mindset is essential for success in trading. It can help you avoid emotional decisions, stick to your trading plan, and ultimately achieve your trading goals. Developing the right mindset takes time and effort, but it is possible. Set realistic expectations, focus on the process, accept losses, practice patience, manage emotions, and maintain a positive attitude. With the right mindset, you can become a successful trader.
Mindful TradingMindfulness can be a powerful tool for day traders to improve their clarity of mind, focus, and decision-making skills. In this article, we will explore the concept of mindfulness in day trading.
🤷♂️What is Mindfulness?
Mindfulness is the practice of being present in the moment and fully engaged with our thoughts, feelings, and surroundings. It involves paying attention to our thoughts and emotions without judgment. Mindfulness can help us to reduce stress, improve our focus and concentration, and enhance our decision-making skills.
🤷♂️How Can Mindfulness Help Traders?
Mindfulness can be a valuable tool for day traders to improve their performance and well-being. Here are some ways that mindfulness can benefit day traders:
🚩Increased Awareness-- Mindfulness can help traders to become more aware of their thoughts, emotions, and physical sensations during the trading day. This increased awareness can help traders to identify and manage negative emotions such as fear, greed, and anxiety, which can impact their decision-making and trading performance.
🚩Improved Focus and Concentration-- Day trading requires traders to maintain focus and concentration for an extended period of time. Mindfulness can help traders to improve their ability to stay present and focused during the trading day, reducing distractions and improving their decision-making skills.
🚩Reduced Stress-- Day trading is a high-stress activity, and stress can negatively impact trading performance as well as social life. Mindfulness can help traders to reduce stress by teaching them techniques to manage their emotions and stay calm and focused during periods of market volatility.
🚩Enhanced Decision Making-- Mindfulness can help traders to make better decisions by improving their awareness and ability to stay focused and calm. Traders who practice mindfulness may be more likely to make rational and well-informed decisions, even in high-pressure situations.
🚩Improved Well-Being-- Practicing mindfulness can also improve a trader's overall well-being, including reduced anxiety levels and depression, improved sleep quality, and enhanced overall mental health.
⚡Basic Mindfulness Techniques
🚩Breathing Exercises-- Breathing exercises are a simple yet effective way to practice mindfulness. Deep breathing can help traders to calm their mind, reduce stress and anxiety, and increase focus and concentration. Traders can take a few deep breaths before making a trading decision or during periods of market volatility to stay calm and centered.
🚩Meditation-- Meditation is a powerful mindfulness technique that can help traders to develop mental clarity and focus. Traders can practice meditation for a few minutes (preferably before the market open) each day to improve their ability to stay present and focused during the trading day. Meditation can also help traders to manage negative emotions.
🚩Visualization-- Visualization involves using mental imagery to create a positive mental state. Traders can use visualization techniques to imagine successful trades, visualize market movements, and develop a positive mindset. Visualization can also help traders to manage fear and anxiety.
⚡Mindful Trading
Mindful trading is the practice of applying mindfulness techniques to the trading process. Here are some ways in which mindfulness can improve trading practices.
✅Start the day with a clear mind.
✅Stay focused in the present rather than getting lost in good or bad experiences of past trades.
✅Practice acceptance of uncontrollable variables of trading such as, market conditions and outcomes.
✅Manage extreme emotions such as fear and greed and hence improve decision making.
✅Taking regular breaks during the trading day maintains mental clarity and help in recharge and refocus.
Thanks for reading.
Hit the 🚀 button for more educational posts in future.
Disclaimer: I am not a pioneer/creator of Mindfulness concepts.
'Shades' of 'Trades' - color of the marketIn this color season let's have an insight into how the market plays 'Holi' with traders with its binary colors.
The above line sounds fascinating but it's not let me elaborate a bit more. Yes, the market plays with colors with traders
but the market uses only binary colors. Many of you may think of white and black as binary colors, but this is not the case here.
The market only uses two primary colors green and red to play with traders but we play with colors only on 'Holi' it seems that markets are very fond of playing with colors so it does probably every trading day it either colors the trader's position page with the green of red.
Though we have only two colors in markets which can be divided into four shades which are the following:-
-> Light Green - symbolizes a small profit
-> Dark Green - symbolizes a big profit ( Trader's Favorite )
-> Light Red - symbolizes a small loss
-> Dark Red - symbolizes a big loss ( Hazardous to account )
In this article let's dive into the depth of these colors and the reason for incurring such colors on your position page.
-->How to get light green color -- Aimed for steady and regular profits .
-> Trader can incur this only if they are consistent and aims for regular profit cause markets aren't trending every day.
-> Discipline is the key to consistency.
I think many of you have heard of the story of sage Vishwamitra who was meditating for a purpose and Menka was used to break the meditation and misguide him from his path. The same is the case of markets if you are in the market to generate regular profits then you must be disciplined as markets have negative behavior of creating illusions to trap the traders just like Menka .
-> I suggest developing a trading system or set of rules on which you are going to take the trade if you want to generate regular and steady profits cause if the system is profitable you will also be profitable. Don't rely on price action on an intraday basis unless you're a champ in the same.
-->How to get dark green color -- Aimed for sporadic and occasional profits.
-> Though everyone wants profits it's not obvious as said earlier markets aren't trending every day.
-> But if you are keen on watching market movements, you could probably catch these sporadic days and generate
big profits.
-> Fear should reside out to ride big profits.
I think why many of us aren't able to ride big profits because of the opulence of loss that has developed fear in our minds due to which we try to book profits early without getting any sign of weakness in our trades. Our mindset says to us "Something is better than nothing".
-> To overcome this fear I suggest backtesting your trades which can help you in gaining self-confidence if anyhow you can develop faith in yourself then fear naturally resides.
-->Reasons to get light red color -- Quite obvious as a part of the game.
-> It's quite obvious if you getting small losses as loss is a part of the trade game.
-> There is nothing to be stressed about or to ponder upon these small losses if it comes along with profits as there is no such trading system or trader which only gives or generates profit.
-> This usually happens when stop-loss is hit and you must be thankful to yourself that you had placed a stop and accept the small loss.
Markets reward traders who admit their errors and change their ways whereas punish traders who are obstinate and won't change.
I think everyone must check the reason for each loss they incur if it's due to the system you are following and the system is profitable in long run then the loss is fine but if it's due to your own mistake, learn from it and rectify the same as quick as possible.
-->Reasons to get dark red color -- Hazardous and may lead to termination.
-> One must avoid these big losses at all costs; otherwise, you may find yourself in a situation where you are unable to pay any costs.
-> Most hazardous and may sometimes lead to the termination of your trading journey.
-> This usually happens due to the stubborn nature of traders where they don't accept that they are wrong or don't have the guts to book their stop losses.
I think why many of us incur big losses because of neglecting the use of system stop-loss. Traders have realized the significance of stop-loss hence they decide on the sl before entering into the trade but what they do is keep sl in mind rather than the system and when the price reaches the sl level they don't have the guts to book the loss due to which small loss turn into a big loss.
This is the reason why everybody should place system stop-loss as a computer doesn't have emotion.
As stated earlier Markets reward traders who admit their errors and change their ways whereas punish traders who are obstinate and won't change. That means that if the trader does not recognize their mistake and book, the sl market will penalize them with a large loss.
I suppose that all of you have got great knowledge of the 'Shades' of 'Trades' and an insight into all outcomes of a trade.
And I think that I was able to explain to you how the market also likes to play with color and now the first line doesn't seem to be fascinating but obvious.
I hope this 'Holi' market colors you all with dark green, and wish you all a 'Happy Holi'.
A practical guide to Risk management Hey everyone! 👋
While trading and investing offer the opportunity for profit, there is always the potential for loss. The most experienced traders know this best and in today’s post, we’re going to share several time-tested tips to help new traders and investors better understand financial risk and intelligent planning.
📝 Develop a Trading Plan
• Many traders jump into the market without a thorough understanding of how it works and what it takes to be successful.
• You should have a detailed trading plan in place prior to engaging in any trades.
• Having a plan can help you stay calm under stress and ensure that you are trading within your risk tolerance.
🧘♂️ Understand your risk tolerance
• Risk is subjective. Different traders have different personalities and systems, hence a different risk tolerance.
• There is no “One-size-fits-all” approach.
• Find out what suits your needs based on your account size, age, long-term plan, and other key variables that are specifically unique to your circumstances. Then, implement it accordingly.
📚 Follow your trading system
• A trading system lays down a set of rules that can help a trader avoid impulsive decisions.
• A trading system is essential because it requires you to think deeply about your approach to markets before you begin risking real money.
• Traders should backtest and research their system under different market conditions. Ask yourself how you would perform in a bear market? Have you tried paper trading your system to see if it works? Have you discussed your system with others or asked for feedback?
• Some traders hop strategies after a series of losses. This usually leads to more losses and is unproductive in the long term.
• If your system has a verifiable edge, then sticking to it will help you in generating consistent returns over time. It will also help you stick to your original long-term plan as mentioned above.
🚨 Use a Stop-Loss
• A stop-loss order is an order that is placed at a predetermined price level and can help in limiting your losses if the trade goes against you. It’s also used to ensure you’re sticking to your original trading plan or trading system.
• In general, this predetermined price level is the level at which your trade idea gets invalidated.
✂️ Manage your position size
• It's important to take an optimal position size so that there isn’t too much risk exposure in any given trade.
• Trading is a game of probabilities. Hence, a trader should never put all his eggs in one basket and if he does, then he should be well aware of it.
❌ Don't overtrade or revenge trade
• Although it can be tempting, it's never a good idea to try to recoup the losses by taking higher risks.
• It's easy to feel strong emotions while trading. However, making decisions based on emotions rather than rational analysis can be a recipe for disaster. If you fear that this is happening, walk away from your computer.
📔 Maintain a trading journal
•A trading journal can help you in identifying the shortcomings in your trading.
• Evaluation of this journal at regular intervals will help you in understanding and in improving yourself. The trading journal is a tool to self-reflect on your journey.
Thanks for reading! We hope you enjoyed this post. Please feel free to write any additional tips or pieces of advice in the comments section below!
Please remember this is an educational post to help all of our members better understand concepts used in trading or investing. This in no way promotes a particular style of trading!
See you all next week. 🙂
– Team TradingView
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Cash flow statement or Three great riversToday we're going to start taking apart the third and final report that the company publishes each quarter and year - it's Cash flow statement.
Remember, when we studied the balance sheet , we learned that one of the company's assets is cash in accounts. This is a very important asset because if the company doesn't have money in the account, it can't buy raw materials, pay employees' salaries, etc.
What, in general, is a "company" in the eyes of an accountant? These are assets that have been purchased on credit or with equity, for the purpose of earning a net income for its shareholders or investing that income in further growth.
That is, the source of cash in a company's account may be profits . But why do I say "may be"? The point is that it's possible to have a situation where profits are positive on the income statement, but there is no money physically in the account. To make sense of this, let's remember the workshop I use in all the examples. Suppose our master sold all of his boots on credit. That is, he was promised payment, but later. He ended up with a receivable in assets and, most interestingly, generated revenue. The accountant will calculate the revenue for these sales, despite the fact that the shop hasn't actually received the money yet. Then the accountant will deduct the expenses from the revenue, and the result will be a profit. But there is zero money in the account. So what should our master do? The orders are coming in, but there is nothing to pay for the raw materials. In such circumstances, while the master is waiting for the repayment of debts from customers, he himself borrows from the bank to top up his current account with money.
Now let us make his situation more complicated. Let us assume that the money borrowed he still does not have enough, and the bank does not give more. The only thing left is to sell some of his property, that is, some of his assets. Remember, when we took apart the assets of the workshop , the master had shares in an oil company. This is something he could sell without hurting the production process. Then there is enough money in the checking account to produce boots uninterrupted.
Of course, this is a wildly exaggerated example, since more often than not, profits are money, after all, and not the virtual records of an accountant. Nevertheless, I gave this example to make it clear that cash in the account and profit are related, but still different concepts.
So what does the cash flow statement show? Let's engage our imagination again. Imagine a lake with three rivers flowing into it on the left and three rivers flowing out on the right. That is, on one side the lake feeds on water, and on the other side it gives it away. So the asset called "cash" on the balance sheet is the lake. And the amount of cash is the amount of water in that lake. Let's now name the three rivers that feed our lake.
Let's call the first river the operating cash flow . When we receive the money from product sales, the lake is filled with water from the first river.
The second river on the left is called the financial cash flow . This is when we receive financing from outside, or, to put it simply, we borrow. Since this is money received into the company's account, it also fills our lake.
The third river let's call investment cash flow . This is the flow of money we get from the sale of the company's non-current assets. In the example with the master, these were assets in the form of oil company stock. Their sale led to the replenishment of our notional money lake.
So we have a lake of money, which is filled thanks to three flows: operational, financial, and investment. That sounds great, but our lake is not only getting bigger, but it's also getting smaller through the three outgoing flows. I'll tell you about that in my next post. See you soon!
How to add tweets to your TradingView charts?Hello everyone!
Did you know that you can integrate tweets into your TradingView charts? If not, you're in for a treat! In this visual guide, we will show you how you can enhance your charts by seamlessly incorporating tweets. 🙂
But first, let us show you an example of how incorporating tweets in your charts can make them more interactive and informative.
Adani Enterprises after the release of Hindenburg’s report:
Pretty cool, right? Now without further ado, let’s get started.
1. On your chart window, go to the toolbar on the left side of the screen and select the "Text" option, which is 5th from the top.
2. You will see a few options once you click on it. Select the “Tweet” option.
3. It will ask you to insert the link of the tweet that you want to add to your chart. All you have to do is just "paste" the link and click "ok" .
4. Upon adding the link, the tweet will show up on the chart along with the timestamp that denotes the precise time of its posting.
5. To adjust the tweet's placement, simply click and drag the tweet window to the desired location.
Thanks for reading! Hope this was helpful.
See you all next week. 🙂
– Team TradingView
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Stock Market Risks: A Brief Guide to Get ThroughThe stock market can be an exciting and potentially lucrative place to invest, but it also carries significant risks, particularly in the futures and options segment. While the potential for high returns is a major draw, it is essential to understand the risks and take appropriate measures to manage them effectively.
Risks in Futures and Options Segment
Futures and options are derivative products that allow investors to buy or sell a particular asset at a specific price on a future date. This segment can be risky due to the potential for high leverage, meaning that a small investment can lead to significant losses or gains. Moreover, futures and options are often complex instruments that require a solid understanding of the underlying asset.
Risk Aspects in Investment
Investment in the stock market also carries inherent risks, such as market volatility, company-specific risk, and currency risk, among others. These risks can impact the overall performance of your portfolio in the long run.
Risk Aspects in Day Trading
In day trading, an instrument is bought and sold on the same day so as to make a quick profit. While day trading can be profitable, it also carries significant risks due to the high volatility and leverage involved. Day traders need to have a deep understanding of the market and should use technical analysis to make informed decisions.
Step-by-Step Guide for Surviving the Stock Market
1. Educate Yourself: The first step to surviving the stock market is to educate yourself about the risks involved, market trends, and investment strategies. You can attend seminars, read books, and consult with experienced investors or brokers.
2. Set Realistic Goals: Setting realistic financial goals based on your investment horizon, risk appetite, and financial situation is crucial. This not only helps in avoiding impulsive trading but also in staying focussed.
3. Diversify Your Investments: Diversifying your portfolio across different sectors, geographies, and asset classes can help mitigate risks and balance your returns.
4. Have a Disciplined Approach: Avoid chasing quick returns or taking unnecessary risks. Have a disciplined approach to investing, and stick to your investment plan.
5. Manage Your Risks: Use risk management tools such as stop-loss orders and limit orders to minimize losses. Moreover, one should always try to invest only that much money which one can afford to lose. Other than that there is always need to maintain a cash buffer for emergencies.
In conclusion, the stock market carries significant risks, especially in the futures and options segment. However, with a disciplined approach, a sound investment strategy, and effective risk management, new and struggling traders and investors can survive and thrive in the stock market.
Thanks for reading.
10 Reasons why Most traders lose moneyHey everyone!👋
Trading & investing is not easy. If it were, everyone would be rich.
Here are a couple of time-honored tips to help you get back to basics.
Lack of knowledge 📘
Many traders jump into the market without a thorough understanding of how it works and what it takes to be successful. As a result, they make costly mistakes and quickly lose money.
Poor risk management 🚨
Risk is an inherent part of trading, and it's important to manage it effectively in order to protect your capital and maximize your chances of success. However, many traders don't have a clear risk management strategy in place, and as a result, they are more vulnerable to outsized losses.
Emotional decision-making 😞
It's easy to feel strong emotions while trading. However, making decisions based on emotions rather than rational analysis can be a recipe for disaster. Many traders make poor decisions when they are feeling overwhelmed, greedy, or fearful and this can lead to significant losses.
Lack of discipline 🧘♂️
Successful trading requires discipline, but many traders struggle to stick to their plan. This can be especially challenging when the market is volatile or when a trader is going through a drawdown. Create a system for yourself that's easy to stay compliant with!
Over-trading 📊
Many traders make the mistake of over-trading, which means they take on too many trades and don't allow their trades to play out properly. This leads to increased risk, higher brokerage costs, and a greater likelihood of making losses. Clearly articulating setups you like can help separate good opportunities from the chaff.
Lack of a trading plan 📝
A trading plan provides a clear set of rules and guidelines to follow when taking trades. Without a plan, traders may make impulsive decisions, which can be dangerous and often lead to losses.
Not keeping up with important data and information ⏰
The market and its common narratives are constantly evolving, and it's important for traders to stay up-to-date with the latest developments in order to make informed decisions.
Not cutting losses quickly ✂️
No trader can avoid making losses completely, but the key is to minimize their impact on your account. One of the best ways to do this is to cut your losses quickly when a trade goes against you. However, many traders hold onto losing trades for too long, hoping that they will recover, and this can lead to larger-than-expected losses.
Not maximizing winners 💸
Just as it's important to cut your losses quickly, it's also important to maximize your winners. Many traders fail to do this, either because they don’t have a plan in place, telling them when and how to exit a trade. As a result, they may leave money on the table and miss out on potential profits.
Not Adapting 📚
Adapting to changing market conditions is paramount to success in the financial markets. Regimes change, trading edge disappears and reappears, and the systems underpinning everything are constantly in flux. One day a trading strategy is producing consistent profits, the next, it isn't. Traders need to adapt in order to make money over the long term, or they risk getting phased out of the market.
The majority of traders can improve their chances of success by educating themselves, developing a solid trading plan, planning out decisions beforehand, and avoiding common pitfalls.
I hope you enjoyed this post. Please feel free to write any additional tips or pieces of advice in the comments section below!
Happy learning. Cheers!
Rajat Kumar Singh (@johntradingwick)
Community Manager (India), TradingView
Risk-Reward ratioHey everyone!👋
Risk management is an essential part of successful trading as it helps in identifying, assessing, and mitigating potential risks that may arise from various factors such as volatility.
Whether you are a day trader, swing trader, or scalper, effective risk management can help you in protecting your capital, and minimising losses while maximizing potential profits.
Before we move ahead, please remember this is an educational post to help all of our members better understand concepts used in trading or investing. This in no way promotes a particular style of trading!
One of the key pillars of risk management is Risk-Reward (RR) ratio. Traders can use this concept for optimising their entries and exits.
📚 What is Risk-Reward ratio?
→ The RR ratio measures your potential risk to the potential loss for a given trade.
→ A Risk:Reward of 1:3 means that you are risking 1 point in order to gain 3 points.
→ Conversely, some traders like to visualise it as Reward:Risk, in which case, the same proportion is written as 3:1.
🔍 What's an ideal Risk-Reward ratio?
→ In general, some traders consider 1:2 or higher as a good RR ratio.
→ However, this is not written in stone and should not necessarily be taken at face value.
→ There is no “One-size-fits-all” approach. Different traders have different systems and winning rates.
→ The risk-reward ratio combined with the win rate determines a trader's profitability.
🚨 Risk-Reward versus Win rate %
For a trader to stay breakeven,
→ A low RR requires a higher winning rate
→ A high RR requires a lower winning rate
As evident from the above data, a trader using a higher RR with a low win rate can still be profitable.
Hence, traders must combine their winning rate with an optimal RR to reach their desired profitability target.
Need for a balanced approach
→ A high risk-reward ratio seems attractive because it allows traders to make more profit than they stand to lose.
→ Similarly, a low risk-reward seems less attractive because it gives less reward as compared to the risk.
Example: Buying the horizontal breakout (Higher risk, higher RR)
Example: Buying the horizontal breakout (Lower risk, lower RR)
Risk is subjective and no two traders have the same risk tolerance. Therefore, it is advisable to use a RR as per your own trading system and the winning rate so as to ensure that the potential reward justifies the potential risk.
Thanks for reading! As we mentioned before, this isn't trading advice, but rather information about a tool that many traders use. Hope this was helpful!
See you all next week. 🙂
– Team TradingView
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My precious-s-s-s EPSIn the previous post , we began looking at the Income statement that the company publishes for each quarter and year. The report contains important information about different types of profits : gross profit, operating income, pretax income, and net income. Net income can serve both as a source of further investment in the business and as a source of dividend payments to shareholders (of course, if a majority of shareholders vote to pay dividends).
Now let's break down the types of stock on which dividends can be paid. There are only two: preferred stock and common stock . We know from my earlier post that a stock gives you the right to vote at a general meeting of shareholders, the right to receive dividends if the majority voted for them, and the right to part of the bankrupt company's assets if something is left after paying all debts to creditors.
So, this is all about common stock. But sometimes a company, along with its common stock, also issues so-called preferred stock.
What advantages do they have over common stock?
- They give priority rights to receive dividends. That is, if shareholders have decided to pay dividends, the owners of preferred shares must receive dividends, but the owners of common shares may be deprived because of the same decision of the shareholders.
- The company may provide for a fixed amount of dividend on preferred shares. That is, if the decision was made to pay a dividend, preferred stockholders will receive the fixed dividend that the company established when it issued the shares.
- If the company goes bankrupt, the assets that remain after the debts are paid are distributed to the preferred shareholders first, and then to the common shareholders.
In exchange for these privileges, the owners of such shares do not have the right to vote at the general meeting of shareholders. It should be said that preferred shares are not often issued, but they do exist in some companies. The specific rights of shareholders of preferred shares are prescribed in the founding documents of the company.
Now back to the income statement. Earlier we looked at the concept of net income. Since most investments are made in common stock, it would be useful to know what net income would remain if dividends were paid on preferred stock (I remind you: this depends on the decision of the majority of common stockholders). To do this, the income statement has the following line item:
- Net income available to common stockholders (Net income available to common stockholders = Net income - Dividends on preferred stock)
When it is calculated, the amount of dividends on preferred stock is subtracted from net income. This is the profit that can be used to pay dividends on common stock. However, shareholders may decide not to pay dividends and use the profits to further develop and grow the company. If they do so, they are acting as true investors.
I recall the investing formula from my earlier post : give something now to get more in the future . And so it is here. Instead of deciding to spend profits on dividends now, shareholders may decide to invest profits in the business and get more dividends in the future.
Earnings per share or EPS is used to understand how much net income there is per share. EPS is calculated very simply. As you can guess, all you have to do is divide the net income for the common stock by its number:
- EPS ( Earnings per share = Net income for common stock / Number of common shares issued).
There is an even more accurate measure that I use in my analysis, which is EPS Diluted or Diluted earnings per share :
- EPS Diluted ( Diluted earnings per share = Net income for common stock / (Number of common shares issued + Issuer stock options, etc.)).
What does "diluted" earnings mean, and when does it occur?
For example, to incentivize management to work efficiently, company executives may be offered bonuses not in monetary terms, but in shares that the company will issue in the future. In such a case, the staff would be interested in the stock price increase and would put more effort into achieving profit growth. These additional issues are called Employee stock options (or ESO ). Because the amount of these stock bonuses is known in advance, we can calculate diluted earnings per share. To do so, we divide the profit not by the current number of common shares already issued, but by the current number plus possible additional issues. Thus, this indicator shows a more accurate earnings-per-share figure, taking into account all dilutive factors.
The value of EPS or EPS Diluted is so significant for investors that if it does not meet their expectations or, on the contrary, exceeds them, the market may experience significant fluctuations in the share price. Therefore, it is always important to keep an eye on the EPS value.
In TradingView the EPS indicator as well as its forecasted value can be seen by clicking on the E button next to the timeline.
We will continue to discuss this topic in the next publication. See you soon!
Proximal and Distal Line Plotting For Supply and Demand ZonesProximal and Distal lines are important components of any Supply and Demand zone. One needs to plot two horizontal lines to mark Supply and Demand Zones. To know How to draw these lines, you need to understand Supply and Demand Zone formations.
Proximity means nearest to the current price, while distal means farthest from the current price.
What is the need to draw Proximal and Distal lines on a zone?
As a Supply and Demand trader, one needs to know which price point to enter and where to exit.
The proximal line is used to define the entry point into a trade, and the Distal line defines the Stopping Point. We place our stop losses slightly beyond the distal lines of the zones.
Have a look at the above image
Supply zones are located above the current market price and Demand zones are located below the current market price.
In the illustration above, CMP is Rs.1668.3
The green-shaded zone below CMP is the Demand zone. It has two horizontal lines one at Rs.1607.65 which is nearer to the current price, and it forms the proximal line, whereas the other horizontal line is at Rs.1588.75 which is far away as compared to Rs.1607.65, so it constitutes the distal line of the demand zone
The pink-shaded zone above CMP is the Supply zone. It has two horizontal lines one at Rs.1688 which is nearer to the current price, and it forms the proximal line, whereas the other horizontal line is at Rs.1702.4 which is far away as compared to Rs.1688, so it constitutes the distal line of Supply zone.
How to Draw Proximal and Distal Lines for a Demand Zone
A Demand zone is a designated area on a chart where Demand exceeds Supply, and there is a high likelihood of having pending Institutional Buy Orders. We look to enter long trades when the price retraces back to the demand zone, in doing so we also participate along with the Institutions which increases the probability of the trade working in our favour. So it's important to correctly identify the Proximal line and Distal line of a Demand Zone. Let u see how to mark the Proximal and Distal line of a Demand Zone
Proximal Line Marking For A Demand Zone
Irrespective of whether it’s a DBR or RBR Demand zone, the proximal line marking method remains the same. There are multiple ways to mark proximal lines, I will discuss the one that I follow and is widely used. While marking the proximal line we look at only the Base Candles, Proximal line is plotted at the Highest Wick of the base candles.
Distal Line Marking For A Demand Zone
There is a slight variation while marking distal lines, depending upon whether it’s a DBR or RBR Demand Zone
Distal Line For DBR Demand Zone
We need to consider all three components, Leg In, Base Candles & Leg Out. The distal line is plotted at the lowest point of the entire formation.
Distal Line For RBR Demand Zone
We need to ignore the Leg In and focus only on the Base candles and the Leg Out. The distal line is plotted at the lowest point of either the Base candles or the Leg Out, whichever is lower.
How to Draw Proximal and Distal Lines for a Supply Zone
A Supply zone is a designated area on a chart where Supply exceeds Demand, and there is a high likelihood of having pending Institutional Sell Orders. We look to enter Short trades when the price retraces back to the supply zone, in doing so we also participate along with the Institutions which increases the probability of the trade working on our favour. So it's important to correctly identify the Proximal line and Distal line of a Supply Zone. Let u see how to mark the Proximal and Distal lines of a Supply Zone
Proximal Line Marking For A Supply Zone
Irrespective of whether it’s an RBD or DBD Supply zone, the proximal line marking method remains the same. There are multiple ways to mark proximal lines, I will discuss the one that I follow and is widely used. While marking the proximal line we look at only the Base Candles, Proximal line is plotted at the Lowest Wick of the base candles.
Distal Line Marking For A Supply Zone
There is a slight variation while marking distal lines, depending upon whether it’s an RBD or DBD Supply Zone
Distal Line For RBD Supply Zone
We need to consider all three components, Leg In, Base Candles & Leg Out. Distal line is plotted at the highest point of the entire formation.
Distal Line For DBD Supply Zone
We need to ignore the Leg In, focus only on the Base candles and the Leg Out. Distal line is plotted at the Highest point of either the Base candles or the Leg Out, whichever is Higher.
Conclusion
In conclusion, the Proximal and Distal lines are critical components of the Supply and Demand Trading Strategy. Knowing how to properly place them is essential for the correct identification of zones. Supply and Demand Zone formations when combined with other factors like Trend, Location, and Quality attributes of the zone form a very sound rule-based Price Action Trading Strategy.
Importance of Stoploss in TradingStop-loss is a risk management tool used by traders to limit their potential losses. It is an order placed with a broker to automatically sell or buy a security if it reaches a certain price level, known as the stop-loss level.
Here are some general guidelines on where to place stop-loss orders 👇
⚡ Support and Resistance Levels
A common approach is to place stop-loss orders at key levels of support or resistance. For example, if you are long in a stock, you may place your stop-loss order just below a support level. If the price falls below this level, it is an indication that the trend has changed and it's time to exit the trade.
⚡ Volatility
Another approach is to place stop-loss orders based on the volatility of the security. If a stock has high volatility, you may want to place your stop-loss order further away from the entry price to give it more room to move. Conversely, if a stock has low volatility, you may place your stop-loss order closer to the entry price. But you still need to give the stock enough room to breath in case of the latter.
⚡ Technical Indicators
Some traders use technical indicators to place stop-loss orders. For example, you may use the average true range (ATR) to set your stop-loss order. The ATR measures the average range of price movements, and you can set your stop-loss order at a multiple of the ATR.
Ultimately, where you place your stop-loss order will depend on your trading strategy, risk tolerance, and the specific security you are trading. It's important to have a clear plan for where to place your stop-loss order before entering a trade, as it can help you manage risk and avoid potentially large losses.
What are your thoughts on using stoploss and which method do you use? Do write in the comment section.
Trade safe and stay healthy.
How to fail as a traderHey Everyone! 👋
Over the last few months, we've looked at a couple of the best ways to improve your trading, including learning to adjust to market conditions, building a proper trading mindset, and more. Today, we thought it would be fun to do the opposite. Instead of trying to help the community build up solid, professional trading practices, let's design a losing trader from the ground up! What attributes/decisions will we have to encourage to get a losing result?
Theoretically, the market is just a game of probabilities. How can we guarantee that our trader will lose? As it turns out, there are a couple of easy behaviours we can combine to ensure that a losing outcome is a foregone conclusion.
Number 1: They never define risk 🤷🏼♂️
In trading, people often say things about "Risk management" , "Defining your risk" or "Defining your out", but it can sometimes be difficult to determine, as a new trader, what the heck people are talking about. Define my risk? How? What are you talking about? What does this actually mean?
Put simply, defining your risk is figuring out *where* you are wrong on a trade/investment.
👉 For active traders, it can be as simple as picking a recent low or high and saying "If this price is hit, then I'm exiting the trade. The short-term read I had on this asset is no longer valid. I don't think I know what's going to happen next."
👉 For someone who is more of a position trader, it can be as simple as saying "I don't want to lose more than 10% (or some percent) of my capital at any point when I am in this position. I think that I have selected my entry well enough that a 10% drop (or x%) would mean that, for some reason or another, my thesis is no longer valid."
👉 From a cash management/portfolio management perspective, defining your risk has another dimension: How much of your total capital do you want to potentially lose in a worst-case scenario? Should each trade risk 50% of your capital? 20%? 5%? 1%? How much of your total bankroll will you lose before you stop?
In order to ensure that we have a losing trader, it's important that they don't have a plan for position sizing, setting stop losses, or setting account stop losses. This way, they won't have any consistency and will inevitably take a few big losses that knock the out of the game forever.
Number 2: They use lots of leverage 🍋
👉 When combined with Number 1, using lots of leverage is a great way to accelerate the process of losing money. Given that a strategy that wins 50% of the time will statistically face a 7-trade losing streak in the next 100 trades, sizing up and using leverage is a great way to ensure that when a rough patch strikes, you lose all your capital.
👉 Letting trades go past how much you expected to lose is a great way to speed this process because, with the addition of leverage, things only need to go against you 50%, 20%, 10%, etc, before you're wiped out. You can't risk to zero.
Considering that the most aggressive hedge funds in the world typically don't use an excess of 5-8x leverage, even in FX trading, we will need our losing trader to use at least 10-20x leverage in order to speed up their demise.
Number 3: They hop from strategy to strategy 🐰
Bruce lee once said, “I fear not the man who has practised 10,000 kicks once, but I fear the man who has practised one kick 10,000 times.”
👉 In this example, sticking to one strategy, even if suboptimal, is the man who has practised one kick many many times. The trader who strategy hops is the one who has tried almost every kick out there but mastered none. In order to ensure that our trader is a losing trader, we need to ensure that they never develop any mastery and keep switching from strategy to strategy.
👉 We need to constantly dangle a new strategy, indicator, or trading style constantly in front of our traders. Thus, no matter what strategy the trader picks, they will lack the hours necessary to have anything but suboptimal trade execution, poor overall market sense, and a general lack of nuance & understanding.
Combined with number 1 and number 2, it's going to be nearly impossible for this trader to be profitable.
--
So there you have it; 3 ways to ensure that the trader will fail. Recognize any of them?
Our hope in writing this is not to discourage anyone from getting involved in the markets, but rather to continually shine a light on some of the bad habits we can get into when starting out. Avoiding rookie mistakes and bad practices that can stunt a career as a trader & create bad habits!
Let us know if you enjoyed it, and we will continue to make more of these posts that go through some trading "best practices" .
Have a great week!
-Team TradingView ❤️
Do check us out on Instagram , and YouTube for more awesome content! 💘
Basics of Elliot Waves.Hello Traders!
1. Today, we will discuss the basic market movement structure, elliotically . A recent comment on one of my ideas published pointed (indirectly) towards the need for a basic understanding of Elliot Waves for the general trading public.
2. The market moves in consistent impulsive and corrective structures . Waves 1, 2, 3, 4, and 5 together form the 1st Impulsive structure of the market. Waves A, B, and C together form the next Corrective structure of the market.
What is an Impulsive Structure ? These are patterns that occur in the direction of the trend. A movement consisting of 5 smaller cycle waves and following certain set rules/guidelines set by Elliot; Wave 2 never retraces more than 100%, Wave 3 is never the shortest, & Wave 4 does not enter the price territory of Wave 1. The 3rd rule is at times compromised and that should be up for discussion some other day. More rules exist but are not required for the basic understanding of the markets.
What is a Corrective Structure ? We will put this very vaguely. Whatever is not impulsive, is corrective, in laymen's terms.
3. Let's address the Impulsive structure .
Waves 1, 3, and 5 are impulsive waves within the impulsive structure. Waves 2 and 4 of this impulsive structure stand to be corrective. Waves 1, 3, and 5 consist of 5 waves each. Waves 2 and 4 consist of 3 waves each.
4. Now we'll address the next Corrective structure . Wave A and C of this structure are impulsive whereas Wave B is of corrective nature.
Waves in the corrective structure are very interesting. Wave A can at times consist of 5 waves as well as 3, even though impulsive, and can also be a diagonal. Wave B can sometimes contain 5 waves, when in a form of a triangle, even though corrective. Wave C always has only 5 waves and can be a diagonal as well. The corrective waves are a whole lot more complicated and require a vigorous understanding of the structures.
5. Every wave structure is part of a larger wave structure on a larger timeframe. 5 impulsive, 3 corrective waves of the smallest cycle; which will form Waves 1 and 2 of a larger cycle. Then these two waves along with 3, 4, 5, and the next correction set, will form the 1st and 2nd waves of an even larger cycle. This is how our final wave structure (basic) would look like.
The world moves in harmony with progression and recession. And so do the markets. All they need is an observer. Be one.
Happy observing!
Profits,
Market's Mechanic.
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The income statement: the place where profit livesToday we are going to look at the second of the three main reports that a company publishes during the earnings season, the income statement. Just like the balance sheet, it is published every quarter and year. This is how we can find out how much a company earns and how much it spends. The difference between revenues and expenses is called profit . I would like to highlight this term "profit" again, because there is a very strong correlation between the dynamics of the stock price and the profitability of the company.
Let's take a look at the stock price charts of companies that are profitable and those that are unprofitable.
3 charts of unprofitable :
3 charts of profitable :
As we can see, stocks of unprofitable companies have a hard enough time growing, while profitable companies, on the contrary, are getting fundamental support to grow their stocks. We know from the previous post that a company's Equity grows due to Retained Earnings. And if Equity grows, so do Assets. Recall: Assets are equal to the sum of a company's Equity and Liabilities. Thus, growing Assets, like a winch attached to a strong tree, pull our machine (= stock price) higher and higher. This is, of course, a simplified example, but it still helps to realize that a company's financial performance directly affects its value.
Now let's look at how earnings are calculated in the income statement. The general principle is this: if we subtract all expenses from revenue, we get profit . Revenue is calculated quite simply - it is the sum of all goods and services sold over a period (a quarter or a year). But expenses are different, so in the income statement we will see one item called "Total revenue" and many items of expenses. These expenses are deducted from revenue gradually (top-down). That is, we don't add up all the expenses and then subtract the total expenses from the revenue - no. We deduct each expense item individually. So at each step of this subtraction, we get different kinds of profit : gross profit, operating income, pretax income, net income. So let's look at the report itself.
- Total revenue
This is, as we've already determined, the sum of all goods and services sold for the period. Or you could put it another way: this is all the money the company received from sales over a period of time. Let me say right off the bat that all of the numbers in this report are counted for a specific period. In the quarterly report, the period, respectively, is 1 quarter, and in the annual report, it is 1 year.
Remember my comparison of the balance sheet with the photo ? When we analyze the balance sheet, we see a photo (data snapshot) on the last day of the reporting period, but not so in the income statement. There we see the accumulated amounts for a specific period (i.e. from the beginning of the reporting quarter to the end of that quarter or from the beginning of the reporting year to the end of that year).
- Cost of goods sold
Since materials and other components are used to make products, accountants calculate the amount of costs directly related to the production of products and place them in this item. For example, the cost of raw materials for making shoes would fall into this item, but the cost of salaries for the accountant who works for that company would not. You could say that these costs are costs that are directly related to the quantity of goods produced.
- Gross profit (Gross profit = Total revenue - Cost of goods sold)
If we subtract the cost of goods sold from the total revenue, we get gross profit.
- Operating expenses (Operating expenses are costs that are not part of the cost of production)
Operating expenses include fixed costs that have little or no relation to the amount of output. These may include rental payments, staff salaries, office support costs, advertising costs, and so on.
- Operating income (Operating income = Gross profit - Operating expenses)
If we subtract operating expenses from gross profit, we get operating income. Or you can calculate it this way: Operating income = Total revenue - Cost of goods sold - Operating expenses.
- Non-operating income (this item includes all income and expenses that are not related to regular business operations)
It is interesting, that despite its name, non-operating income and operating income can have negative values. For this to happen, it is sufficient that the corresponding expenses exceed the income. This is a clear demonstration of how businessmen revere profit and income, but avoid the word "loss" in every possible way. Apparently, a negative operating income sounds better. Below is a look at two popular components of non-operating income.
- Interest expense
This is the interest the company pays on loans.
- Unusual income/expense
This item includes unusual income minus unusual expenses. "Unusual" means not repeated in the course of regular activities. Let's say you put up a statue of the company's founder - that's an unusual expense. And if it was already there, and it was sold, that's unusual income.
- Pretax income (Pretax income = Operating income + Non-operating income)
If we add or subtract (depending on whether it is negative or positive) non-operating income to operating income, we get pretax income.
- Income tax
Income tax reduces our profit by the tax rate.
- Net income (Net income = Pretax income - Income tax)
Here we get to the income from which expenses are no longer deducted. That is why it is called "net". It is the bottom line of any company's performance over a period. Net income can be positive or negative. If it's positive, it's good news for investors, because it can go either to pay dividends or to further develop the company and increase profits.
This concludes part one of my series of posts on the Income statement. In the next parts, we'll break down how net income is distributed to holders of different types of stock: preferred and common. See you soon!
Introduction to market structureHey everyone!👋
In this article, we'll dive into market structure, providing insightful examples to enhance your understanding of this concept.
Please remember this is an educational post to help all of our members better understand concepts used in trading or investing. This in no way promotes a particular style of trading!
Market structure is a basic form of understanding how markets move. It can be seen as the flow of the price between a series of swing highs and swing lows.
The market moves in trends. These trends are nothing but a combination of different structures.
The market structure allows you to be in sync with the market and avoid counter-trend trading, which enhances the probability of your setups.
There are broadly 3 types of structures:
1. Bullish (Uptrend)
2. Bearish (Downtrend)
3. Ranging (Sideways)
Illustration: Bullish market structure
Illustration: Bearish market structure
Illustration: Range market structure
📈 What is an uptrend?
✅ Characterised by a bullish market structure.
✅ Formation of higher highs followed by higher lows.
✅ For an uptrend to stay intact, it must preserve its ascending structure - higher highs must follow higher lows.
✅ Lower highs are allowed if the price goes into compression or re-accumulation.
📉 What is a downtrend?
✅ Characterised by a bearish market structure.
✅ Formation of lower highs followed by lower lows.
✅ For a downtrend to stay intact, it must preserve its descending structure - lower highs must follow lower lows.
✅ Lower highs are allowed if the price goes into compression or re-distribution.
⚡ What is a range?
✅ A range is a zone where the price finds itself bouncing between two levels.
✅ These levels are - range high and range low.
✅ The size of the range is dependent on different factors such as asset class, demand-supply, volatility, etc.
A lot of times, the structure won’t be as clear as you want it to be. Conversely, sometimes the structure will replicate the textbook. Hence, you need to be flexible in your approach.
Sometimes, trading in range-bound markets can be challenging due to the choppiness in price movements. However, when the price action is more defined, some traders may prefer to trade the range by executing breakout trades or mean reversion trades from the range high to the range low or vice versa.
It is better to combine market structure with other concepts/indicators for better results.
Thanks for reading! As we mentioned before, this isn't trading advice, but rather information about a tool that many traders use. Hope this was helpful!
See you all next week. 🙂
– Team TradingView
Feel free to check us out on Instagram , and YouTube for more awesome content! 💘
What are ratios to analyse any banking stocksHAPPY REPUBLIC DAY 🇮🇳
Today we will study ratios for analysing any banking/ non- banking stock.
Key Ratios are -
1. Net Interest Margin (NIM)
2. Provision Non Performing Assets (PNPA)
3. Loan to Assets Ratio
4. Return on Assets Ratio (ROA)
5. Capital Adequacy Ratio
6. Gross NPA
7. Net NPA
8. CASA Ratio
9. Cost to Income ratio
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1. Net Interest Margin (NIM)
1. Net Interest Margin = ( Investment Income –
Interest Expenses ) / Average Earning Assets.
2. Positive Net Interest Margin shows that bank is earning more money in the form of interest than its cost of funding investments.
3. There are several factors that affect bank NIM. One of the most significant is interest rates. When interest rates are high, banks are able to earn more from loans and investments, which increases their NIM. When interest rates low, banks earning will loans and investments decrease, which lead lower NIM.
4. In summary, Net Interest Margin is important measure of bank's profitability and its ability to generate income from its existing assets. NIM is affected by interest rates and competition. Banks with a high NIM are generally considered strong financial position and better to grow and invest in new opportunities.
Let's look at example
Bank in India has total assets of ₹1,00,000 crore consist of loans and investments. The bank has total deposits of ₹80,000 crore and it pays interest rate of 4% on savings accounts and 6% on Fix Deposit The bank total interest income for the period is ₹2,400 crore which is earned by loans and investments. The bank total interest expense for period is ₹1,600 crore, which is paid to depositors.
To check the NIM we take the bank net interest income (NII) of ₹800 crore (₹2,400 crore in interest income - ₹1,600 crore interest expense) and divide by the bank average earning assets of ₹90,000 crore (average of total assets and total deposits).
NIM = NII / Average Earning Assets
NIM = ₹800 crore / ₹90,000 crore
NIM = 0.89%
Bank NIM is 0.89% every ₹100 of assets the bank is earning ₹0.89 of net interest income. This NIM is a measure of the bank efficiency in generating income from assets and can be used to compare it with other banks and over time.
NIM in India will be lower than developed countries due to lower lending rates and high competition among bank.
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2. Provision Non Performing Assets (PNPA)
1. An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.
2. Provision for Non Performing Assets (NPA). The amount keep aside by bank, to cover it's potential losses from loans and other credit related assets that have been non performing.These provisions are made when a bank expects that some of its borrowers will default on their loans, and the bank needs to set aside funds to cover the potential loss.
3. In summary, Provision for Non Performing Assets (NPA) Banks are required to make provisions for NPA on a regular basis, quarterly basis, amount of provisions is disclosed in the financial statements. Provision for NPA is an important measure of a bank's financial health, Help bank to absorb the impact of loan defaults and manage credit risk.
Provisions for NPA is closely watched by investors, analysts, and regulators, it helps them to assess the bank's credit risk.
Let's look at example
Bank total loans of ₹50,000 crore. ₹2,000 crore classified Non performing Assets (NPA) borrowers defaulted their payments more than 90 days. Bank required to set aside certain percentage of the NPA loans as PNPA as per the Reserve Bank of India's guidelines. The current PNPA provisioning ratio is 15%.
To get PNPA we multiply the NPA loans of ₹2,000 crore with the PNPA provisioning ratio of 15%.
PNPA = NPA loans x PNPA provisioning ratio
PNPA = INR 2,000 crore x 15%
PNPA = INR 300 crore
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3. Loan to Assets Ratio
1. Loan to Assets ratio can help investors obtain complete analysis of bank's operations. Banks that have relatively higher Loan to Assets ratio banks with lower levels of Loan to Assets ratios derive a relatively larger portion of their total incomes from more diversified, noninterest earning sources, such as asset management or trading. Banks with lower Loan to Assets ratios may fare better when interest rates are low or credit is tight.
2. In summary, Loan to Asset ratio is financial metric compares bank total loans to total assets. It's used to measure bank leverage assess the level of risk associated with lending activities. Higher Loan to Assets ratio indicates that a bank is more heavily reliant on lending and is more leveraged and risky, while a lower ratio indicates that the bank is less risky.
Let's look at example
Bank has total assets ₹1,00,000 crore, total loans ₹70,000 crore. to get Loan to Assets Ratio we divide the total loans by the total assets.
Loan to Asset Ratio = Total Loans / Total Assets
Loan to Asset Ratio = ₹70,000 crore / ₹1,00,000 crore. Loan to Asset Ratio = 0.7.
Bank's Loan to Assets Ratio is 0.7 / 70% (0.7*100) bank assets in form of loans. A higher Ratio indicates that bank is heavily invested in lending activities, which can be sign of more aggressive lending strategy. it's also increases the risk of default. Than higher risk of NPA. Banks required to maintain minimum level of Capital Adequacy Ratio as per the Reserve Bank of India's (RBI) guidelines.
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4. Return on Assets Ratio (ROA)
1. Return on Assets = Net Income / Total Assets
2. The higher ratio means assets are well managed and low ratio means resources didn't used effectively compared to the industry and competitors.
3. In summary, ROA is financial ratio measures profitability of company in relation to total assets. It is calculated by dividing the company's
net income by its total assets. This ratio is useful to compare the performance of company with its peers in the same industry. It is an important metric used to evaluate a company's overall efficiency and performance but it's important to keep in mind that high ROA not necessarily mean that company have strong financial position.
Let's look at example
Bank has total assets of ₹100 billion and net income of ₹5 billion. To get ROA we divide the net income by total assets.
ROA = Net Income / Total Assets
ROA = ₹5 billion / ₹100 billion
ROA = 0.05 or 5%.
Bank ROA is 5% For every ₹100 billion of assets, the bank generates ₹5 billion of net income. Higher ROA show that bank is profitable and efficient in utilizing assets. It's important to note this ratio is sensitive to the size of the bank It's better to compare the ROA of a bank with other banks of similar size.
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5. Capital Adequacy Ratio
1. The Capital Adequacy Ratio helps make sure banks have enough capital to protect depositors money.
2. Banks are required to maintain a certain level of Capital Adequacy Ratio as per the regulations set by central bank to ensure that they have sufficient capital to meet the potential losses and continue their operations even in adverse situations.
3. It helps maintain the stability of the financial system by ensuring that banks can withstand in unexpected situation.
Let's look at example
In India, the Reserve Bank of India (RBI) sets the minimum Capital Adequacy Ratio for banks at 9%. which means that they must hold capital worth at least 9% of their total risk-weighted assets.
Bank in India with total assets of ₹100 billion and risk-weighted assets of ₹80 billion must maintain minimum capital of ₹7.2 billion (9% of ₹80 billion) to meet the Capital Adequacy Ratio requirement set by the RBI.
It's important to note that, the Banks with a higher Capital Adequacy Ratio are considered to have a better ability to absorb unexpected losses.
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6. Gross NPA
1. Gross Non Performing Assets (GNPA) is refer to the total value of loans or advances that have been classified as Non Performing Assets. These are loans or advances the borrower has defaulted on repayment or interest for certain time. loan is classified as an NPA if the borrower has not made any payment for period of 90 days or more.
2. A high ratio of GNPA to total loans indicates a higher level of credit risk and potentially weaker financial condition for the bank.
Let's look at example
Bank has total loans of ₹100 billion and ₹20 billion are classified Non Performing Assets (NPA). The bank Gross Non Performing Assets (GNPA) would be INR 20 billion.
we see the ratio of GNPA to total loans we get 0.2 (₹20 billion / ₹100 billion). This ratio of 20% indicates that 20% of the bank loans are classified as NPA. This high ratio may indicate the bank is facing high level of credit risk it could be cause for concern.
It's important to note that Gross NPA ratio is used in conjunction with other financial indicators to understand overall financial health of bank and single indicator may not enough to make a conclusion.
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7. Net NPA
1. Any financial security owned by a bank is considered an asset. The interest we pay on loans is the primary source of income for banks these loans are classified as assets for bank's.
when borrowers can't repay the amount these assets are classified as Non Performing Assets (NPA) because they are not generating any income for the bank's.
2.If loan provided by bank is overdue more than 90 days from the borrower end comes under NPA. If loan amount is unpaid more than 1 year from due date then it's a doubtful debt and if it’s unpaid more than 3 years then loss of an asset or default account.
Net Non-Performing Asset = Gross NPA – Provisions.
Gross NPA = Total Gross NPA/Total Loans given.
Impact of NPA
Due to higher NPA rates, banks will suffer significant revenue losses that will potentially affect their brand image. insufficient funds, banks will have to increase the interest rates on loans to maintain their profit margin.
Let's look at example
Bank has total loans of ₹100 billion and ₹20 billion are classified as Non Performing Assets (NPA). The bank is required to make provisions for ₹10 billion against these NPA. The bank Gross Non-Performing Assets (GNPA) would be ₹20 billion and Net Non Performing Assets (Net NPA) would be ₹10 billion (₹20 billion - ₹10 billion).
If we see the ratio of Net NPA to total loans we get 0.1 (INR 10 billion / INR 100 billion). This ratio of 10% indicates that 10% of the bank's loans classified as NPA after making necessary provisioning. This ratio gives a clearer picture of bank's financial health than just Gross NPA ratio as it takes into account the provisions made against NPA.
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8. CASA Ratio
1. CASA (Current Account and Saving Account) it is measure the proportion of bank deposits that are in the form of current and savings accounts.
2. The ratio is calculated by dividing the total value of current and savings account deposits by the total deposits. It is typically expressed as percentage. Higher CASA ratio indicates that bank have larger proportion of stable deposits. This is because banks can use these deposits to fund their lending activities at a lower cost which improves bank's net interest margin.
Let's look at example
Bank has total deposits of ₹200 billion and ₹150 billion in form of current and savings accounts. The bank CASA ratio would be 75%.
This ratio indicates that three fourth of the bank deposits are in the form of current and savings accounts which are considered the stable form of deposits. This high ratio is considered positive sign. Stable deposits can used to fund lending activities lower cost.
High CASA ratio the bank will have access to cheaper funding which will improve it's net interest margin. This means that the bank will be able to offer loans at a lower rate of interest. which will make it more competitive in the market and attract more customers. And bank will also have more stable funding which will make it less vulnerable to market fluctuations and interest rate changes.
Asset quality, capital adequacy play important roles in assessing a bank's overall financial condition.
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9. Cost to Income ratio
1. Cost to Income Ratio (CIR) measure company efficiency by comparing it's operating expenses to it's revenue. calculated by dividing the total operating expenses by the total revenue and expressed in percentage.
2. Lower (CIR) indicates that company more efficient in managing expenses and able to generate more income for every unit of expenses. while higher (CIR) indicates that company less efficient in managing it's expenses and is generating less income for every unit of expenses.
Let's look at example
Bank A with a high CIR.
Bank has total operating expenses of ₹10 billion and total revenue of ₹15 billion. The bank's CIR is 67% (₹10 billion / ₹15 billion). High CIR indicates that the bank is not very efficient in managing its expenses and is generating less income for every unit of expenses. The bank may need to review its cost structure and implement measures to reduce expenses in order to increase its efficiency and profitability.
Bank B with a low CIR:
A bank has total operating expenses of ₹5 billion and total revenue of ₹15 billion. The bank CIR is 33% (₹5 billion / ₹15 billion). This low CIR indicates that the bank is efficient in managing its expenses and is able to generate more income for every unit of expenses. The bank able to invest in growth opportunities and increase profitability.
I hope you found this helpful.
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Keep Learning,
Thank you for reading!
If you are not 'INSIDE' you are 'OUTSIDE' In the stock market, if you are not inside, you are outside.
I expect all those reading this article wants to be inside the market.
So, if you want to participate in the market then you must develop a deep insight into
the key market players i.e. your competitors who drive day to day movement of the market.
Key Market Players:-
The following are the three types of market participants.
->Retail - general public also called clients
->High Net Worth Investors - commonly known as HNI clients.
->Proprietary Trading - also called 'Pro' are firms.
->Institutions - referred to as trading organizations.
Let's dive into the details of each of them listed above .
Retail Investors :- They are the general public who invest or trade in the market individually with very
small capital as compared to other participants. They are at the bottom of the market food chain when considered individually
but in recent few years, the retail participants as a whole have seen a significant rise in numbers.
High Net Worth Investors: - They are also an individual but with big sums in their pockets. They have a deeper access to
the markets, inside news, and all. They don't participate in day-to-day trading.
Proprietary Traders :- Also known as 'Pro 'are those firms/banks which also trade in the daily market with the firm's funds.
They are at the middle of the market food chain i.e. above retail but below institutions. Actively participate
in daily market movements.
Institutional Investors :- They are organizations taking part actively in market movements. They are at the top of the market food chain.
They can be further divided into two groups:
->FII (Foreign Institutional Investors): Institutions whose origin is outside India but still they invest in Indian markets. Actively participate
in daily market movements.
->DII (Domestic Institutional Investors): Institutions whose origin is India. They are inactive in the derivatives segment.
Among the participants listed above Retail, Pro & FII are actively involved in the daily market trading and encourage
derivatives segment.
We all have seen everyone in markets talking about FIIs that are bearish/bullish on markets but why?
The above figure is of FII+Pro & Client correlation with nifty, this describes the reason why the positions of FII are significant.
We can draw the following conclusion:-
1. Majority of the time FII is correct to predict the market movement.
2. Clients generally build position against FII and max times have an opposite correlation with market movements.
Now, have a look at how the FII and client positions affect the market movement
The above figure justifies the correlation.
We can draw the following conclusions:-
1. Maximum time FII are net short in nifty whereas clients are net long in nifty.
2. When FII cover their shorts and deploys the longs we see an uptrend but at the same time, the client unwinds long
and deploys shorts which are generally against the trend i.e. client likes to drive in opposite direction.
3. And when FII positions converge with the Client there is previous trend exhaustion and the arrival of a sideways market or
sometimes a new trend.
As of now the index is clearly explained but what about stocks how much significant is FII in stocks?
To answer the above question let's take an example of a very famous stock ITC:-
The above figure says that FII has increased holding in the interval of Jun2022 - Sep2022 from 12.7% to 44.5%
and by the time client has decreased the holding from 44.5% to 14.8%.
Does the change in position affect the stock price of ITC? let's have a look
Now it's clear that FII have ultimate power because when they started to increase their holding in ITC
the price shoot up during this time Public who were holding it for the last 2yrs exited when ITC has just begun to move.
Hope the readers had understood the mightiness of FII and the oppositeness of the Public and also have got a deep insight
about their competitors .
Also, thanks to @biswapatra for requesting me to write an article on this topic. You can also suggest an topic on which you
want to have analysis.
