Wednesday, September 15, 2010

A wrong trade

Yesterday I referred to an email in which the trader said he was short in Nifty December calls. I had suggested he should lighten up. Today I received this message "i have cut down my position down to xx now. xx lots of each 5700,5800,5900 are dec. call are left short with me , but it's creating huge loss, sir i dont have any MTM , margin etc problems, but the mental pressure is very high, i dont know what high can we see in nifty, is there any idea of any high point in nifty, so that i can prepare my mind for that???

This was my reply

"Okay, xxxxx, let me explain the problem.


You have xx lots, xxx Nifty short. They are calls but short calls become like futures. Now, if the Nifty goes up by another 1000 points, you will lose xx lakhs. I think this is the worst case scenario.

You should be mentally prepared for this. But, even if you can afford this loss, is it wise?

Therefore, you need to decide on a cutoff - a point at which you accept that the trade has gone wrong. That's ok. This is just one trade in thousands that you will do. All traders go through such phases. Not to worry.

Can you decide on a cut off? if so, let me know so I can give my opinion.

Now, I am travelling for the next 2 days - thursday and friday. I will be in Chennai but I am going for some darshan etc so I may not be able to access my email. If you wish to contact me for some reason, please call xx at xx number and ask him to convey your message to me.

Now, to answer your question: My analysis suggests it is a matter of days before a correction begins. But, what if I am wrong?"
 
My Notes: I have reproduced this exchange because (1) I feel this will help many traders avoid this kind of mistake, (2) I hope readers will offer their suggestions to help the trader.

Note how Silver has rallied to life time highs. What is the outlook for gold?
Find out about the Gold Super Cycle by clicking here.

Also find out about the 52 week High Friday Rule. Click here for this rule.

14 comments:

ANAS said...

Respected Sir, it me again..

I dont know about other readers, but I am not qualified enough to PROVIDE ANY SUGGESTION TO THE TRADER...

WHAT I HAVE LEARNT FROM YHE POST, I would like to express and request you to kindly RECTIFY me on it.

1) never rupee average any trade CONSISTENTLY (long or short) if it moves against your assumed direction.

2) dont fall in love with your position. and be bold enough to accept your mistakes. (Meaning , to cut your losses on time before it is too late.)

3) when a break-out occurs, it generally leads to large moves. just like when a spring is released suddenly after applying pressure on it.
So, when these break-out come, respect them .

4) LITTLE knowledge or education of any feild is dangerous...

5) Be SMART enough to UNDERSTAND what people SMARTER than yourself , MEAN, when say something. (NO ONE WILL SPOON FEED YOU, BUT ONLY GIVE YOU SMALL HINTS OF VERY BIG USE)

6) OPTION STRAGTEGIES, though have very less payoff percentage, have a very LOW amount of Risk . SO you see. IF you stay alive today then you can even fight tomorrow. But if you die today, then its the ENDDD...

Other readers are welcome to comment,

ANAS ELIAS BATLA..
KOLKATA
anas_batla10@rediffmail.com

men said...

If your money management was good, even with BAD TA knowledge you could have managed.If one is living hand to mouth for mtm then have a strict sl or take position in mini or best avoid fno till you get the necessary capital. Know your strength and weakness before initiating a position. One can at best take guidance from people like Mr. Sudarshan, but they have to trade for themselves, I doubt if one could make money purely by copying another.

kaps said...

I too am not an expert trader,but have gone thru this scenario few times before.
What I realize is that
We can find so many logical and convincing analysis to support our views But we shud bet only what we are ready to loose.Often the market makes a move in the direction that we want but only after it has thrown us out of the way.We stay alongwith market only when we can bear the pain that it inflicts initially on us.

men said...

Dear Mr. Sudarshan,
On the same topic hope you would give your experience on how to build a portfolio and the management of the same. Today on CNBC Ashwini suggested having a p/f of 10 stocks and if assume one stock fell 10% then total loss would be 1% on the total portfolio(theoritically), and then one should exit that particular stock.
Also your stock selection would help.
Regards,

cooldent said...

Sir what about your call to buy nifty oct 5600 puts on rallies? What level of nifty should be considered as a stop for this?

Student Of Market said...

I used to do things like these and now I do such things less frequently. What I mean is that earlier I would lose a lot of money short selling Nifty in a rising market - the thinking behind it was that how high can it go? So, I would short with a tight SL which would get hit and then again I would place another short thinking it can't go any higher and the vicious cycle would repeat. Having lost a lot of money this way, I have come to realize that it is better to go long every time I am tempted to short in a rising market. I mean while shorting in a rising market, I may luck out once in 20 short calls ( win 1 and lose 19) where as reversing the temptation will get me statistically more percentage of correct calls. So, in this rising market, I did not go long as I keep thinking that the market is overbought -- but fortunately, I did not go short even once .... so I have not lost money either like I used to and I will hopefully live to trade another tide some other time !! Not sure if all this makes sense ... but if it helps someone, I would be happy.

stockastrology.blogspot.com said...

Sudarshan Sir,

What's your take on this stupendous run up?

Thanks in advance

VAIBHAV said...

I would suggest trader to simply hedge his position by taking 6000 for Rs 18 calls for nifty for sept.Make sure if he has x quantity of sold calls of Dec, he takes x+y (y quantity as he feels comfortable),If he is wrong and as Sudershan says that mkt moves up he would be making money even if his original trade was in wrong direction.If correction comes, he can easily get out of sold calls positions at profit which would compensate for 18rs he spent on hedge.
I don't feel its a panic situation, i myself has come out of similiar situations on Nifty

Forecasting Markets said...

Elliot Wave theory suggests VIX has not much upside left, Downside target of 13, Does it suggest that markets will not go much lower. http://marketsinandout.blogspot.com

amitkbaid1008 said...

Sir,

My question is about dumping of Public Offerings (IPOs) in the markets. Is it first warning for market correction. As we all know the same thing happened in Jan-Feb 2008 when RELIANCE POWER IPO set the stage for market burst will this time COAL INDIA IPO set the stage for some thing like that?????

Sri said...

Sir,

I believe my solution might not be a great one, but I believe, I can advice on something else.

Entering a trade without knowing/understanding where to exit is utter foolishness. Trading/Investing is not a betting business. Stock Markets are supposed to be unpredictable beast, how can any individual survive without a "Trading plan". I hope everyone agrees on this.

Now to the solution:
I believe Markets, repeat what they have done earlier. The last time Nifty reached 6000 it found a lot of resistance and we also saw quite deep and quick corrections.

If we were to think, that the same would happen, I believe this person can have a stop at 6000 odd levels. Based on Fibonacci retracements we can expect atleast a correction of 23% from 4800-6000 i.e around 5700, if this level is broken then we can expect a 23% retracement from 2550-6000.

Also to add, if we see daily charts of Nifty with Bollinger Bands[with a period that is consistent throughout], it is more than due for the price to go sideways or hit the lower band. It is obvious that the markets will correct or go sideways it is only a matter of time.

-Sridhar

Fuller Madeleine said...

Are you sure that that's Nifty and not just a top-notch case of bad?

PROACTIVE said...

Sir we are entering a bubble period, as money supply is creating hyperinflationary pressures. With nifty having consolidation a long time, only thing one should do is go long. Overbought would only bring in more short sellers, as traders would be afraid to enter such lofty levels, ignoring the market realities, and they would want to short, as they are addicted to trading. I suggest Mr. X could go long nifty to hedge his position and use any corrections to exit short calls. The market rise would obliterate the previous rise of 2007-08, and we are going to reach PE levels of 25-26 for nifty.

amitkbaid1008 said...

Sir,
I have already posted one comment regarding your view on IPOs and Market Crash.

I also want to ask you one stock specific question. Please have a look at the charts of VOLTAMP and comment whether there is any valid C9 reversal pattern. If no pattern please elaborate what the reasons for not taking it as a valid C9 reversal pattern