|Manu Bhatia, BTech Chemical|
Looking back, I think the most important thing that was missing between how I trade now and then is money management and risk management. Back then I did not know anything about position sizing. I used to take the same sized bet for all trades. I used to have the same exposure even when it was time to be aggressive or defensive.
Apart from money and risk management, were there any changes in the core strategy?
Yes, the strategy has also changed. Earlier I used to take positional trades, nowadays I take a lot of intraday trades. But having said that, by applying money and risk management on my earlier strategies, returns would have been much higher. In fact, if I would have used these money and risk management when I had taken a sabbatical I would have met the 100 percent return target in a year.
At what point in time did you decide to quit your job and become a fulltime trader?
For the positional strategy, I backtested it for 10 years while for intra-day, I did it for 1,000 trades. The results of these testing were really great. Then I traded them and saw good results over the next few months. I wanted to see that the assumptions that I had taken for testing were actually possible in trading. Say if the strategy says that I should buy the open, in reality, it is really difficult to buy the open. Ones the actual trades and backtest results were aligned I decided to quit my job.
How do you take your intraday trades?
What I look for is an imbalance in the stock. I get in after a huge price movement is visible in the stock. I then look for an entry to participate in the rally which could either last for a few minutes or a couple of hours. Average True Range (ATR) shooting up is one of the criteria that I look out for.
I only trade in cash market in intraday and lookout for stocks where the implied volatility (IV) is at historic high. These high volatility stocks make for good candidates for intra-day trading. I look to participate in line with the trend but am open to taking a trade in the other direction.
Suppose that a volatile stock is trading close to its all-time high. It could either run past these levels or it can test the high and fall. These are the points where I look to trade. I might take a position where the stock moves first, but I am equally comfortable in changing my direction if a pivot point is taken off.
My stop loss points are generally at pivot lows, or it can be the low of the day, low of the previous day or some such point. I normally keep 2 levels of protection for my stop loss points.
For my exits, I look for optimum exit points. Suppose if I am risking Rs 10,000 on a trade and if I see a Rs 20,000 profit in it I will move my stop loss closer to protect the profit. I might even at times book partially or trail the trade with a very tight stop loss.
In the intra-day strategy, my win to loss trades is between 50-60 percent with a risk-reward of Rs 2 for every rupee risked.
What about the positional strategy?
Positional strategy is completely different. Here I am looking to enter a sustained trend or a resumption of a trend. Here the requirement is that there should be a confluence of multiple things. It can be a trendline and a moving average bounce or a support level and moving average. Such stocks then come in my watch list.
I then look for triggers in the form of either an increase in open interest or a big candle which will confirm that market is respecting this confluence. I follow the positional strategy mainly in Nifty and Bank Nifty as I find that doing it for stocks is riskier.
In positional trade, the win to loss ratio is better at 65 percent with the same risk-reward as that of intraday trades.
You said earlier, that a significant portion of your success is on account of change in money management and risk management. Can you elucidate?
Sure. In my earlier trades, all I used to look for was entry and exit points. I used to take the same position for all trades. Say, if I was trading Bank Nifty then even if the stop loss was at a distance of 100 points or 500 points I would take the same number of lots to trade.
Position size has to be defined by the money that I am risking in that trade divided by the difference between entry and stop loss point.
So even if the strategy is working well, one large stop loss can damage the capital and it will take a number of good trades to recoup. Having the right position size will improve the performance of the strategy.
Second is the question of how much you are risking on every trade. What used to happen earlier was say, in the case of Nifty if it bounces off a trend line, the same formation would be visible in other stocks. Earlier I used to take multiple trades which had more or less the same signal. They would either all work or their stop losses would be hit.
Now I have made a rule that I would not be risking more than 1 percent on a trade and not more than 5 percent at any point in the market.
Apart from these I generally look out for filters and boosters to enhance my performance. I have found out that my performance is better if the India VIX (volatility index) is above 17-18. So if VIX is above 18 I would increase my position size and perhaps bet say, 1.5 percent on each trade. I am constantly in search of such filters and boosters which without changing the basic strategy enhances returns.
As for the money management part, I learned the power of compounding as a helpful tool in trading. What I do is I add back the profits from the trades to the capital and then calculate the risk to be taken on each trade. So the 1 percent that I am risking on each trade is automatically increased. This move has helped improve my return considerably.
Apart from trading, what else do you do?
I am generally testing different strategies and looking for ways to improve my existing strategy. Off-late I am teaching a couple of traders the ropes. I keep on interacting with people and kind of work with them in improving their strategy. That is something I am very passionate about, I like to back-test and improve on the returns, it helps me in learning something new in the process.
Read more at https://www.moneycontrol.com/news/business/markets/an-iit-engineers-journey-from-e-commerce-to-successful-trading-2598621.html