How to Make Money Trading Indian Stock Markets

We live in the golden age of information.

Yet, not all traders are fully aware of the possibilities of making money in Indian stock markets.

Either they are stuck with any one instrument like stocks or don’t have accurate information and knowledge about other instrument like Futures or Options.

In any case, trading Indian markets and making money may not be easy but it is definitely possible.

Don’t trust me because I say so. But it is true because a lot of traders have made money trading Indian markets.

The only question is that of accurate information.

Too many sources of information and too many conflicting views on the Internet, right?

No worries.

We have put together a brief overview of how to make money trading Indian stock markets.

Different Instruments

1. Stocks:

  • This instrument needs no introduction. Every living, breathing Indian indulges in it at one or the other point during his/her life time.
  • However, isn’t it true that not many traders make money from stocks? What do you think is the reason?
  • There is no one reason but there are reasons.
  • First of all, stock selection is what makes or breaks your trade. Let’s say, you have only Rs. 10000, which stocks would you buy?
  • Most naturally, you would want to buy a stock which you can buy in quantity. So you would look for a stock which is trading 30 or 40 or even 100 so that you can buy it in some sort of quantity. The assumption here is that it cannot fall more and even if it moves a little on the upside, you make money.
  • The question is does it really go that way? More often than not, it does not work out that way because you have allowed the wrong factors to determine the core of your trading- stock selection.
  • You need to select stocks not based on their price in the sense that it does not matter whether it is 500 or 5000. It does not matter whether you can buy 1 or 10. Stock selection should depend upon the quality of the stock.
  • If you want to make money from a stock, you have to look for a stock of a company that is making huge profits every year. There is potential for more growth. If the company grows, the stock price will naturally follow. Remember, prices are slaves of growth.
  • Secondly, avoid penny stocks trading at ridiculously low prices. The reason is that if penny stocks fall, they may or may not bounce back like good stocks such Reliance, Tata Steel or SBI. Your money will be locked forever in those stocks.
  • Thirdly, don’t stocks which are supposedly going to go up or down because of some buyback and some or the other news/rumour. Avoid trading based on any news at all. Don’t trade the wrong ones and your right ones will count at the end of the day.
  • Fourthly, don’t buy stocks because they are good stocks but they are at their 52 week low or at all time low. If a stock is at 52 week low, there is a reason why it is there. The market is telling you something through this. The market is telling you that this stock deserves to be at a low price and stay away from it. So understand the message and stay from 52 week low or stocks which have fallen 20% or 30% and on the assumption that now they will bounce back.
  • Fifthly, buy stocks which are in an uptrend. So let’s say, Reliance went above 1000 in July 2018. It is at a higher price than previous several weeks. In technical terms, it’s breakout on the upside. So what would you say? Oh, it has gone up so much, I will buy after it comes down. The fact that it has gone up so much is the reason for you to buy it. Reliance never came back to 1000 after that and went on to make a new high above 1200 recently. So the right strategy would be to keep adding positions at every 30 rupees up to 1200. Don’t try and predict where to get out. Let market give you an indication that now the trend is about to change. When volumes go down, or RSI is at 80, you can get out.
  • If a stock is going up and up, the market is telling you something. Listen to the market and follow it. Remember, market is always right. If the market thinks that the stock should be at 52 week low, accept it and leave the stock alone. If the market thinks that the stock should go up, accept it and go along.
  • Traders who argue and bargain with the market lose money because market will do what it thinks is right. It does not care what you think and why. So if you don’t argue and bargain with the market and simply follow the market’s trend and direction, you will make money.
  • In a bull market, there is no reason to worry. You can trade any kind of stocks, small caps, mid caps or large caps. But in a bear market, you need to switch from small caps and mid caps to more solid and defensive large caps because they stand tall when there is a storm. They don’t correct as much.
  • Book profits. Yes, you got it right. Book profits. Periodically. Regularly. Surely. You cannot expect the market to keep going in one direction-up. Market can crash and the trend can change any time. The stock you purchased can fall lower than your purchase price. It does not matter how much it is going up right now. All you need to do is keep booking partial profits.
  • There are traders who look at their portfolio and take satisfaction from the 20% profit that it indicates. They keep postponing the crucial part of booking profits. One day, when they wake up, markets go south and wipe out their profits. Then they wait more for the markets to go back in the uptrend but they don’t. Markets keep wiping out their profits and they keep watching. Trust me, it is not that traders don’t come into profit. It’s just that they don’t book profits and allow markets to take it back.
  • Your ego. Yes, your ego. Keep that out of this process. If you purchase a stock, and if it goes down, it means you made a wrong decision. It is a wrong trade. Don’t hesitate in accepting the decision. Don’t start assuming that the market is wrong. Don’t start blaming global markets and manipulators of the markets etc etc. Accept that you are wrong. If a trade does not work out the way you thought, accept it with complete humility and get out of that trade. If you keep waiting while the price of the stock erodes, it can become a trade that you can never get out of. Don’t allow your ego to affect your trading. Remain humble and accept that you can be wrong. If you do so, you will be able to get out early and cut your losses significantly. This is the key to making money. Your losses should be small and your profits should be large.
  • There are many different aspects of stock trading which need to be understood for making money. However, a detailed blog post on stock trading will follow later.

2. Futures

  • Scary, isn’t it? Large losses, in fact, unlimited losses is what we think when we think of Futures.
  • Most traders think that it is impossible to trade Futures because of the possibility of large losses which can occur.
  • Most traders think that if you trade in Futures, you can lose money overnight.
  • All of these are right about any kind of trading if you don’t use hedge or lack discipline. Traders have lost money from stocks since Jan 2018. Mid caps and small caps have given sleepless nights to traders. Stocks which were once champions in 2017 have now corrected 30, 40 or 50% and currently don’t see any signs of recovery. So it’s fair to assume that you can lose money in kind of trading. Futures is not an exception.
  • Yes, Futures can be risky if you don’t have any hedge. That’s true about stocks too. You buy PC Jewelllers or Jet Airways and then it plunges. How do you stop that? Lupin began to fall from 2100 in 2015 has presently come down to 800. Isn’t unlimited or large loss? If you have purchased Lupin in 2015, what can you do to stop the carnage? There’s hardly anything you can do. Fortunately, you can do a lot in Futures to stop unlimited or large losses.
  • In fact, you can trade Futures with clarity about the profit or loss right at the time of entry. Right at the outset, you can enter the trade with pre-defined loss and pre-defined profit if you hedge it properly.
  • Let’s understand it with examples. Nifty is trading at 11450 sort of levels. If you think that it is in an uptrend. In fact, it came back from 10000 in March 2018. Since March 2018, it has gone up 1500 points. If you can even get a fraction of that, you would make a lot of money. You might ask, what if it went down? Here’s how you can trade Nifty Futures.
  • If you buy Nifty Futures at 10000 and buy a Put Option with it of Rs. 150. It’s perfect hedge. It’s not a complete hedge but a perfect hedge. Please understand it clearly so that you don’t make a mistake. If Nifty goes down 100 points, Put Option will go up by 50 or 60 points. Your loss will be limited to 40 points. For a lot of 75 of Nifty Futures, 40 points loss would mean Rs.3000. Even if Nifty goes down 500 points from 10000, your loss will be proportionate. You have fixed your loss right at the start. Ideally, you should get out after it goes against you by 100 or 200 points.
  • Now what if Nifty Futures goes up? If it goes up 500 points, you will get 500 points on the Nifty Futures which has a lot of 75. So your profit would be 500×75. In rupee terms, it would be 37500. You have paid for Put Option worth 150 which comes to Rs. 11250. The Put Option will expire worthless. So you would lose Rs. 11250 and profit would be Rs. 37500. Your net profit minus the Put Option price would be Rs. 26250.
  • You can imagine how the risk is limited and profits are large. You get out if Nifty Futures goes against you. It’s wrong trade so you accept it and try again. But if it goes in your direction, you make substantial profits in no time.
  • This is just a discussion of one lot of Nifty Futures. You can imagine your profits if you trade in multiple lots.
  • There are various ways of trading Futures of Nifty and Bank Nifty. But it will be dealt with separately in detail in later blogs.

3. Options

  • Options trading is one of the underutilized tools of trading in India. But it is one of most flexible tools of trading that you can customize to suit your trading style and temperament.
  • It is also one of the most amazing tools in terms of returns. You can get the kind of returns that you get from Futures but at much less risk.
  • You can buy and sell options of Nifty and Bank Nifty as well as stocks. Depending upon your market view, you can use options to benefit from market movements.
  • Let’s take the same example of Nifty at 10000 in March. Let’s say you don’t want to trade Futures for some reason. You can do the same trade with options at much less risk. You can sell the Put Options of lower strike price of 9800 and wait if market moves in your direction. If it does not move in your market direction, you get out. You might ask what about the risk?
  • Let’s say you sell the Put Option of 9800 at Rs. 100. It means if market goes down you can get into loss. Losses can be substantial because market can down significantly and price of Put Option will go up and you will incur losses. Is there a way to limit your loss? Yes, there is. When you sell the Put Option of 9800, all you need to do is buy a Call Option of 9700. That’s it. The difference between the two is your loss as well as your profit. If markets go down, you will incur only that much loss. If it goes up, the same is your profit.
  • The beauty of options is that there is one more scenario of profit for options. If market does not go anywhere, you still make money. In fact, option sellers hope that markets don’t go anywhere because options have a lot of time premium. If markets don’t move in any direction, the time premium erodes and options prices start falling with every passing day.
  • So you make money from the Put Option of 9800 if the markets go up or markets stay where they are. The only scenario in which you lose a specific amount of money if markets go down.
  • Why options matter so much because there are hundreds of different strategies that you can deploy depending upon market situations. You cannot say the same about stock trading. What can you do at differently with Nifty at 11500 in terms of stock trading? All you can do with stocks is buy them or probably sell them but on intraday basis. Buying at 11500 is asking for trouble. If markets fall from here, stocks you purchase will have to wait for eternity to come back to the same price and may not even come back.
  • If you recollect the crash of 2008, there are many stocks which have not come back to the levels of 2008 in spite of the fact that markets have made new all time highs.
  • So there is more risk in buying stocks in this kind of market condition. You can sell options and use different strategies to benefit from all kind of market conditions.
  • The most important reason for trading options is that options are merely time premium. You play for time erosion in options. The reason to play for time erosion is that markets are in any kind of trend only 30% of the time. 70% of the time, there is no trend. It means that option prices will erode and options will expire worthless. So if you trade options, there is a great chance of benefitting from the time erosion.

Key Tips

  • Trading requires knowledge and understanding of different instruments and ability to use them.
  • Trading also requires the understanding of risks associated with each instrument and trading accordingly. For instance, most people trade stocks like there is no risk and end up losing money. On the other hand, most traders stay away from Futures & Options thinking that they are hugely risky but they are not risky if you manage your risk well.
  • Trading requires a temperament that adapts to the changing market conditions. So train your mind to be flexible and accept when you are wrong. At the same time, train your mind to be not too greedy. Book your profits at regular intervals so that you don’t end up losing your profits.
  • You need a bit of technical knowledge. Technical analysis is not inevitable but hugely important. For example, support and resistance levels on a chart can prevent you from buying or selling at wrong levels. If you can see that a stock has broken out of a trading range, you can enter and benefit from the trend.
  • Be prepared to get less profit and preserve your capital rather than lose your capital for higher profits. If your capital is there, you can make profits. If you lose your capital, there is no way to make money.
  • Stay away from overtrading. It is not necessary to trade every day simply because there is a market and simply because you have money in your account. Entry at the right level gives you an advantage. For instance, buying at the right level means half the battle is won. So stay away from trading every day. Wait for the right opportunity and capitalize on it.
  • Use a combination of strategies to hedge your trade and benefit from different instruments. You can combine stocks and options to benefit from both the instruments and hedge your position. The same is true about Futures & Options.
  • If you trade options, use low-risk and high reward strategies so that you don’t expose yourself to significant losses but earn significant returns at low risk.

Trading is a less of a science and more of an art. You can keep adapting and customizing to improve upon it.

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