A Guide for New Derivatives Traders

Asad Dossani

Learning to trade requires trial and error. Add to that a few losing trades. Surviving this initial learning period is critical. Those who make it through the hump usually go on to become successful traders. Those who don't get swallowed by the markets. Usually, a few large losses does the trick.

And unfortunately, most new traders fall into the second category. But today I'm going to show you how to be part of that first category. How to be part of the group that not just survives, but thrives in the initial learning period.

First, you must accept the following fact: You will have an initial losing streak. And all new traders have this. In fact, even seasoned traders suffer losing streaks. But the first one is tough because you don't expect it. You don't know how to handle it when it comes. It may make you question whether you should carry on.

To survive the losing streak, you must keep your stakes small. You must risk only a small amount of money when you trade. This solves most of the problems new traders face. It allows you to stay rational when trades lose money. It allows you time to experiment with different ideas and strategies to get things right. It takes the pressure off.

Now, unfortunately, many derivatives trades require a large amount of capital. This is especially true for equity derivatives, like Nifty futures and options. But there is a market where you can start trading with almost nothing.

The best market to start trading is the currency market. You can trade futures and options on USDINR, the dollar rupee exchange rate. It is a liquid market that can be traded with a variety of trading strategies (fundamental, technical, quantitative, etc). And best of all, it is very low stakes.

To give you a sense of how low stakes it is, let's compare it to the most popular derivatives market: Nifty futures. To trade a Nifty futures contract, you must deposit Rs 56,000 with your broker as margin. This is an amount you must be willing to lose when you trade. It's the minimum you can risk on any trade.

By contrast, the margin requirement for a USDINR futures contract is just Rs 1,400. That's right. The Nifty future requires 40 times the margin of a USDINR future. The large gap is strange, but that's how it is. For just Rs 1,400, you can start trading derivatives. Small stakes mean you will get through the initial learning curve just fine.

Of course, small stakes is just one piece of the puzzle. You must learn the ins and outs of derivatives trading. And you can start by downloading my special report: The Ultimate Guide to Profiting from Derivatives. This is the best place to start your journey to becoming a successful derivatives trader.


Market Notes

Baahubali 2, The Real Reason for a Rally in PVR?

The news headlines read something like this...

PVR, Mukta Art Rallied before Kattappa's Baahubali secret is out

The media usually tries to justify stock market movements with an event - irrespective of whether that event was the actual reason for the movement.

Did PVR rally only because Baahubali was about to hit the theaters? Does a blockbuster release really impact PVR's share price?

To find out, we took movies that earned more than Rs 100 crore at the box office and calculated PVR's returns 21 days before and after their release. Why 21? Because three weeks is roughly how long the craze surrounding a blockbuster lasts.

Now, a total of 53 movies turned out to be blockbuster or entered the '100-crore club' since 2008. PVR's average return 21 days after any blockbuster release was 4%. Average returns 21 days prior to a blockbuster release were 5%. So whether you bought PVR before or after a blockbuster release, you would have made money.

We must also admit that we can't know beforehand whether a movie will be a blockbuster or a flop. Suppose you invested in PVR on the day of a movie premier, anticipating it will become a blockbuster. It's nothing more than speculation. People could hate the movie. Investing in anticipation of a blockbuster simply doesn't make much sense.

PVR Trading in a Strong Uptrend

PVR Trading in a Strong Uptrend

More importantly, PVR has traded in an uptrend since November 2008. And in an uptrend, the probability of PVR generating a positive return before and after a movie release is higher. Whether a movie turns out to be a blockbuster or not. Since the price action was strong a blockbuster release would hardly matter.

So Baahubali 2 might not be the reason for the PVR rally. In fact, the price action itself suggested strength.

Even if you applied a simple trend following strategy - like moving average crossover - you would have generated better returns than investing in anticipation of a blockbuster. Even if you focused just on chart analysis, you could have been in a better position - as we were here at Swing Trader. We recommended PVR on 6 March 2017 at Rs 1,330 and closed the trade this week with 17.89% gains.

But the rational for the trade had nothing to do with a movie release. We'd spotted an inverse head and shoulder pattern that seemed like a consolidation in the middle of an uptrend. The RSI indicator and volumes also supported the trade.

PVR might have rallied in anticipation of Baahubali 2, but this may not be the actual reason for the stock's strength. In fact, if you had invested after the release of Baahubali 2, you would be down 5.5%.

Don't let the media justify stock market movements for you. It's always better to do your own chart analysis and focus on the price action.

From The Market Wizards...

"When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position size when my trading is worst." - Paul Tudor Jones

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