Directional Trading has lots of benefits as well as risks. You should have strong risk management in place when you take on directional trades.
I started giving 2 conservative directional trades in my course due to the simple reason that almost everyone who called me to inquire about the course said that they like to play directional trades. In fact none of them used to trade non-directional trades, but were interested in them, so asked about the course.
Old habits die hard. I know that even after taking my course some time later they may try a directional trade and end up losing whatever they made in months or even years through the non-directional trading in just one wrong directional play. Yes it can get that risky.
For example lets say in 3 months a trader made around 100 points and took a buy call in Future. Next day Nifty opens gap down 100 points – Bump – Gone! In panic he will cover the Future in a loss. Whatever made in the last 3 months gone in a day. Now start again, very low on motivation. Bad.
Have a look at an email I received recently. See how this trader lost in lakhs trading directional calls/puts.
This happens to a lot of traders. To overcome this my course now includes 2 conservative directional trades as well, to help traders not lose much money playing directional trades if they are wrong, and make more if right. In fact in the above situation they will make money.
Of course I cannot reveal what’s there in the course but what I can say is most traders playing directional trades are doing it the wrong way.
In this post I will help you know how to trade directional trades better. Please read in full to know.
There are few benefits of directional trades. Here are they:
1. Risk reward especially with options is extremely good. Risk is Limited, Reward Unlimited (on paper 🙂 ). You can actually double your money every month. (Though I guarantee there is no one on Earth who does that.) Some or the other option definitely doubles in 20 trading days. The problem is we just don’t know which one.
If you can know that option, put your money there. Unfortunately its almost impossible to time the markets. And I don’t think there is anyone in this world even with the best technical skills to predict with certainty where the markets are headed and in what time. Well some may be good at predicting whether Nifty will go up or down over the medium term, but no one can definitely predict in what time Nifty will be where.
Since timing of the movement is extremely difficult (well impossible) most option buyers lose money.
2. Risk reward is same in futures. Yes it is same but you can always bring options into the picture to make the risk-reward favorable to you. This is what my directional trades teach. So even if you are 50% right, you should make money.
3. Money comes pretty fast. The beauty of directional trades is that results are pretty fast. You will know in a few days (sometimes the same day), whether you have made a profit or a loss. Great for people who are into the markets for fun.
Yes you may not know, but there are lot of people who are into the options market for fun. One day a trader called me and asked for a strategy that makes money every other day. Tell me how can I help him? Only God can help him. How can there be any strategy that makes money every other day? If you want to make money every other day, you will lose money every other day. In fact you will lose a lot of money every other month. 🙂
Stock markets do not like people who are Greedy. They don’t know but stock markets are rich because of those greedy people. Believe me the only way to make money from the stock markets is to make money slowly overtime. Small profits accumulated overtime becomes huge money.
If you are in the markets to make a lot of money quickly – you may get some fun but no money. After sometime it may not be fun too! Is losing money fun really? 🙂
Please do not live on hope – doubling money every year from the stock markets or making a lakh from a lakh in your account is simply not possible. If you are one of those traders who think that day will definitely come – then let me give some bad news to you – that day will NEVER come.
You will keep on living on hope and losing money doing all the trials and errors in the world. Please do not waste your hard earned money. Be conservative.
So what are the risks in the directional trades? Well a lot.
1. If you make money fast, you lose money fast too. If your risk-reward is not good you will end up losing more than you make.
2. Most traders do not have a proper risk management in place. So what happens is this – when profits come you will take them away in a swift, but when losses comes you will keep waiting for a market reversal. You will keep praying to Gods for help. Was not taking a stop-loss at the appropriate time Gods mistake? Why should Gods help you?
Markets will do what they want to do. They won’t reverse because a trader is losing money. Ultimately when markets do not reverse you will see that you ended up losing 5 times of what you made in your last profitable trade. Losses multiplies by 5 to profits. Frankly this is what I hear from most traders. This will not happen if you have a good risk management in place.
3. Directional trades makes you greedy. Mostly you win the first time. This is called “Beginners Luck“. Once you win you start thinking you have a “God Gift” of predicting markets. Your job is useless. You deserve a better life. You then take a lot of money out from all sources (sometimes even a loan) and gamble in the stock markets taking directional calls. You lose all of it and curse yourself for being greedy. But what has happened has happened. You will not get your money back. Period. Here is one trader who lost more than 40 lakhs because he just couldn’t control greed.
In my course the directional trades are perfectly hedged. So what happens is on Rs.10 invested, you make Rs.7 or you lose Rs.3. When you win you make more, when you lose you lose less. But I have told them to book profits/loss on 100 points at least. The reason is you give room for Nifty to move. And since the losses are less, you can take that chance.
Here is another example of greed. After taking my course one trader mailed me this:
In your directional trade strategy, if I am looking for 25 points as profit and 25 points as stop loss, how to execute this trade?
Which means he essentially wanted to turn it into an Intraday trading and know at the end of the day whether he made a profit or loss. Dude you can find better ways to pass time – markets are not the place to have fun.
When its clearly written you got to wait for a 100 point movement then you got to wait. That is what the strategy was made for in the first place. You just cannot tweak it for fun. People who do not have patience should not trade options in the first place.
This is what I replied:
The problem with small Stop Loss and Profit is that either can be hit very fast – it gets mostly Intraday. Your trade is correct but I do not like trades with no room to move. For example will Nifty go to 8600 or 8400 is an easy guess than Nifty moving from 8525 to 8550.
Another simple example is when you buy a stock, do you buy it to sell it the next day? Ok sometimes it does appreciates in value in 1 day and you can sell to make a quick buck or two. But mostly we buy stocks to keep them for a long period to make money right? When we can show patience there why can’t we show the same patience when we trade with options?
Here are a few tips on How To Do Directional Trading:
1. Strict risk management should be in place: Do not trade on hope. Have proper risk management. Always think of the worst case scenario. Do not place all your money in a single trade. If that goes bust, all your trading money is gone. You will be left with nothing to trade. You should never be in such a situation. So please trade in small size.
One good risk management is keep your profits double the size of your loss. So if you want to target 50 points as profits, your stop loss should be 25 or max 30 points. Which means if you hit target two times, it will take four failures to undo that. Though.
2. Write your target profit or loss in your trade plan. When that is hit just exit the trade. There is nothing called hope in the stock markets. If target profit is hit, be ready to take those profits. If a loss is hit, just take the loss. No egos on either profits or losses. You made money or lost it. It was nothing else.
3. Reduce your cost of trade: When you buy a call, sell a call. And when you sell a call you should buy a call for protection.
For example if you think Nifty may go up then you may:
Buy 24-Dec-14 CE 8,500.00 151.00
Sell 24-Dec-14 CE 8,600.00 87.25
(Taken from 04-Dec-2014 closing price.)
Had you bought 8500 calls without hedge, the risk on 2 lots is: 151 * 50 = Rs.7,550.00
Whereas because you sold 2 lots of 8600 CE your risk reduces by: 87.25 * 50 = Rs.4362.50
Total money at risk: 7550 – 4362.5 = Rs.3187.50 only.
Can you see the beauty of hedging? Now you can easily wait until Nifty hits either 8600 or 8400. 8600 is where you can take your profits out, and 8400 means you got to take the loss. Yes your profits will reduce too, but the losses will also reduce significantly.
Imagine the same trade with a 25 points leeway. The trader will hit stop loss most of the times. Where is the money?
You can do the same if you think Nifty will go down, that is buy a put and sell OTM put.
4. If you are trading futures protect yourself from unlimited losses. You can do it by buying some protection using options. This is described in details in my course to do it in the best possible way.
5. Relax: If you are doing it conservatively you can relax and trade freely. If you are taking unlimited risk you can never relax and a non-relaxed trader loses money.
I know most of you take directional trades. Do you do anything to reduce risk?
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