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How to do Directional Trading

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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.

Directional Strategy Trader Lost Lakhs

Directional Strategy Trader Lost Lakhs – Click to Enlarge

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 πŸ™‚ ). 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. πŸ™‚

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? πŸ™‚

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.

Here is another article I wrote on how to reduce the cost of buying an option.

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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INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website. Please note that I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other form of social media. I strictly adhere to laws of my country. I only offer education on finance, investments on stock markets in the best possible way as much as I can through this website. Still, you must consult an authorized advisor or do thorough research before investing in any stock or derivative before trading any strategy given in this website. I am not responsible for any investment decision you take after reading any article given in this website. Knowledge is the only way to get success in stock markets. I try my best to give stock market investing and trading knowledge through the articles posted in this website. Thanks for visiting my website.

Making Use of VIX Volatility
Options Greeks Explained Delta Gamma Theta Vega Rho

About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 33 comments… add one }
  • Abhishek Patil

    Dilip Sir….Great….!!!
    Very useful article for everyone.Who want to trade in Options.Thank you.Keep writing Sir.God bless you.

    • Thank You Abhishek. God Bless You Too. If you keep above in mind you will surly make money trading options. Glad you liked the article. Thanks once again.

      • SANJAY JAT

        I read your all tips and thanku to share this all tips.
        dilip you r really good person

  • Vijit

    Dear Sir,

    I read some of the posts you have written on this website and they are very true in stock market. I too am in the stock market from 2012 but only used to study its movement and what are the parameters on which market reacts. I also invested in cash segment, but now wanted to move to options, realizing its advantage. From past few days I have been searching good websites to learn options but due to so many strategies not able to grasp very much. After reading the posts on your site, I also wanted to take this course to learn those strategies.

    Sir, right now I have my trading account only for cash segment not for derivatives, will it pose any hindrance in learning these strategies. Also, tell me when to deposit the required amount.

    Thanks and Regards,
    Vijit

    • Vijit,

      You will need a F&O Derivative Trading Account to do options trading. You cannot do it in cash-only Demat account. Of course the same Demat acc can allow you to trade F&O.

      In the cash segment you can only buy and sell shares of the listed companies.

      Please ask your broker about it, he should be able to help. You may need to fill some forms and it will be done in a day.

      Yes learning all strategies is not good – just focus on 2 or 3 max and excel in it. Some people try a lot of strategies and when they fail in any strategy they think the strategy itself is bad.

      A strategy’s success depends on how the trader is playing it. Therefore for most traders conservative strategies are the best. πŸ™‚

      So paper trade some strategies – see how much comfortable you are with them. Chose the best 2 and excel in them – master them. This is the only way to make money from options trading.

      For fee of my course please refer to this link:

      http://www.theoptioncourse.com/bank-details/

      Before you pay please make sure you can trade options and you have basic knowledge of options.

      My Best Regards!

  • RUPINDER SINGH RAINA

    Hello Dilip Sir

    Very informative article

    Thanks a lot

    Regards

    • Rupinder,

      I will be glad even if 10% of traders who read this implement the suggestions given in the article. Greed is hard to control because all traders think the only outcome from a trade is “Profit”. In reality you have to be practical.

      Thanks for reading. πŸ™‚

  • ashish

    Excellent post dilip! Its better to get consisent small conservative profits from our hard earned money than to trade directional trades and lose money everyday or every month.

    • Yes Ashish its true but some how people want to trade everyday and make money everyday which is not possible in stock markets. By the time they realize this, they would have already lost substantial money. Then they stop trading blaming their bad-luck.

      Be conservative, take small profits and occasional small losses – that’s the way to trade the stock markets.

  • jacob

    Dear dilip
    Thanks for the useful info. What is the practical difference of
    a) buy one call & buy one put ( eg Buy 8400 call ,8300 put)
    versus
    a) buy one call & sell one call ( eg Buy 8400 call, sell 8500 call)

    jacob

    • Jacob,

      A lot πŸ™‚

      A trader buying one call and one put is trading the Volatility, I mean his view is that either Nifty will fall or go up – but more importantly this will happen pretty fast – within a couple of days. It means he thinks one option will increase in value faster than the other option depreciates in value. He also thinks that the speed will be faster than time decay of both the options. Unfortunately a lot of traders lose money doing this trade because you need to perfectly time the markets just before the movement begins. In this trade direction need not be predicted but timing is important.This is not possible most of the times.

      When a trader sells one OTM call and buys a near the money call – it means his view is that Nifty will go up in the near future or will be up by expiry. If it actually goes up, this trader will make money. Because on expiry the option bought and sold will have more value than the original trade. Direction needs to be predicted here though and that is the only disadvantage – timing is not important. Time decay is also not important – only the direction.

      Hope it clears the confusion.

  • naveen ruhil

    Dear Dilip sir, very nice and educated articles u had posted so far. Thanks a lot

  • jacob

    Your articles are really good. Hope it saves people from doing foolish things.
    I have a query here. when does options start losing money fast? i.e. I mean Time decay of 25% of more per day. Is it when expiry date is less than a week away. Or is it 3 days. What is your experience/observation?

    • The answer will need a different post πŸ™‚

      Time decay is different for every strike and time left to expiry. Time decay is fastest for ATM options, and low for OTM options. Last 7 days for any option is very fast and the last trading day is the fastest.

      But – this is very important – making a strategy based on the fastest time decay in the last 2-3 days can prove to be very dangerous. Theta is a friend, but Gamma can destroy. Once ITM that option will move 1 to 1 point with the stock and that is why managing such a position will get very difficult.

      This is good question Jacob and I will write a detailed post on this. Thanks.

  • purnaiah

    Hi,

    Is there any past performance for to know better your cources

    Thanks in Advance

    • Hi Purnaiah,

      Past performance can be fake. Do you think the thousands of equity tips providing website online are posting 100% real past performance results in their website?

      You yourself mailed me and said that you are making losses following tips from a stock advisory tips providing company. But I saw that they are claiming huge profits in their past performance sheets.

      Past performance can also be twisted. For example adjust sell all to the first target, but if all three targets are met than sell all at the last target. This increases their returns. In reality their followers will only sell a part of their shares in the first target the rest may hit stop loss, or give zero returns – but in the past performance this will be shown as a great return.

      Sometimes the stock is triggered but they will send SMS saying the trigger did not meet. You will however take a stop loss after a lot of loss. The company knows this very well.

      SMS can take time to reach – by that time the stock may have hit the target – but you cannot trade.

      Some companies just delete losses from there past performance sheet.

      By the way what will you do with my past performance? Will it help you? No it will not, my knowledge will πŸ™‚ . Look for what you can learn and get from the course rather than what I make from these strategies.

      I am sure more than 10% of traders who have taken my course will actually end up making more than me because they are much smarter then me. I will be very happy to know that.

      I am not very intelligent – but I am very disciplined. And more so I am not greedy. I am very conservative trader and if some month I make even 1.5% return I am satisfied. At least I made money – most traders lost. What I make sure is that my losses are small if any – very small in fact. This helps to increase the profits month after month.

      Rest is your call.

      Thanks for the question.

  • inder

    aapki nifty ki stratgy bahut acchi he.powerfull mene apr me 200000 ki investment me22000 income ki tnx dilip ji

    • Thanks Inderji. It makes me very happy to see people making money from my strategies. Thanks for the information. Enjoy the success. πŸ™‚

      It means Mr. Dilip your Nifty strategy is very good, powerful. In April, I made a profit of Rs. 22,000 on Rs. 200,000 investment. Thanks Dilipji.

      NOTE: Mr. Inder traded the conservative directional strategy written in my course and not what is written in this article. Testimonial was sent without asking as a comment in this post. 11% return may not be possible in every trade.

  • subodh

    Dilip,

    Need your opinion. You have mentioned above in post that 100 points target or SL should be kept in Debit spread (8500 call Buy & 8600 Call Sell). While if expiry is not near then for booking profit 100 points is fine for debit spread. But many times we do see that if nifty goes 100 points down it bounces back with support. So waiting for reversal or booking loss, which is better if expiry is not near? Because if its spread one position is making money to counter loss & strange things can take place in nifty. So need help from you, which is better option, keeping spread going or taking loss?

    • Subodh,

      Your trading plan is not good. When in debit or credit spread you should know even before placing the trade when you are going to exit the trade.

      It could be certain points of profit or loss or Nifty position in mind. For example it could be 20 points profit or 10 points loss (just an example please do not copy – try what works best for you). In this case movement of Nifty really should not matter. Once your target profit or loss is reached then exit.

      Another way could be 100 points here or there. Which means if its a call debit spread – If Nifty touches the upper strike of 100 points – exit Or if Nifty goes 100 points down – exit. It does not matter whether its near expiry or far.

      As you can see there is a plan in place in both the above situations. However in your question there is “hope” – hoping that Nifty may reverse. In my trades there is zero place for hope or any other emotion. Its the plan that’s above all.

      In other words HAVE A PLAN. πŸ™‚

      Trading without plan is a recipe for disaster.

      Hope that helps.
      Thanks.

  • subodh

    Dilip ji, may be I put it in wrong way. I do both i.e. booking profit with points target or nifty position also waiting for reversal. When I take trade I do study tech indicators, so if 100 points movement is against my side, then if I have time on my side, then I do wait. My question to you as a more experience trader than me, which is better? Because in one article you mentioned that if wrong then one can wait till expiry in debit spread.

    • Subodh,

      You have to first check what plan works best for you and stick to that plan for the rest of life. You CANNOT jump from one plan to another just because “expiry” is near or far.

      Agreed near expiry if Nifty reverses then a lost trade can turn into profitable one especially if it is a credit spread. For debit spreads it still has some more length to travel.

      Yes I did write, but if you follow that plan – that is putting a debit spread and either waiting (if losing) till expiry or exit when Nifty hits the target. What I am trying to say is that even waiting till expiry should be in your plan. If its is not, its better to exit.

      Why not have a plan like this – I will put this trade and do either of these two things:

      1. Wait till expiry and take my profits or loss whatever it may be, or

      2. If the bought strike hits the strike that is sold I will exit – assuming bought strike was at the money.

      I will continue this plan forever and not hop and experiment from one plan to another.

      As you can see in the above plan expiry has a role to play, if expiry has no role to play there is no point thinking about it. If the above works for you, stick to it.

      Hope that helps.

  • michael

    Great Article on trading Directional with Options
    So the ” Hedges ” mentioned in the article are the Debit Spreads correct …. ( BullCall and BearPut ) ?

    Thanks again

    • Yes Michael,
      Hedges means any trade that works counter to the original trade. The idea is to take a limited loss. Sometimes the hedges make more money that the original trade. It depends on how you hedge. Two of the strategies in my course have hedges that can make more than the original trade, if the prediction was wrong in the original trade.

  • shankar babu

    Dear Sir,
    You have mentioned that Rs.30000 is sufficient for trading as per your course.
    But in your above replies you have mentioned buying and selling calls at a time. But
    in my knowledge selling of options we need more money to be kept with broker.
    Kindly clarify

    • Right now for selling 25 shares (or one lot) of Nifty approx Rs.14,500 is blocked. So if you sell 2 lots maximum Rs.30,000 will be blocked. Hope that clarifies.
      Thanks.

  • G S Arora

    Dear Dilip ,
    From your Article & blog , I understanding that you recommending Covered call Strategy to your Users as a Directional trade ( Long a Future & Sell a Call ) , the main problem with this trade when market start falling sharply . Can you please explain me the following points –
    1. When you Send message or e-mail to your Users to Change the Position , Lot of Damage has already been happened in the trade because a universal truth when Market fall its fall more sharply than going upside.
    2. Do you recommend to Sell An extra call in these situations or Just Replacing Call to another deeper Strike price ?
    3.When this happened , do you Advice to exit from trade by taking some losses or Guide your users how to Make a profit from a losing trade by Management techniques ?
    your valuable reply will help me and i think some more users too
    Thanks & regards
    G S ARORA

    • Mr. Arora,

      I don’t know who told you this but my directional strategy DOES NOT involve covered call strategy. If you called me an asked about the course I would have told you that my directional strategy makes money both sides – in fact it makes more money when you are wrong in your Future direction. How can a covered call make more when the Future trade is going badly wrong?

      Also I am not a tip provider. So I don’t know who is trading what. I just give my paid subscribers ideas to trade directional strategy – but it depends on my paid subscribers if they want to trade or not. Once I give an idea everybody is on their own. I don’t give exit calls – they know when to exit as written in the course – and I assume they exit there.

      As far as covered calls are concerned they are not intended to work with Futures. You know that and still trading. If you are not using covered calls for the purpose they are made for, its obvious you will lose money.

      Of course I cannot reveal here what is there in my directional strategy as people have paid to learn and morally it will be wrong to reveal in public domain.

      Best.

  • Nagendra kumar

    Sir plz tell me about short selling..when it should be done in a month and what precautions? Done with hedging ? People say short selling makes money faster than buying. If done causiously

    • Nagendra it is true that shorting options makes money most of the times, but it also comes with unlimited risks that sometimes a retail trader is unable to handle.

      This is the reason traders shorting options also lose money. So you must hedge when you short the options – it could be by buying another option out of the money or buying the stock itself in cash and shorting the call options. There are a lot of ways to do it. But since the best ways to hedge is in my course I cannot write any further.

      Thanks.

  • Vikas Jain

    Great..

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