Friday, 6 June 2008

Margin and a day - II

Welcome back.

Let me talk a bit about the going long and short again. As you now now when you go long you must have bought something, and when you went short you sold something. To add to your disbelief, they can be separate transactions.

Allow me to make things clear the Bunty and Babli way. Going long comes naturally but the trick is about going short. Its a like selling The Taj Mahal. Do you own it? No. Can you go short on it? Yes.

No, I am not playing with your emotions. I am playing a trader. I was excited when I heard about it a few days ago. I was astonished when I executed the trade on my own, and I was overwhelmed when I saw the result in the ever falling market.

What else do you need? You don't have to pay the entire amount of trade - you have margin. You don't have to own the stock you want to sell. What else do you need? Luck.

You have a very nice platform to ply around, and they encourage you to put money. They guarantee you of prompt service but what they can't give you is the wisdom and luck to win. Even masters of the trade can't always win. The reason is simple - the stock market depends on thousands of factors - on supply/demand, on sentiments, on breaking news!!! Countless. So you end up guessing. But, the trick lies in taking calculated guesses.

Chamanlal asked: How can you ever sell Taj Mahal? Its not yours. I replied: But, I can borrow it from Government of India for a day and then do whatever with it with a promise to return by the end of the day.

Margin trading, also called Day trading or Intraday trading is considered a very risky affair. It indeed is. The rules involved make it riskier. Whatever position you take, you have to "square off" the position by the end of the trading day. In India, trading starts at about 10 am and ends at about 3pm excluding weekends. As you don't have sufficient time to recover from your losses, you end up losing - its intraday what did you expect? Squaring off is the process of performing the equal and opposite trade e.g. if you sold 10 stocks of XYZ, you have to buy it back by the end of the day.

Chamanlal says: Alright, I have sold Taj Mahal, now do you want me to buy it back? Ruthless. What will I do with it? I can't sleep with Shahjehan. I said: Grasshopper, you don't have to keep it, remember its not yours, you borrowed it from someone. You have to return it. All you end up keeping is the profit/loss(P/L) that you generated during the day.

You have to keep in mind that apart from margin you need to pay a minimal brokerage. Your P/L is adjusted from the margin. The good thing is that your P/L can't go beyond 16%. So, if a stock moves more than 16% since you last traded, it will be automatically squared off. So, for every 100/- you can gain or lose 16/-. Other features include stopping your losses, and placing Limit orders for Buying and Selling.

So irrespective of the market position you have the chance to make money. If the market is falling, you short at a higher price and then square it off at a lower price. Similarly if the market is moving up, you can go long at the lower price and then square it off at a higher price. Exciting strategy isn't it? Did I say that margin/day traders are the ones who are worst affected by any strong adverse movement of the market? So research, make calculated and informed choices, and use only your risk capital(money you can afford to lose) to make profits.

As per general perception and lot of text written over Intraday trading, its a widely accepted fact that 90% of the traders lose money. This is an adventure sport and must be played only when you are ready to lose but wont mind winning at times.

1 comment:

soju said...

Amazing.. amazing way of writing my dear friend.