Process of Winning

Hello Dears, 

    How are you? I hope you guys are doing great. I know it has been almost a year since I have blogged. Now, I am here to provide a piece of valuable information (hope so but I leave it up to you to decide) based on my observation and reading.

    Before getting into the core of the content, I would like to thank all of my friends who helped me to come up with this post. Here is the summary of the best questions I have received 

1. Can, I buy this particular script now?

2. Will our major Index fall more, so I can buy a stock at its bottom price for more profit.

3. I see a stock that has the potential to reach this (some) target, can I pour all of my money here?

4. How long I can hold this stock because I am at loss for now?

5. Technical or Fundamental analysis is best?

    I am not going to answer here for all the questions but still, I can provide a clarification based on that you can derive an answer (hopefully) by yourself and help others too.

Risk Reward:

    All of us are here (in the stock market) to make money. We always know in the money-making process there are certain risks involved and if we take a certain risk, we might get the reward but sometimes we end up in our risk part (losing money). Deciding on where we might end up is not in our hands but we can decide how much we can afford to risk for a certain profit. 

  To simplify the above concept, we can have a look at an example

   Let us assume, stock called A is trading at 100. We did all our analysis, studies, charting techniques and decided that price of A might reach 130 in the future if it moves higher or it can reach 70 if it moves lower.

Stock A : 

Current price: 100rs

Reward (chances to move higher): 30rs (100+30 = 130)

Risk (chances to move lower): 30rs (100-30 = 70)

  In this example, if we take a risk of 30rs we get a profit of 30rs. That is for every 1re of risk, we get 1re of profit. so the Risk, reward ratio is 1:1. What is our winning chance here 50-50%.

  If you ask me personally, I would always go with the trade which has less risk than reward minimum of 1:2 ratio. This way we can personally improve our winning rate and reduce losing trade. I would recommend you to do the calculation for 5 winning trades and 5 losing trades with a 1:2 risk-reward ratio for better clarity.

Position Sizing:

    Bit complex concept, Let's assume that we have identified two trade chances which are providing 1:2 of risk-reward. By now it would be understood that our winning rate is higher in both these trades.

    We have 10K money in our trading account and we have one stock as our favorite among two what would we do, psychologically we invest more in which is our favorite one. What if our favorite failed in this trade while the other one succeeded? so be balanced on all stocks this is the secret of position sizing. Let's see an example

Assumptions

10K in our trading account.

Stock A: Current price is 200, reward 40rs, and risk 20rs. (Favorite Stock)

Stock B: Current price is 100, reward 20rs, and risk 10rs.  

Investing 7000 in Stock A 35 quantity (favorite) and 3K in Stock B 30 quantity.

Result: Loss in Stock A 700rs loss and Profit in Stock B 600rs profit, overall we lost 100rs.

Let's see the result if we invested 5K (25 quantity in A and 50 quantity in B) in each with the same result

Result: Loss in Stock A 500rs loss and Profit in Stock B 1000rs profit, overall we gained 500rs.

Summary: Maintain the same position or distribute money equally, I can't assure you that you will end up in profit but I can assure you that everyone can minimize their loss.

Minimizing loss:

    We might not win all the trades that we are taking, there might be several reasons for it. The price of a stock or stock market will never move straight towards our target there might be some ups and downs before reaching our risk or reward levels. There is a simple way to minimizing loss but this needs a different level of conviction. We are entering into a trade that has a risk-reward of 1:2 and we are near to where our trade might end up on the risk side. Still, we can minimize the loss. Now all might have a question or answer that "By exiting the trade before it hit 100% of risk" we can minimize the loss. Yes, I agree that is one way but there is another way too, Amazed!!! Let's see that technique

Assumption: We have 5K of money in the trading account and identified a trade with a 1:2 risk-reward.

Stock A trading at 100, risk side 20rs, and reward of 40rs. Instead of buying for the whole 5K, we are buying stock only for 2.5K at 100rs.

Demo Calculation for example:

25 Quantity at 100rs = 2,500

The price of the stock went down by 10rs and trading at 90rs so we are buying 27 quantity shares here that are 2,430rs.

Amount left 5,000 - (2,500+2,430) = 70rs

Avg buying price of the stock will come to 94.80rs, so if we end up on the risk side we end up losing 13.20rs per stock, that is (13.20*52 = 686rs) instead of (20*50 = 1000rs). 

Now I hope all might have understood this concept.

Maximizing Profit:

     We can maximize our profit by using the same logic as we discussed in minimizing loss. We are entering into a trade that has a risk-reward of 1:2 and we are near to where our trade might end up on the risk side. Still, we can maximize the profit. Let's see that technique

Assumption: We have 5K of money in the trading account and identified a trade with 1:2 risk-reward.

Stock A trading at 100rs, risk side 20rs, and reward of 40rs. Instead of buying for the whole 5000, we are buying stock only for 2.5K at 100rs.

Demo Calculation for example:

25 Quantity at 100rs = 2,500

The price of the stock went down by 10rs and trading at 90rs so we are buying 27 quantity shares here that are 2,430rs.

Amount left 5,000 - (2,500+2,430) = 70rs

Avg buying price of the stock will come to 94.80rs, so if we end up on the reward side we end up making a profit of 45.20rs per stock, that is (45.2*52 = 2,350rs) instead of (40*50 = 2000rs).

 

By applying all the above techniques, I wish everyone to be a smart trader.

Note:

    Once a legend said 

I don't want this to be one-way communication, so if you have any questions, post in the comment box, will try to create a new blog post only to address all questions and will try to provide an answer ASAP. Thank you guys Cheers.