How to minimize risk during trading in option?

Many traders trade in option segment. In option segment, trader has less risk and can earn maximum profit. Traders have to invest fewer amounts and can earn maximum profit some times. Suppose trader has invested only 2000 rupees, he or she can earn unlimited profit, but at the same time, here risk is of only 2000 rupees.

I can show you one method that can help you traders to minimize your risk during trading in option segment. Trader can follow some simple steps to apply this method.

First of all trader have to find intrinsic value for particular stock. We can find intrinsic value by subtracting strike price from current price.

Intrinsic value = Current LTP – Strike Price.

Now trader has to calculate interest rate of current LTP using following formula.

Interest Rate = (Current LTP *X/N) %

Here, X is difference of days between current date and expiry date.

For e.g. if current date is 5/5/2014 and you expiry date is 29/5/2014 (dd/mm/yyyy) then you difference will be X= (29-5) = 24.

Here, N is total days of current month as well as moth of expiry date. Suppose your current date is 5/5/2014 and you expiry date is 29/5/2014 (dd/mm/yyyy) then your N will be 31 days.

Because you current moth and expiry month both are same and total days in that month are 31. So your total numbers of days (N) are 31.

Generally trader can calculate interest rate at 3%. If trader is trading in indices then he or she can use 5% of interest rate.

Once trader get the intrinsic value then trader have to calculate actual premium price for scrip. For that check if the intrinsic price is greater than zero or less than zero. If intrinsic value is greater than zero then sum up that intrinsic value with interest rate.

And if the intrinsic value is less than zero (negative) then use zero as intrinsic value and sum up that zero with interest rate. This is how trader can find actual premium price for particular scrip.

Keep in mind if actual premium price is greater than given premium price then you are trading at risk. Means trader is paying higher premium value and if some how he or she makes loss he or she will lose more money.

And if actual premium price is less than given premium price then trader is trading with less risk. Because trader is investing with less premium value and that’s why if he or she is makes any kind of loss he or she will lose less amount. And this is how trader can find out risk during trading in option segment.

Trend line in technical analysis

Trend line can be drawn between two or more price pivot points on charts. In technical analysis trend line is used to find entry and exit point when trading. Trend line is a straight line and used to confirm trend in stock market. Many people call trend line as Dutch line because it was first used in Holland.

Trend line can be like boundary for price movements. Most charting software draw trend line automatically while some charting software enables traders to draw their own trend line.

Six types of trend lines are available.

• ·         Linear Trend line
• ·         Logarithmic Trend line
• ·         Polynomial Trend line
• ·         Power Trend line
• ·         Exponential Trend line
• ·         Moving average Trend line

• Linear Trend line:

Linear trend line can be used if the price data are increasing or decreasing at steady rates. If the plotted price points follow the straight or nearly equal to straight line then you can call it as linear trend line.

 Formula:

                                                Y =m*x +b

Here m = slope (x, y) while b represent the price point.

• Logarithmic Trend Line:

Logarithmic trend line can be used when the rate of changes in price increases or decreases quickly. If the plotted prices increases or decreases quickly and then level out you can use logarithmic trend line.

Formula:

y = (c * LN(x)) + b

c: =INDEX(LINEST(y, LN(x)),1)

b: =INDEX(LINEST(y, LN(x)),1,2)

• Polynomial Trend line:

Polynomial trend line can be used when data fluctuate many times. It is useful for analyzing profit loss over large data.

Formula:

2nd Order Polynomial Trend line

y = (c2 * x^2) + (c1 * x ^1) + b

c2: =INDEX (LINEST(y, x^ {1, 2}), 1)

C1: =INDEX (LINEST(y, x^ {1, 2}), 1, 2)

b = =INDEX (LINEST(y, x^ {1, 2}), 1, 3)

3rd Order Polynomial Trend line

Equation: y = (c3 * x^3) + (c2 * x^2) + (c1 * x^1) + b

c3: =INDEX (LINEST(y, x^ {1, 2, 3}), 1)     

c2: =INDEX (LINEST(y, x^ {1, 2, 3}), 1, 2)

C1: =INDEX (LINEST(y, x^ {1, 2, 3}), 1, 3)

b: =INDEX(LINEST(y, x^{1, 2, 3}), 1, 4)

• Power Trend Line: 

When the price rate increases at specific rate at regular interval, we can use power trend line.

Formula:

y=c*x^ b

c: =EXP(INDEX (LINEST(LN(y), LN(x),,),1, 2))

b: =INDEX (LINEST(LN(y), LN(x),,), 1)

• Exponential Trend Line:

Exponential trend line and power trend lines are similar in shape. Difference between these two is power trend line gets symmetric arc while exponential trend line takes sharp arc at one end. Direction of exponential trend line may be either up or down. You can use exponential tend line when price value increase or decrease rates are constantly increasing.  

Formula:

y = c *e ^ (b * x)

c: =EXP (INDEX (LINEST(LN(y), x), 1, 2))

b: =INDEX (LINEST(LN(y), x), 1)

• Moving Average Trend line:

If the price value fluctuate uneven (up down) we can use moving average trend line. Moving average takes average of specified number of points and uses that average as next point.

Morning Star - Candle stick pattern.

Morning star is a candle stick chart pattern. Morning star pattern is used by technical analyst of stock market to find reversal of trend in stock market. Technical analyst use morning star patterns to predict future prices of stocks. Morning star pattern occur at the end of downtrend and indicates the change of trend from bear to bull trend.

Morning star pattern is made up of three candles. First one is large bearish candle, second or middle candle may be bullish or bearish or neutral. Second candle may be small in size. Third candle large bullish candle. 

On the first day of morning star pattern supply dominate the demand and creates large bearish candle. On second day candle opens with gap down. Bearish or bullish gap down will decrease the price of scrip. The candle stick on day two is small and can be bullish, bearish or neutral.  On the third day of morning star large bullish candle indicates increase of demand. Third day candle pull the price upward and eliminate the loss on first day candle.

Morning star consists of three candle sticks. Trader will use higher volume to confirm morning star pattern on third day. Trader or market analysts usually see length of candles to figure out strength of pattern.

 In order to have valid morning star most traders will look at the top of the third candle to be at least half way up the body of first candle.  If first and third day candles are larger and if the third day candle moves higher in relation with first day candle then it is strong sign of reversal in trend.

What is trading? What are common trading strategies?

Trading is an activity of buying and selling stock based on short term or long term price movement. Basically two types of trading strategies is available one is active trading another is buy and hold trading strategy.

Active trading strategy (short term) is suitable for short term investor while buy and hold strategy (long term strategy) is suitable for long term investors. Here I have some trading strategies which come in active or long term strategy.

Intraday trading:

Intraday trading strategy comes in active trading strategy (short term trading strategy). In intraday trading buying and selling of stock are done on same day before the market gets closed. No position is held for next day. Intraday trading is an active trading style. Traders who trade in intraday trading are called active trader. Intraday trading can be risky if trader trades without money management or trading disciplines. In day trading strategy traders used to make profit from difference between buying price and selling price within same day.

Position Trading:

Position trading comes in buy and hold trading strategy. Long term investor trades in position trading strategy. Position trading technique use daily charts and some indicators to find trend in market. These types of trend can lasts for a week or a month. Positional traders trade when market is moving in one direction. Positional traders trade when trend has established and leave market when trend is about to break.

Swing trading:

Swing trading comes between short term trading and long term trading. In swing trading trader hold the scrip for more than one day like 2 to 3 days. Swing traders generally create some algorithms from fundamental and technical analysis. Using that technique swing trader identifies entry point and exit point to the market. Swing traders gets active when one trend is ending and new trend is about to start. Swing trading strategy works best when market is going in one direction up side or down side.

Scalping:

Scalping comes in an active strategy. This strategy is employed by active traders and lasts for very short period. It is a day trading strategy and focuses on making small profit from many trades. Scalper holds stocks for very short period and that way they decrease the risk of money loss. Scalper does not wait for long moves in market they take advantage of smaller moves that happens frequently. Scalper generally likes to trade when the market in range bound or sideways.

Basics on Future and Options

Future ad options are derivative basic instruments in stock market. Derivatives are financial instruments and their values are driven by stocks, currency, and gold.

Future:

Future is a derivative in which there is a contract between buyer and seller to buy or sell assets for specific price. If you buy future you have to pay for assets within specific time and if you sell assets you have to transfer assets within specific period of time.

Future contracts are available for equity stocks, indices, commodities and currency. Price of the assets in future market is more than the price of the assets in spot market. This price difference is generally negative and known as basis. The difference between prices is just because of some storage cost, or some other expenses.

Options:

In option derivatives holder of instrument has right to buy or sell the underlying assets at the pre determine price. This pre determined price is called strike price. An option can be of two type call option put option. In call option buyer has all rights to buy assets at given price, while seller has only obligation no rights. If buyer wants to buy assets seller have to sell that assets.

That means once seller sells their assets they don’t have any rights over that assets. In put option buyer has rights to sell the assets to buyer and seller has just obligations to buy the assets.

In option contract buyer has all rights while seller has only obligations no rights. Is the seller of contract break the obligations, seller has to pay for that, and that amount is called premium

What is trend in stock market? What are the different types of trends available in stock market?

Market trend helps the trader or investor to find buying or selling opportunities in stock market. Market trend is like behavior of stock market, which moves in one direction. Market trend can be classified as follow.

• ·         Secular market trend
• ·         Primary market trend
• ·         Secondary market trend

Secular Market Trend:

Secular market trends are generally lasts for many years like 15 to 20 years. They are long term market trends. Secular market trend can be further classified in bull secular market trend or bear secular market trend.

Primary Market Trend:

Primary market trend generally lasts for years. They can be classified further in bull market, bear market, market top, and market bottom.

Bull market trend generally indicates advances in the stock market over period of time while bear market indicates declines in stock market over the period of time. In market top or market high trend market will reach its highest point for some short period of time. Opposite of market high trend, in market bottom trend stock reaches to its bottom. These two trends are very difficult to find and leaves for short period of time.

Secondary term Market Trend:

Secondary market trend are leaves for very short period let say few weeks. These types of trends are like some minor changes in price direction. Secondary market trends are of two types one is correction and second is market rally.

Correction is a downward trend and declines the prices up to 5% to 20%. And another secondary trend is market rally sometimes called sucker’s rally or dead bounce cat. Market rally will increase the price of stock only up to 10% to 20%  

How to find Trend using ADX

Many traders or technical analyst used to follow trend in stock market. Technical analyst use ADX (Average Directional Movement Index) to find trend in stock market. Actually ADX is not a directional indicator; it will not give you direction of trend. Instead of direction or momentum, ADX can give you strength of trend for particular scrip.

Value for ADX varies in between 0 to 100. As the value of ADX changes the strength of trend will also change. If the value of ADX is below 20 then it is very poor trend. And if the value of ADX is above 40 you can say it is strong trend.

There are lots of strategies to find trend using ADX. Here is one strategy to find trend using ADX in stock market. ADX is a combination of two other indicators. One is positive Di and second one is negative DI. We can use positive directional indicator (+DI) and negative directional indicator (-DI) to find the direction of the trend.

If the value of +DI is higher than the –DI you can say it is up trend, while if the value of –DI goes higher than +DI then you can say it is down trend. +DI or –DI are nothing but the directional indicators which are used with ADX to find direction of trend.

Sometimes +DI / -DI generates false trend signals, to prevent these false signals we must confirm the value of ADX. If the value of ADX is above 20 or rising above 20, than and then you can confirm that trend is up trend or down trend based on the value of +DI / -DI.