NIFTYSTATISTICSTOOLS

Lets play a game , the name of the game is “Game of Trading” . I am stock market and you are investor. You have got 2 chances of investing you money , One time i will give you 200% return and other time i will give you -80% , or in reverse order , so it can either be
200% , -80%
OR
-80% , 200%
You have to decide in advance that how much percentage of your total capital you will invest each time (invest capital) and how much you will keep safe money (safe capital) , you have to decide for both the times in the start only .
Lets analyse different cases .
Case A : You choose invest capital as 100% first time and 20% for next chance

Case A.1 : Return was -80% first time and 200% next time .

Case A.2 : Return was 200% first time and -80% next time .


Case B : You choose invest capital as 20% first time and 100% for next chance
Case B.1 : Return was -80% first time and 200% next time .


Case B.2 : Return was 200% first time and -80% next time .


You can see that at last A.1 = B.2 and A.2 = B.1 , so it means that order of your invest capital ratio does not affect your result , it both the cases it can either become 28 or 252 (depending on the return order) …
What should you do ?
100% and 20% choice will always loose in long run , if you play this game over and over again for long run , Understand that in this game , you can make it “high risk high return” Game or “Extremely no risk , low return game” ,And your choice of your invest percentage will decide which game is it .
Characteristic of “High return High risk game” : Its possible to make great money in short term , but in long run you will loose .Characteristic of “Low risk , low return game” : You will Not make great return in short term , but with compounding effect ,you are bound to be a winner in long run .
Let see if we can choose a ratio (invest percentage) can give us some profit irrespective of the return order .
Lets choose 25% invest capital :
Case A.1 : Return was -80% first time and 200% next time .

Case A.2 : Return was 200% first time and -80% next time .


You can see that in any case your 100 becomes 120 , which is 20% return.
What if you choose 80% invest capital : In that case at last you will have 93.6 (calculate yourself) . So what should be the best percentage capital to deploy each time in this game .
I tried to make an Equation , with all variables
p = profit times (2 or 200/100)
l = loss times ( -.8 or -80%/100 )
C = Capital at the start
T = Trade factor (.25 means , 25% of the capital will be invested at any time)
We want to find optimum T , given any p and l (assuming that the trade will be done 2 times)
So , If you calculate the total capital after the 2 trades (do the maths) , you will get
Total capital = C (1 + pT) * (1 + lT)
So our original capital is getting multiplied by (1+pT)*(1+lT) , and we have to maximize this number .
lets say I = (1+pT) * (1+lT)
I = 1 + plT^2 + pT + lT
If we do some differentiation here with respect to T (people who dont know differentiation , just leave it) , and put dI/dT = 0
2plT + p + l = 0
T = – (p + l) / 2pl
So the best valeuof T is -(p+l)/2pl ..
For our earliar example , p = 2 , l = -.8
we get – (2 – .8)/ (2 * 2 * -.8) = .375
Which means , 37.5% of capital will be invested everytime , and with that our capital will become 122.5 and that is the max you can make without risk .
What if return = 200% and -90% , in that case p = 2 , l = -.9 , so T = 2 – .9 / 2 * 2 * .9 = 1.1/3.6 = 11/36 , means investing capital will be 30.555% always and that will give us max return .

What is the point i am trying to make ?
In any given sitution of making money , there may be a big risk of loosing it , we should always use these kind of tools and always be safe . Dont try to be very bold in stock markets.
People who make killing in the start often get killed somewhere on the way and people who make respectable and sufficient money with satisfaction become winner over long term .

Summary
When you do Investment or do trading , you should never put all your capital into it , one bad trade or investment and you will be ruined forever , better to risk only that much capital which can not take out of of the game , but just hurts a bit . Take small and risk-less profits if possible , Investing and trading is all game of probabilities . Use maths and logic to take smart decisions like discussed in this article .

I am starting a series of articles which will deal with “How to invest in stocks efficiently” . This post is Part 1 .
There are two important questions which you have to answer when you want to buy shares ? They are “What to buy” and “When to buy” ?
You may be familiar with Fundamental Analysis , Fundamental Analysis answers the question “What to buy” ? . It a study of companies Financial statements , cash books , markets study to find out the future prospects of a company. It answers the question “Will this company be a good buy for long term” ? , “Will it be more valuable than what it is now ” etc etc “
But !! , Even though you have picked up some excellent companies for your long term investments , That’s not the end of the story . Now the biggest challenge and question you have is “When to buy it” ?
You should not just go next day and buy the share , that’s not the right approach . There can be a price area where buying is best in terms of risk/reward .
Technical Analysis is the study of charts , price and volume patterns and other indicators derived from price and volume . Technical Analysis gives us hint on what can happen in future , understand that it only gives you chances, not a guarantee . So everything should be taken with crossed fingers , Decisions taken on basis of TA only increases your risk/reward scenario .
I will give you an example :
Reliance is a very good long term Investment (do your own analysis to find out why, but it is ) .
On Feb 1 2009 , Ajay and Robert want to invest Rs 1 lac in Reliance for long term . Both of them understand that Reliance is truly long term buy . Ajay invests in Reliance on Feb 1 , because share is going up and he feels its a good time to enter other . He buys the stock at Rs 1360 . After some days Stock starts falling and reaches around Rs 1,150 . Roberts buys the stock at that time .

Here you can see that Robert has got the stock at 15% lower price , which means his profits will always be more than Ajay’s by that much . What did Robert do ? Robert used simple Technical Analysis concepts and entered in the stock with better prices , It does not mean it will always happen , but there are good chances for getting better price .
In the above case of Reliance , there is no significant price difference , but there can be cases ,where there can be drastic differences , and it would be really worth to use basic Technical Analysis .
Dont be scared , I will tell you some very basic things of technical Analysis in some of next post .
I will talk about
Part 2 : Support , Resistance
Part 3 : Trend Lines
Part 4 : Simple Oscillators to use for short term investments .
Watch out for second part soon .
Please share any real life example which happened with you , May be we all can try to find out what could have been done to make a better entry or exit from stock .

In the last Article , we had seen an Introduction to trading . In this section we will see what are the 3 M’s of Successful Trading as per Dr Alexander Elder .
I will give brief introduction of each of it , Its your responsibility to take it further and learn it in detail . take this as just a starting point .
The 3 M’s are :
- MIND
- METHOD - MONEY
MIND
This part of Trading is most important . It deals with Psychology . When one enters Trading business , he/she has some beliefs about the environment , about markets . They have to understand the importance of Discipline , How people think , how greed and fear affects investors . There are sub-parts to this
- Individual psychology of traders : You have to understand how to control Fear and Greed . How you should take rational decisions and not fall pray to your emotions while trading .
- Mass psychology of the markets : You also have to understand how mass psychology works . Why most of the people do what they do .
- The rules for maintaining personal discipline : You also have to understand the importance of Self Discipline , why you must be always consistent with your trading . You must never violate your rules . because in long run your discipline in one thing which will make you most money , not your knowledge or your skills .
METHOD
This is the part which deals with your knowledge about market , technical analysis , other tools which you can use to make Entry and Exit from any trade . This part is percieved to be the most important aspect and most of the people run after these a lot , but these are the least important part of your trading . Let us see part of this .
- Technical indicators : These deals with the tools available for making decisions , for example , MACD , RSI , Stocastics , OBV and other 200 weird words .
- The best chart patterns : Then you must know different types of patterns , which gives some idea about future action and how masses are thinking , some examples can be double top , Head and shoulder pattern etc .
- Developing a trading system : Then finally after you are done with knowledge part , you should build up your trading system . what is trading system ? Its your rules for buying ,selling , booking profits and cutting losses .

For learning on some technical tools you can see my series of articles on “How to be a better than average Investor”
MONEY
Now this part is an amazing one and my favorite . What this determines is how will you manage your money , it decides how much money will put in market at any given time , and how much loss will you take maximum on any given trade . How much will be your maximum loss on any one trade, things like that .
Basically this part decides how long can you in the game of trading if things would go wrong . This part is extremely important . Without proper money management no can can survive for long in Trading . Lets see some basic and widely accepted views .

- The 2% Rule for individual traders : This rule days that on any given trade your loss should not exceed 2% of total capital . So if you have Rs 1,00,000 , first time your loss should not be more than 2,000 . This rule makes sure that even if you make long series of loosing trades , still you are in the game . Even if you make 10 consecutive loosing trades , your overall loss will be 18.3% , Though this will be rare , still you take care of this situation .
- The 6% Rules for every trading account : This rule says that your monthly loss should not cross more than 6% in a month . Sometimes when you trade it may happen that there is some problem with your analysis or some issue between you and market which can not be explained , you keep trying to win , but dont succeed , that time you have a great urge to revenge trade and get your money back . The best thing at that time is to stop and get some rest , go for vacation and come back with fresh mind . This rule will make sure that if your chemistry with market doesnt fit , you stop after loosing 6% of your capital . You can choose your own percentage amount . I would like to choose 12% for me . it all depends on your risk appetite and stubbornness
You might be interested in my previous money management example
- Essential record keeping for success : This part says that you should always keep all the information regarding each trade . Buy price , sell price , date of purchase , how many days you carried , Reason for buy , reason of sell , what you learned from the trade , chart at the time of buying , charts at the time of selling etc etc .
Why do you do this ? Record keeping makes sure that any day you can go back to your records and see what kind of mistakes you have done, why some trade failed , why you succeeded in some trade ? you can get lots of information from your records , you need to analyse your performance over days/months/years .
Its extremely important , after a series of trades when you look back to your records , you may be able to find out some pattern , some particular aspect or mistake which you do with each loosing trade and hence can take corrective measures .
So , finally we are done with 3 M’s of successful trading . Professor Van Tharp , in this legendary book “Trade your way to Financial Freedom” talks about how the weightage they would give on these 3 M’s . According to him in Trading the importance factor is like this
Mind : 60%Money : 30% Method : 10%
Its totally opposite of what people perceive it to be , general people think that having all market knowledge and technical analysis is most important . nothing is far from truth , It wont be too ambitious to say that you can make money in market by simple coin toss if your have sound money management Techniques and Great control over your self , you need to cut your loosers short without any emotion and let your profits run till they can by sitting tight and doing nothing .

Conclusion
So finally if you want to start learning Trading , Work hard on your Psychology part and money management techniques , Technical analysis and other knowledge is important but not vital !! .
Some other article’s you might be interested in :

What does it takes to be successful in Trading ?
We are going to see 2 articles on this subject , this is Part 1 .
In this part I will give introduction to Trading and tell you what exactly is it and how should you approach it (if you want to do it) .
Dr. Alexander Elder , explains in his legendary book “Come in to My Trading Room” , the 3 M’s of Successful trading , which I will touch upon today and will explain it in my own way to you . In the second part we will see the 3 M’s in my way of explanation .
Let us first see what exactly is the difference between Trading and Investing and then we will go over the explanation .
Difference between Investing and Trading


How Risky and Rewarding is Trading ?

Risk : Trading is considered as one of the most risky business you can ever do . Trading can wipe out your entire money so fast that you cant even imagine . As per the data , every 19 person out of 20 who does trading eventually looses . So the success ratio is not more than 5% , even out of this 5% , 3-4% just make small money , actually big money is made by 1% of people .
Reward : If done correctly and successfully trading can make you enough money you cant imagine . Most of the successful traders make more money in a month than people who are considered as “making good money” make in a year . but this numbers is for highly successful traders .
The other reward for successful trader is Independence . Once successful , you are your own boss , can work whenever you want, trade from all corner of the world while travelling .

Should you try Trading ?
Well , Just anyone who thinks that trading is a “get rich quick” thing , is doomed to failure , this is the biggest reason why people fail , they start or see trading with wrong attitude , they want to make millions (if not billions) in just a month or a year from Trading , They underestimate the Risk part and over estimate Reward part of Trading and eventually fall pray to Market’s anger .
Just because its “BUY” or “SELL” , they think its easy . and they need to read a little bit and because they are so successful and smart in whatever they are doing currently , they will succeed in Trading too . The approach Trading in a wrong way with totally unrealistic expectations .
So the main question still is “Is it for you ?”
you have to ask your self this some question ?

- Are you ready to take Great risk of losing money ?
- Do you have time and energy to learn the stuff required to Trading ?- Do you like Markets , numbers and what ever required for Trading ?
- Some of the thing which “does not matter much” in Trading are :

- Are you highly intelligent person ?
- How successful you have always been in whatever you have done earlier in your life ?
Conclusion :
Understand very well that Trading is a very very risky business and not an easy thing , you have to learn it just like any other profession like Medicine or Software and it takes time . But , now a days I would say Trading is much easier compared to earlier days , Now with the online trading and lots of data available on Internet , there is lot of scope in Trading now .
In the next post we will quickly see 3 M’s for successful Trading . here is Part 2
Disclaimer : I am myself a student of Trading and still in my learning Phase , I have lost good money in Trading and still struggling to break even . But Eventually its going to happen, because I have not lost the confidence and still on fighting in the battlefield (Markets) .