The idea behind a stop-loss is to not let losses of one of your trades get so big that it causes a significant drawdown in your overall portfolio.
The more efficient way is to trade with much lesser value. So when you are buying a stock, allocate only a small % of your overall portfolio to that trade. By doing this you can avoid putting a tight stoploss in place. The issue with markets is that they are hardly ever trending one direction, it is usually up and down even when they are trending one way. A tight stoploss means you keep getting chopped out.
If you put say more than 25% of your capital in one trade, you will be forced to put a tight stop as losses will mean a significant dent to your overall trading capital. This idea of tight stop-loss is usually peddled by tipsters to cover their ass when they are wrong. So that they can somehow prove that their tips overall made money. If you have really tight stops it is very tough to make money trading the markets.
How do you know if you have a tight stop?
If you are getting stopped out quite often, that means it is a tight stop.
About getting into the same stock after a stop has been hit. Yes, you can if your trading strategy asks you to. But don’t it for revenge and wanting to recover the money you have lost on that stock. Those trades hardly ever workout okay.
There are multiple factors that drive the value of stocks. The dividend is one factor through which you can identify the value of a stock and you can do this via a special valuation technique called the 'Dividend discount model’.
It’s called a special technique because it’s a subset of a generic valuation technique called the ‘Discounted cash flow model’ or the DCF.
The fact that a company is considered valuable only if it pays dividend is flawed.
To help you understand better, I’ve put a mini QnA -
What is a dividend?
A dividend is a cash reward that the company pays to its investors.
Is it mandatory for a company to pay dividends?
Not mandatory. If the company has money, it can choose to pay dividends. If they don’t, then they obviously won’t.
What if the company has funds, do they have to pay dividends?
Not really. One of the core responsibilities of a company is also to maximise the shareholder’s wealth. Wealth can be maximized when the company invest in itself prudently (could buy new machinery, build a new plant, expand to new geography). So when the company has cash in hand, they have to decide to either invest in themselves for better growth or if they see no growth opportunities, then they are better off paying dividends.
So as you see there are many valid reasons for not paying dividends, so you cant judge a company’s value based on its dividend policy.
Btw, one of the techniques to prevent placing a tight stoploss is by identifying SL price based on Volatility, also called ‘Volatility based stop loss’. We have discussed it here - Volatility Applications – Varsity by Zerodha (section 18.2).
Hi @nithin I really appreciate your time in giving response. Actually, Yeah now I got that we can select all trades and tag them. Maybe I am too ambitious, but one day we can able to create dashboard for a Strategy which we tagged to our trades and plot an equity curve just for that. It would be amazing. Its like how a smallcase portfolio keeps an index and plots it. Thanks again for answering.
The closing price for the day of any stock and hence even the index is the weighted average price of the last 30 mins of trading. That is the reason why the last traded price of the day is usually different from the final closing price.
On expiry days towards the close of the market, it is useful for F&O traders if the platform can predict what the actual closing price of the underlying will be. This can help decide on whether to hold on expiring F&O positions or exit them in the market.
Assume that on an expiry day at 3.26pm you have Nifty 17500 calls, and say Nifty is at 17535 and 17000 calls are trading at say Rs 32. Assume at this time the predictive closing price of Nifty is 17525. If you look at the current market price of 17535, you will assume that 17500 calls need to be atleast at Rs 35 and decide not to exit. But if you realize that it will actually close at 17525 which would mean that options will close at Rs 25, you will sell at Rs 32.
We don’t have this feature on Kite. Even when we had this on Pi, it wasn’t really used by anyone. Let me check if we can implement this feature.
My Question Regarding option buying limit (otm Overnight)
eg: in banknifty, I want to buy one call option for overnight so I decided to buy otm.
so at that time banknifty at 38000 with 300 premium call side and 380 premium put side so the combined premium is 680.
300+380 = 680 so
I decide to buy 680 points from ATM which will come 38680 after roundoff 38700 it’s coming but in Zerodha I am not able to hold it overnight due to Sebi stands one can hold buy position overnight with respect to the premium of the spot price. But my idea is I am sure about gap up for that position.
During the pre-market session for the first 8 minutes (between 9:00 AM and 9:08 AM) orders are collected, modified, or cancelled. You can place limit orders/market orders. The order collection window can close at any time between 9:07 AM and 9:08 AM.
Order matching period starts immediately after completion of order collection period. Orders are matched at a single (equilibrium) price which will be open price. The order matching happens in the following sequence:
Eligible limit orders are matched with eligible limit orders
Residual eligible limit orders are matched with market orders
Market orders are matched with market orders
During order matching period order modification, order cancellation, trade modification and trade cancellation is not allowed. The trade confirmations are disseminated to respective members on their trading terminals before the start of normal market. After completion of order matching there is a silent period to facilitate the transition from pre-open session to the normal market. All outstanding orders are moved to the normal market retaining the original time stamp.
Limit orders are at limit price and market orders are at the discovered equilibrium price. In a situation where no equilibrium price is discovered in the pre-open session, all market orders are moved to normal market at previous day’s close price or adjusted close price / base price following price time priority. Accordingly, Normal Market / Odd lot Market and Retail Debt Market opens for trading after closure of pre-open session i.e. 9:15 am.
Yeah, we have restrictions in place on how far out options you can buy. While this might seem restrictive to you as a trader, our belief is that this restriction has helped our customers save significant amounts of money. OTM options are the ones that lose the most money for customers, significantly more than anything else. Btw this restriction is because
Yep, that is a good way to figure the predictive closing. Most arbitrage shops will ensure that the closest ITM option is very close to the predictive closing price.
When we buy an option and sell it. Who buys it on the other side.?
I read that options are bought from the sellers. But what actually happens while selling the buyed option.
Thanks
The only edge is that markets go down much faster than they go up. An intraday trader is always in a hurry to book profits and just because markets fall faster might, in the long run, give a small edge for short trades vs long trades.
There is always a counter party to your trade on the exchange, only then can you enter or exit a trade. So if you bought an option from someone, to be able to sell it you need another buyer. Suggest you to go through all the modules on Varsity.
From @Meher_Smaran’s answer. The collection is only for the first 7 mins, after which the matching starts happening for the next 8 mins.
Order matching period starts immediately after completion of order collection period. Orders are matched at a single (equilibrium) price which will be open price. The order matching happens in the following sequence:
Eligible limit orders are matched with eligible limit orders
Residual eligible limit orders are matched with market orders
Hi @nithin
Thank you for this opportunity to ask anything about trading.
My question is : Are there exchange appointed market makers for stock options in NSE/BSE who are obliged to provide liquidity or is it just the institutions and public proving liquidity to each other?
Thanks in advance.
hello, everyone! @nithin sir @nik sir can you please share lessons from your journey in markets over the years,and what you have learned that can be helpful…
