Library / MiyeeStockBuddy: The Complete Guide to Indian Markets
Part 17. Four Trades, Start To Finish
Every part so far taught pieces. This part runs four complete trades from the first thought to the closing entry in the journal, with every rupee accounted for. Two of them lose money, because a guide that only shows winners teaches nothing useful.
The prices are illustrative. The arithmetic and the decisions are exactly what you would do.
17.1 Case One: A Breakout That Worked
The idea
A mid cap engineering company. Sales have grown for four years, ROCE has averaged nineteen percent, debt to equity is 0.3, and cash from operations has averaged eighty six percent of operating profit. It is a business worth owning, which is the first filter.
On the chart it has traded between 604 and 648 for eleven weeks, a range of about seven percent. Volume has fallen steadily through the base. ADX is 16, which says no trend yet, which is exactly right for a base.
The trigger
On a Tuesday it closes at 652, above the eleven week high, on volume three point one times its twenty day average. The candle range is more than twice the recent daily average. All four base breakout conditions from Part 6.9 are present.
Sizing the trade before entering Account 5,00,000 Risk per trade, 1 percent 5,000 Entry 652 Stop loss, just below the base 626 Risk per share 26 Position size = 5,000 / 26 = 192 shares Capital deployed = 192 x 652 = 1,25,184 Target, at 1 to 3 = 652 + (26 x 3) = 730 Risk 5,000 to make 15,000. |
What happened
Week | Price | What was done | Open profit | |
|---|---|---|---|---|
1 | 652 | Entered 192 shares. Stop at 626. | 0 | |
2 | 671 | Nothing. The plan does not require action. | + 3,648 | |
3 | 664 | Nothing. A pullback that holds above the base is normal. | + 2,304 | |
5 | 702 | Stop moved up to 668, just below the new higher low. Risk is now zero. | + 9,600 | |
7 | 731 | Target reached. Sold half, 96 shares, at 731. | + 15,168 | |
9 | 758 | Stop on the rest raised to 726. | ||
11 | 726 | Stop hit on the remaining 96 shares. | ||
Sold 96 shares at 731 profit 96 x 79 = 7,584 Sold 96 shares at 726 profit 96 x 74 = 7,104 -------- Gross profit 14,688 less costs, roughly 450 Net 14,238 Return on the capital deployed 11.4 percent in eleven weeks Return on the account 2.8 percent Risk taken 1 percent | ||||
What actually made this work Not the entry. The entry was one Tuesday and took thirty seconds. It was the eleven weeks of doing nothing in weeks 2 and 3, the decision to move the stop to break even rather than to take a small profit in week 5, and selling half at the planned target rather than deciding at that moment to hold for more. Every one of those decisions was made before the trade started. That is the whole method. | ||||
17.2 Case Two: The Same Setup, Failing Properly
Here is the identical setup two months later in a different stock, and this time it does not work. This case matters more than the first one.
The trade Entry 418 on a breakout with 2.4x volume Stop loss 402 Risk per share 16 Position size = 5,000 / 16 = 312 shares Capital deployed = 312 x 418 = 1,30,416 | |||
Day | Price | What was done | |
1 | 418 | Entered 312 shares. Stop at 402. | |
2 | 423 | Held. | |
3 | 409 | Held. Still above the stop, and the base is intact. | |
4 | 401 | Stop hit. Sold all 312 shares at 401. | |
Loss = 312 x (418 - 401) = 5,304 plus costs 420 Total 5,724 which is 1.14 percent of the account | |||
Why this is a good trade, not a bad one The analysis was sound, the setup was valid, and the trade lost money. Both things are true at once, and accepting that is the hardest part of learning to trade. What matters is that the loss was 1.14 percent rather than 15 percent. The stock went on to fall to 340 over the next two months. A trader without a stop loss would have watched a 5,700 rupee loss become a 24,000 rupee one, and would probably have averaged down somewhere in the middle and made it worse. The stop loss did not fail. The stop loss was the entire value of the plan. | |||
The rule to remember Judge a trade by whether you followed the plan, not by whether it made money. Over a hundred trades, plan discipline is the variable you control and the outcome is the variable you do not. | |||
17.3 Case Three: A Bull Call Spread, Managed
A monthly Nifty view. The index has held a rising trendline for six weeks, ADX is 27, and the 50 day average is above the 200 day. You expect a moderate move up over the next three weeks, not a violent one.
A plain call would cost more and need a bigger move. A bull call spread suits a moderate view, which is the honest description of what you actually believe.
Setting up Nifty 24,000 19 days to expiry Buy 24,000 call at 150 debit 11,250 Sell 24,200 call at 78 credit 5,850 -------- Net cost 5,400 Break even 24,072 Maximum profit 9,600 at 24,200 and above Maximum loss 5,400 at 24,000 and below Position risk as a share of the account 1.1 percent of 5,00,000 | |||||
Day | Nifty | Spread value | Open P&L | Decision | |
1 | 24,000 | 5,400 | 0 | Entered | |
4 | 23,880 | 4,050 | - 1,350 | Held. Nothing has invalidated the trendline. | |
8 | 24,140 | 8,100 | + 2,700 | Held. | |
13 | 24,265 | 11,700 | + 6,300 | Nifty is above the short strike, so the spread is near maximum. | |
14 | 24,280 | 12,150 | + 6,750 | Closed the whole spread. | |
Closed for 12,150 Cost 5,400 -------- Gross profit 6,750 less costs, four legs 520 Net 6,230 on 5,400 at risk | |||||
The decision that mattered On day 14 the spread was worth 12,150 out of a possible 14,850 at expiry. Holding for five more days to capture the last 2,700 would have meant carrying full downside risk of the position for a fifth of the reward. Closing a spread at eighty percent of maximum value, rather than holding to expiry for the last twenty percent, is one of the few genuinely reliable habits in option trading. The last part of the profit is the most expensive to earn, because gamma is at its most violent exactly then. | |||||
17.4 Case Four: An Iron Condor Through a Bad Week
This is the case worth studying hardest, because it shows a losing option position behaving exactly as designed.
Setting up Nifty 24,000, 22 days to expiry, India VIX 13.4 which is on the low side Sell 24,400 call at 62 Buy 24,600 call at 26 Sell 23,600 put at 58 Buy 23,400 put at 24 Net credit = 70 x 75 = 5,250 Maximum loss = 9,750 Profit zone = 23,600 to 24,400 Margin blocked = about 32,000 | |||||
Day | Nifty | VIX | Position value | What was done | |
1 | 24,000 | 13.4 | + 0 | Entered for a 5,250 credit | |
6 | 24,090 | 12.8 | + 1,800 | Held. Well inside the range and decay is working. | |
11 | 24,260 | 15.1 | + 600 | Held, but the call side is being tested. Plan reviewed. | |
13 | 24,430 | 19.6 | - 3,200 | Nifty is through the short call. Predefined exit level reached. | |
13 | 24,430 | 19.6 | - 3,200 | Closed all four legs. | |
Credit received on entry 5,250 Paid to close 8,450 -------- Gross loss 3,200 plus costs, eight legs 980 Net loss 4,180 which is 0.84 percent of the account Had it been held to expiry with Nifty at 24,610: Loss would have been the full 9,750 | |||||
Three things this case demonstrates The exit was decided on day one. The plan said: close if Nifty touches the short strike. On day 13 that happened, and there was nothing to think about. Deciding at that moment, with money at stake and volatility rising, is how a 4,180 loss becomes a 9,750 one. Volatility hurt as much as direction. VIX rose from 13.4 to 19.6, which raised the value of every option in the structure and worked against a net seller regardless of where Nifty went. That is vega, and it is the part beginners never see coming. The wings did their job. The loss was capped at 9,750 by construction. The same trade as a naked short strangle would have had no cap at all, and would have needed roughly five times the margin to hold. | |||||
17.5 What the Four Cases Have in Common
Case | Outcome | Was the plan followed? | |
|---|---|---|---|
One: breakout | + 14,238 | Yes | |
Two: failed breakout | - 5,724 | Yes | |
Three: bull call spread | + 6,230 | Yes | |
Four: iron condor | - 4,180 | Yes | |
Four trades, two winners and two losers. Net result + 10,564 Largest single loss 5,724 which is 1.14 percent of the account Win rate 50 percent | |||
A fifty percent win rate produced a profit because the winners were larger than the losers, and the losers were small because each one had a stop or a defined maximum written down before entry. Nothing else in these four cases was clever. There was no prediction that came true, no indicator that called a turn, and no moment of insight.
The rule to remember This is what competent trading actually looks like. It is repetitive, most of it is waiting, and the good decisions are all made before the money is at risk. If that sounds boring, it is, and that is the point. |
© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.