How to Prepare for Your Trading Day in 8 Simple Steps

Hi,

This is Vijay Bhambwani and I'm gonna guide you through how to prepare for a trading day, from a mathematical point of view.

Trading is about mathematics. The less you leave to emotion, the better it is. Chance favours the prepared mind. So if you take these mathematical steps, I would assure you, the probability of success will go up many fold.

Now let me guide you through the mathematical aspects of the market.

First and foremost, once the trading session is over, do a good detailed chart reading for the next trading session.

So you basically have an idea of what you might have to do tomorrow. I use the word 'might' because there's a lot of slip between the cup in the lip. The overseas market could change. There could be breaking news before the next day's trading session opens. Commodities, currencies, bond prices could shift, thereby impacting equities and vice a versa.

So you should basically prepare one day in advance and then do a re-check again before the next day's training session.

The next item on the checklist...

Make a list of couple of buy and sell scripts, whether it is commodities, currencies, equities, or bonds. Have a list of bearish counters. Have a list of bullish counters. Do not make a fixed decision to buy or sell one day in advance.

When the trading session is about to open, take a review half an hour before trade starts. Has the overseas market closed bullish or bearish? What is the Singapore Nifty telling you about the open, the possible open, of the Indian markets?

And then wait for the market to actually open.

If the market is looking like it wants to go up today, then hey, you need to focus on that list of bullish stocks that you made last evening. On the other hand, if the market looks like it's going to fall through the floor, you need to focus on those stocks which were looking bearish to you yesterday. Like I said, do not form hard opinions, but go with the flow.

The next item on the checklist...

Always watch the overseas markets. Here again, the world is one big global village where money is so fungible that it flows from one part of the world to the other with a click of a few buttons.

And like I said in the other videos about the presidential cycle in the United States, there are positions in the markets which are extremely predictable. So you have corporate announcements. You have quarter endings, which I have told you in another video where mutual funds tend to ramp up their NAVs by resorting to bullish buying.

The next item on the checklist is about what part of the trading cycle you are on.

Always make note, like have told you in another video, about quarter endings. Mutual funds tend to boost their NAVs by resorting to last minute buying at quarter ends. Therefore, markets if all other factors remained constant, tend to be bullish.

Also remember about the video I sent you about Santa Claus rallies. In December endings FIIS tend to pump prime there NAVs by buying here.

And there are other times of the day where you need to be extremely careful. The 1st 5 to 10 minutes of the trading session and the last 5 to 10 minutes of the trading session should be avoided because this time of the trading session is dominated by BTST or STBT traders.

BTST traders buy today sell tomorrow traders who will enter a long position in the last 2 to 3 minutes of the trading session, only to square it up in the 1st 2 to 3 minutes of the next day's trading session.

STBT, on the other hand, are traders who goes short in the last 2 to 3 minutes of a trading session, only to cover their shorts in the 1st 3 minutes of the next day's trading session.

So the last and the 1st 5 to 10 minutes are dominated by a lot of volatility caused by these STBT and BTST traders. These are clearly times when veteran traders would like to avoid initiating fresh trades.

The other time of the day that discerning players like to avoid is the lunch hour. Here do to obvious reasons volumes are thinner and therefore, a little bit of buying or little bit of selling sends prices out in an exaggerated manner in big outsized movements. Here again, you could hit a stop loss faster than the blink of the eye. So avoid trading in the lunch hour and raise the probability of staying away from whipsaws.

Avoid illiquid items. This would be my next on the checklist. The reason is amply clear. If you get stuck in an illiquid item, you could get an entry into a trade but you may not be able to get out.

Who wants that?

My dad, when he was teaching me business told me that making a mistake is your right. As a matter of fact, he used the words of going wrong is your right but correcting that wrong, as fast as possible, is what sets a good businessman apart from the others.

If it all you make a mistake and you're losing money, you should ensure that you get out as fast as possible but from an illiquid item, you may not be able to get out. That is the worst nightmare for a trader.

Remember, I talked to you about Santa Claus rallies? During the last few trading sessions of December, there have been times, when in futures positions, I have seen on my snap quote window, the distance between one trade and the other, in terms of time difference, is as big as 10 minutes!

Can you imagine for 10 minutes there is not trading taking place on the counter where you have an open position? That's a nightmare. So avoid illiquid counters.

The next item on my trading list would be not to enter those counters where the market wide position limits or the amount of exposure that the total market can take, determined by the exchanges and SEBI, has crossed 82% to 85% of the entire exposure allowed.

This is called MWPL or Market Wide Position Limits. I'll explain to you why.

If it all a counter exceeds 90% of the MWPL, it goes into a ban period. No fresh positions are then allowed. You are only allowed to square up positions that your holding.

I'll tell you a personal example. Three years ago, I entered into a counter with a short position and I had deliberately entered short keeping in mind that I would be adding onto these short positions in a few minutes after the first trade was initiated.

I failed to cheque the MWPL before trading started. To my utter horror, MWPL at open was 89% and within the first few seconds, crossed 90. I could not average my short position, even though that was the game plan, because the stock went into a ban.

If it all even by mistake, you were to enter into a fresh trade after the ban period is hit, you would pay a huge penalty imposed by the exchange on your broker who in turn, would debit your ledger with that penalty. You clearly want to avoid such embarrassing situations.

Let me go one step further. The exchange has two kinds of margins. One is the SPAN or the initial margin deposit that you are required to pay up front before the trade can actually go through or get executed.

The other is the exposure margin. The higher the exposure on that particular counter, the higher the margin goes. Up to 59.9%, the exchange does not impose additional exposure margins but once the stock crosses 60% of MWPL, additional exposure margins come into play. So trading that particular counter can become a little more expensive in terms of margin deposit requirements.

Now this can lead to its own pulls and pushes on the price. You don't want to get caught and get into a stop loss because you failed to take into account the MWPL aspect before the market open. So you see, there are a lot of moving parts that go into a trade before you can actually initiate a trade and close it successfully.

The next item on my checklist is to avoid stocks that have a very high impact cost.

Now the concept of impact cost is very important. If you're buying one lot at the first buy bid and you have to average another lot, if the difference between the first buy and the second buy is 5 to 10 paise, the impact cost is 5 to 10 paise.

If it all you buy one lot at Rs 101 the next lot Rs 105 because that's the best offer available, the impact cost is Rs 4.

Now the lower the impact cost, the higher is your take home profit and the higher the impact cost, the lower your take home profit. So you need to decide whether you want to work for yourself or work for somebody else.

Look at the Nifty or the Bank Nifty. The Nifty ideally. How beautifully low the impact cost is. You can buy 5,000 lots of the Nifty for every difference of five paise. The impact cost is a mere 5 paise. This is a classic example of the lowest impact cost possible here. So you must go with stocks that have low impact cost so as to maximise your own returns.

The next item on my mathematical checklist...

Do you remember the video I talked to you about contrarian versus momentum style of trading and what kind of personalities are required for each kind of trade? You first need to ask yourself the question whether you're a low risk or a high risk, deep pocketed or small pocketed trader.

If it all you're a risk averse trader, initiate only those trades which are momentum in nature, where you're going with the flow.

If it all you have deep pockets, you are not averse to the idea of taking higher amounts of risks, only then get into contrian trades. Know yourself before you enter into a trade so that you know the trade itself. Following this checklist will ensure that you have a higher degree of probability of success in your trading life.

Before I say goodbye, let me remind you to hit like on this video. Subscribe to my YouTube channel. Do not forget to share this video with family and friends and through the comments section, tell me what you think about this video and what are the topics you would like me to talk about in my next video.

Thank you.