Data Analytics in Stock Market

It is negative-sum activity!

There is a PANIC seller, there is a GREEDY buyer

There is a GREEDY buyer, there is a PROFIT-Making seller

Golden Rules of Trading: note it is called "golden rules" and not "assured return" rules.

1. Decide exit strategy [stop-loss or book-profit] at the time of entry only
2. Make yourself a promise not to enter into a trade without (trailing) stop-loss
3. Deploy only 50% of corpus - keep 25% for reverse trade during extreme volatility
4. Put all effort to avoid Hope Trades - this will mentally drain you and lead to over-trade
5. Learn to respect the momentum [moving averages are the simplest method to gauge momentum if you cannot infer momentum from price chart].

Criteria to Select Stocks for FNO Trades in NSE

1. Top 500 stocks: based on average daily market capitalisation and the average daily traded value computed on the 16th of each month, on a rolling basis
2. Average daily market capitalization - part of calculation to appear among top 500 stocks
3. Average daily traded value - part of calculation to appear among top 500 stocks
4. The market wide position limit [20% of the free float market capitalisation of a stock and if stock is already in FNO trade it includes positions in futures and options ] in the security ≥ Rs. 500 crores on a rolling basis
5. Median quarter sigma (σ/4) order size values ≥ INR 25 lakh where standard deviation (σ) is Exponentially Weighted Moving Average (EWMA)
6. The average daily deliverable value ≥ Rs. 10 crores in the previous six months on a rolling basis

If an existing security fails to meet aforesaid continued eligibility criteria for 3 consecutive months, then no fresh month contract shall be issued on that security. However, the existing contracts may be permitted to trade till expiry and new strikes may be introduced in the existing contract months.

Books on Technical Analysis and Candlestick Charting

1. How to Make Money Trading Derivatives by Ashwini Gujral
2. Technical Analysis of Stock Trends - by Robert D. Edwards and John Magee
3. Candlestick Charting Explained - by Morris and Litchfield
4. Martin Pring on Market Momentum - by Martin Pring

Stock Market Propaganda

1. FII and DII make the maket move high or low - FII और DII मेकट को उच्च या निम्न स्तर पर ले जाते हैं
2. Mostly option seller make money - ज्यादातर विकल्प विक्रेता पैसा कमाते हैं
3. Long term investment is guaranteed to be profitable - दीर्घकालिक निवेश लाभदायक होने की गारंटी है
4. A share having Price-Earning (PE) ratio > 50 is still a value buying.
5. The stock market advisers does not give full picture - they do not easily share timeline for their prediction and most of the levels are based on 1:1 reward-risk ratio

However, the fact remains valid that over very long time interval, the rate of return reduces as compared to the selective and partially hidden values projected in media over short term (3 ~ 5 years). हालाँकि, यह तथ्य निर्विवाद है कि बहुत लंबे समय के अंतराल पर आय की दर कम अवधि (3 ~ 5 वर्ष) में मीडिया में प्रस्तुत/मुद्रित "चयनात्मक और आंशिक रूप से छिपे हुए" आय की तुलना में कम होती है।

Virtual Money in Stock Market Valuations: the stock price is not a linear function of number of stock being bought or sold.

Full-market capitalization: includes both active (available for day-to-day trading) and inactive shares (such as locked-in shares, those held by insiders, promoters, and governments).

Free-float Market Cap: method excludes locked-in shares, such as those held by insiders, promoters, and government and is based on shares readily available in the market.

Some data as on 21-Apr-2023 of NSE stocks:

Can you draw an inference from this information?

It is always (with some exceptions) desirable to have a source of passive income to enable and individual follow the course he wishes to. However, such sources are not easy to put in place or scale in terms of value. Some of such options with associated constraints are tabulated below. यह हमेशा वांछनीय होता है (कुछ अपवादों के साथ) की निष्क्रिय आय का स्रोत होना हर उस व्यक्ति के लिए आवश्यक है जो अपना जीवन अपनी शर्तों पर जीना चाहता है। हालांकि, ऐसे स्रोतों को मूल्य के संदर्भ में जगह देना या मापना आसान नहीं है। संबंधित बाधाओं के साथ ऐसे कुछ विकल्प नीचे सारणीबद्ध हैं।

ये इक्कीसवीं सदी में सूचना प्रौद्योगिकी और तेजी से बदलती प्रौद्योगिकी के युग के सैकड़ों विकल्पों में से कुछ उदाहरण हैं। इनमें से कई में पूर्णकालिक नौकरी के बराबर बहुत अधिक ऊर्जा और समय की आवश्यकता होती है और इसलिए वे निष्क्रिय स्रोत बिल्कुल नहीं हो सकते हैं। या तो आप पहले ही काम दे दें या अपने पिछले काम को अपने लिए पैसे कमाने दें। कुछ उत्पाद, कुछ पाठ्यक्रम, कुछ ईबुक निष्क्रिय आय के स्थिर स्रोत का व्यवसाय नहीं बन सकते हैं। These are some of the examples of hundreds of option available in twenty-first century dominated with information technology and era of fast changing technology. Many of these require lot of energy and time equivalent to full-time job and hence they may not be passive source at all. Either you give work upfront or let your past work earn money for you. Few of anything such few products, few courses, few ebooks do not make steady sources of passive income.

My Mistakes

1. Guessing or assuming that the price may not move much further if oscillators [RSI and Stochastics] are in (so-called) overbought or oversold zones यह अनुमान लगाना या मान लेना कि ऑसिलेटर्स [RSI और Stochastic] अगर (तथाकथित) ओवरबॉट या ओवरसोल्ड ज़ोन में हैं तो कीमत बहुत आगे नहीं बढ़ सकती है
2. Getting fully invested - no [margin] money was left to invest or hedge the position in case trades swung wildly against my positions
3. Not waiting for moving averages to cross and price stay below STMA [Short Term Moving Average] few ticks
4. Assuming signals for candlestick to be valid for many weeks. As per many authors, the candlestick patterns are valid only for few [2-5] time intervals
5. Relying on too many indicators: once I used to follow RSI, MFI, Stochastics, ADX, Bollinger Band and MACD in addition to moving averages

Caveats

• Do not pay attention to the news, they are to justify the market actions. News has no prediction potential for stock price movement - only higher volatility can be expected when an important news such as quarterly result, RBI monetary policy... are to be announced.
• Credit rating agencies and brokerage house play it safe and may have their own vested interest. It is worth playig opposite to their findings (sell rating implies time is ripe for slow accumulation and vice versa).
• Trading process by its design is a negative-sum game. In other words, trading is always a "win-lose" situation and never a "win-win" or "lose-lose" situation.
• Insider trading is not illegal in its entirety and can be easily circumvented!
• Crashes change the players!
• Failing to plan is planing to fail! However, not all decisions are made with checklists - let your instinct and heuristics take over sometimes.

RRRRR

Rate of Return and Risk-Reward Ratio: How many trades you need to earn a pre-defined monthly income? Refresh page to clear the data. Or update inputs and click Submit to re-calculate. ROCE = Return of Capital Employed

Beware of Propaganda and Half-Truths Hidden in News: Broking firms, institutions and individual market experts who cannot sense brewing issues in a particular bank say Yesbank in India or SVB in USA will suddenly turn into a maverick fortune-teller and self-proclaimed expert on entire banking industry and its immediate outlook. Just think the propaganda: An obscure and unknwon bank (SVB) suddenly became the biggest bank failure in USA history! When the price of a share corrects more than 50% from its peak, the so called market expert shall start advising investors to exist. Try to make a chronological history of the buy/sell recommendations by these "market experts" with the spot price of that share and the sheer propaganda to lure retail investors will become clear.

Economic Propaganda: Profit = Plunder - in reality Profit ≠ Plunder, Inequality = Poverty - in reality Inequality ≠ Poverty. Propaganda: Equality of Opportunity = Equality of Outcome, in real life - Equality of Opportunity ≠ Equality of Outcome. Forecasts: verify key assumptions, key variables considered, moeny trails, political and/or institutional affiliation of the group making forecasts. Myth: Governments do not need to repay the debts, they need to only service the debt. In reality, one generation or few consecutive generations of tax-payers have to bear the brunt when government chose to waive off the loans. Myth: Government can raise tax revenue. In reality, governments can only raise tax rates, tax brackets and range of taxable items & services.

Trade Lifecycle of Stocks

1. X number of shares allotted each to A, B, C, D, E investors at price P0. Total shares= 5X
2. A sold it to F at price P1: A's profit/loss = P1 - P0
3. D sold it to G at price P2: D's profit/loss = P2 - P0
4. F sold it to K at price P3: F's profit/loss = P3 - P1

Following entries can be used to calculate delta for up to 5 strike prices for a given spot-price. The default values are: Rate of Interest (ROI) = 5.0% per annum, Implied Volatility = 20 [%] and Dividend Yield = 0 [%]. In order to omit calculation in any row, specify lot size = 0. As an option trader, most of the money is earned through time decay and hence one should try to be delta neutral with only small bias in the anticipated direction of price movement.

In todays [2022] days, most of the brokerage service providers have online tools to calculate Greeks and Margins for options trades. Few screenshots are shared below to show the impact of far OTM covered position on margins required for writing [selling] options.

The example above is for naked option short position and the example below is for covered call position.

Note that a deep In-the-Money [ITM] option has very pool liquidity [not many buyers/sellers are available] and most of the time trade at discount. Hence, carrying forward such position is like an NPA and should not be traded.

Trading Basics

One should know how to place Limit Orders, Stop-loss Orders, Trailing Stop-Loss Orders and Bracket Orders. If a limit order is partially executed, do not modify and re-order. The new modify order will maintain the original quantity and discard the partially executed quantity. For example, you place limit order to buy 10 numbers of a stock, 5 numbers were bought and then modifing that trade will result in total purchase of 10 + 5 = 15 numbers.

If you are used to place naked options, try to make a rule to place orders in pairs. Specify the limit prices 2-3 Rupees higher or lower (as per the order type) so that both the orders get executed instantly. Check the 1 minute or 5 minute chart to ensure prices are not oscillating much on lower timeframes.

Interest Rate Return Table

Following table gives an idea on interest rate and time required for money to double (100% return) and triple (200% return). The information can be used to benchmark the return from an stock market.

Concepts

• Fixed Rate Bonds:-have a coupon that remains constant throughout the life of the bond.
• Floating Rate Bonds: - Coupon rates are reset periodically based on benchmark rate.
• Zero-coupon Bonds no coupons are paid. The bond is issued at a discount to its face value, at which it will be redeemed. There are no intermittent payments of interest.

T-Bill is a money market instrument to finance the short term requirements of the Government of India (GOI). The returns on T-Bill instrument shall be difference between the par value and issue price / traded price. T-Bills are issued at discount in primary auction conducted by Reserve Bank of India (RBI). Negotiated Dealing System - Order Matching (NDS-OM) is a platform provided by RBI to trade T-Bills in secondary market. Yield is the income (return) on an investment usually expressed as a % annual return. Yield can be quoted as Yield to Maturity (YTM) = [Par Value - Market Price] / [Market Price] x 365/[Actual Days] or Discount Yield (DY) = [Par Value - Market Price] / [Par Value] x 360/[Actual Days].

Stock Price Variations

Daily Price Bands

• Group-1: Daily price bands of 2% (either way)
• Group-2: Daily price bands of 5% (either way)
• Group-3: Daily price bands of 10% (either way)
• Group-4: No price bands are applicable on scrips on which derivative products are available. In order to prevent members from entering orders at non-genuine prices (typing or data entry errors) in such securities, the Exchange has fixed operating range of 10%.
• Group-5: Price bands of 20% (either way) on all remaining scrips (including debentures, preference shares...).

Data, Data and Data

NSE IPO list from 1999 to 2015: This spreadsheet contains the issue data and issue price.

FII-FPI trade data: refer to NSDL website at www.fpi.nsdl.co.in/web/Reports/Latest.aspx.

Candlesticks Summary

Candlesticks: Work only at Support / Resistance Level and reflect 'personality' of a stock - back test is a necessity! Long candles = buy/sell pressure, short = consolidation.

Automotive sales data

Probability in trading: We all need to guess the market direction and the impact of news on stock prices. From technical analysis perspective, an "informed guess" is analogous of estimating the probability. A key caveat about 'probability' that it is not probability calculus. Instead, it is the ability to think of uncertainty as a thing that can be quantified at least in principle. This means that we can and should be able talk about uncertainty as if it were a number: numbers can be compared ("is this event more probable than that even") and they can often be measured. Measuring probabilities is difficult and not unique method exists: we usually need many observations about a phenomenon to draw conclusions. However, by systematically collecting data, we can critically evaluate probabilistic statements, and our numbers can sometimes be found to be right or wrong. In other words, the key lesson is that uncertainty is not beyond the scope of rational thinking and discussion, and probability provides a systematic way of doing just that.

Elaboration by example:

We can't conclude that the forecast was wrong based on only single event. The forecast said stock price is going to increase with 70% probability, which means price may drop or increase by lesser percentage with 25% probability or in one out of 4 days. It is reasonable to accept that the day in question was the 1 in 4 event. Concluding that the probability 75% was correct would also be wrong because by the same argument, we could then conclude that 50% chance of price increase by 2% was also correct and both cannot be correct at the same time.

Historical charts of Gold

Historical Price of Brent Crude

Historical data of NIFTY50 stocks and description of some MS-Excel based tools are summarized below.

• PDF: Charting of Technical Indicators
• PDF: Pay-off Diagram for Option Trades

Filters and Scans in Trade Tiger

Scan for stock based on your own pre-defined criteria

• The market direction rarely turns on a dime! It takes lot of time and energy to reverse the direction. Investors are like mules who take lot of pain before admitting defeat!
• Stock market and physics: price is displcement, rate of change of price (ROC) is velocity, moving averages are inertia (mass), indicator like RSI is momentum - combined effect of mass and velocity (index - a train moving at slow / high speed, stocks - a motorcycle moving at slow / high speed).
• Trend is your friend until there is bend in the end! If weekly moving average (inertia or mass) is down, a move on daily chart against this direction may be a trap unless key supply zone or resistance levels are broken decisively.

Technical analysis works, but market does retreat to some levels governed by fundamentals specially earning ratios. Combined "price earning ratio" of the stocks comprising the index is one such variable. In very simple terms, if you get 5% interest on your fixed deposits (FD), the PE ratio of your FD is 100/5 = 20. Similarly, if a stock is trading at 1000 Rupees and it generates profit of 20 Rupees per share in a year, its PE ratio is 1000/20 = 50.

Option Trading

There are only following 8 basic purposes of any option trade. One of these will be appropriate depending upon market conditions.

Greeks

Delta

Gamma

change in option premium = δ × change in stock price + 1/2 × Γ × (change in stock price)²

Theta

It is rate of change of the option price (premium) with respective to the passage of time. Following two tables and charts demonstrates the variation of premium (rather the decay in premium) normalized by difference between spot and strike prices. You may visit this link to calculate theta value for a given condition.

Application of greeks. In practice the interaction or trade-off between these parameters is required to correctly estimate the premium and take benefit of expected change in option price.

• Change in stock prices result in higher value of the option price when gamma is positive and large. This means that when there is no change in stock prices, the value of the option will decline towards the expiration date.
• On the other hand, change in stock prices result in lower option value when gamma is negative and large. This means that when there is no change in stock price, the value of the option will increases towards the expiration and theta is positive.
• Hence, a trade-off between gamma and theta should be worked out so that they can be used as proxy for each other in a delta neutral portfolio.

Type of Shares in US Market

Dirty Money Market

The magic of compounding