What is Swing Trading?
Hello, we are back with episode 8th of the basics of trading with Prateek and me. Let's take a look at what we learned in the last episode. We discussed different styles of trading.
We also learned about trading styles based on various instruments and different time frame. And in this episode we will finally start building our own trading system. First step would be to define the strategy hypothesis, and eventually we'll discuss the basics of risk management and position sizing, but before we start, you know the drill, hit that like button and leave a comment saying Prateek Sir. I'm sure it will make him blush, but more importantly it will tell the algorithm to recommend this video to more people. On that note, enjoy the episode.
Episode 8th. Welcome, welcome. Tell me, what you wanna learn today Tanmay.
I want to start trading. I just want to double my money in 21 days. Come on, you can’t believe now.
Not at this point. Now it feels like even if I want to, I won’t be able to. So okay, let us, you probably can, but you probably lose everything on the 23rd day.
Yeah may be. Yeah. Okay, so question before we build our system right and we're going to build it in this episode. As promised, one question if you had to choose one team that would win in cricket, Australia or Bermuda? Bermuda team. Which team do you think, I would support India.
Okay ohh man. Okay I think, Australia, obviously. So why would you choose Australia? Because it just won 6 world cups, it’s the greatest team that's ever played. That's it? All those reasons, their track record is amazing. Exactly right, could Bermuda win maybe but it's unlikely to win.
Yeah. Correct. Now let's take another example, if you have to choose between two stocks. Yes bank which fell a lot and is really cheap or Asian paints, which has been moving up for decades now. Correct.
If you look at the chart of Asian paints every three years or so it makes a new high. Now, we don't know whether it will continue to do so, but it has in the past. Okay. It's slow, not very exciting but it's been moving up for a long time, which would you pick if you had to pick one? Dude, say the right answer.
Asian Paints is well, a bit boring, Yes Bank is cheaper, is your answer Yes Bank? No, I wanna pick Asian paints, but maybe there's some money to be made in the Yes Bank also. Okay but choose one. Okay, I'll pick Asian paints. So now let's look at some other stocks which have moved up like this and try to draw the traits of stocks that move like this. And then let's make that part of our system, with just observing.
Got it. There are three parts to any system, and maybe we should write this down right. So what are the parts of a system.
Every system has this. The first is observation. You're observing something interesting and you say, yeah, I think this happens in the market, history repeats itself. This is what happens.
The second thing is risk management. Risk management. And then last, there is position sizing.
Let's not worry about what these things are. But these three things basically form a good system, and we'll be able to measure them. Got it. Alright, so let's look at a few examples.
So let's do a foreign stock today. Okay, people who are watching, they probably also use the product Netflix. Of course.
So Netflix, what does Netflix look like over the long term, look at that right. Look at that. Wow, look at that. Can you see this. Okay, I’ll just replay that again. Okay, so the stock was 50 cents.
And also he's noticed that hammer right there. Cool, after hammer, it went up. Now all I'm going to do is just zoom out and this is 2003. Yeah. Just look at it and tell me what do you notice in this stock, okay, I just keep scrolling ahead in time. All time high fell, fell, fell, all time high.
What's the price now? Is $50 plus. That's crazy right. So 100x in 10 years.
All time high, another all time high. What's the price by the way? It's $400. That's crazy right.
5 billion x. Okay, let's keep going. Another all time high. What's the price now? At $600. Now it’s embarrassing, it was 50 cents at first and look at it now.
So that's where it is right now. What do you notice, what's your market observation on this particular stock. It just keeps hitting all time high. Correct. Every, every couple of years. Yeah, and does it feel expensive? It could be, but it’s going to get more expensive with time. It's all relative.
Right. At one time, it's all time high was like five bucks. Let's see another example. Let’s see Amazon, okay. Okay, same thing I'm gonna open a monthly chart. Tanmay what's the price of Amazon, what was the lowest price you see over here? 0.
$1. Yeah, correct. And what's the highest prices you see over here? $24. Yeah. Correct.
It's now, $110 now. That was crazy right? Yeah. Like in a year. Yeah, like a year so this was the tech bubble.
The tech Bubble, 98.com Bubble. .com bubble n 2008 it crashed. And then it fell. Fell down to half, half of it right so, 50% gone.
And then nothing's happening. All time high, all time high. What's the price now? $240.
We started at $2 right. Yeah. All time high. What's the price now? It's $850. That's crazy right from $2 to 800, could anyone have predicted this? The guy who held on for 20 years. He can claim to, I had forgotten, but no one could have predicted it, but you could have followed price perhaps.
What's the price now? It's $1600. What do you think about what's happening over here, any market observation. I think it's very sad that I don't have any Amazon stock. What's the price now? It’s $3000+. $3500. So now I'm gonna ask you, do you think this stock is expensive? It's expensive now compared to a lot of other stocks.
Yeah. But in 20 years it will seem cheap as fuck. That's okay, fine. Let's do one more example and then write the observation down.
So, Pidilite is a good example, there are a lot more but let's just go with one Pidilite. All right, so this is in rupees, not dollars. So what's the lowest and highest prices you will hear. Lowest is 7and half rupees. Perfect. And the highest is 45 rupees.
Let's go. And this is 2002, all time high, now it is 48. Perfect. Where did you start, what was the lowest? Rs.7.5.
Now it’s at Rs.60. Now it’s 100, 110, 170, 270, 570. That’s a high jump.
Wow. Things getting interesting, it's only 2015. Rs, 700, 1000, near 1500. Wow.
It feels expensive now, so now it's trading at almost 2000 rupees. Jeez it’s at all-time high right now. So let's assume we want such stocks in our on our, on our platform on our portfolio. So, what will be the traits of these stocks, what's your observation, they will do what? They will consistently hit all time highs regularly.
Right. Like, very rarely do we see a downtrend like maybe, with Amazon, there was a black swan event like 50% follow Yeah 90%. Yeah, they very rarely do they see those kind of those kind of falls. So that's one observation. Perfect.
Now can you translate that observation, into a buy rule. It should be quantitative. When this happens, I’ll do this. What can that be? When price does this, I will buy. Yeah, whenever it hits a dip.
Okay a dip. You just buy it if you think this company is going to. Got it.
But all stocks were to hit a dip, then Yes Bank would come too. Correct. So, what can we do so that Yes Bank won’t appear, but Pidilite will? What does Asian paints and Pidilite do that Yes bank doesn't. Make all time highs regularly.
Correct. Just make new highs regularly. Okay, so maybe that's our first observation. All time high is interesting I'll modify this a bit.
Let's say 52 week high. 52 weeks, meaning last 1-year highs. So they have one all time high every year.
I mean, all time could be like, 10 years ago it touched a thousand and now it’s 1001, so all time high could, it could be too long, so 52 week high, it's making highs in momentum. So 52 week high can we have first, this is something that they consistently do every year they have agreed right. We agreed right.
52 highs just means that you close higher than what you began the year. Yes, that what it basically do. And it's running. Yeah, so, elaborate it more. 52 week high means what? It has a high in 52 weeks. So let's suppose we have one bar, that is a week long.
Opened on Monday and closed on Friday. The last 52 similar bars will become 1 year. As soon as a bar crosses the last 52 weeks’ range. That's a 52 week high. That's it. So as soon as a stock is higher than the last 52 weeks that we say okay, we want to buy this stock.
We will check 52 weeks high every day. So now the next day, we will drop the last day and now mention this, then as we mentioned we'll scan for 52 weeks, every day, and we'll drop that first day and then we'll add today and we'll add today and running. So you're not looking at calendar, you’re not looking January to December, it’s running. If today’s 1st April, then the range between the last 1st April and today’s 1st April, did today make a new high? Okay.
Got it, right. So you're checking it every single day. Okay, so if I buy at a 52 week high. That's it then I'm gonna make money anyway because it's got, got momentum right. But it's got momentum. Yes.
Let me move this. But there's another thing right, it will not always work. Obviously. Obviously.
Obviously sometimes it will break up. So, this is the main part of the system what I'm gonna say, so please make sure that you like, ingrain it in your mind. Okay, and this is called accuracy, okay, I'm going to write this here. Actually accuracy win loss ratio. They have different names, but accuracy is basically this, that how many, when you take 10 trades, the number of trades that will be profitable and the number of trades that won’t be profitable. Generally accuracy is 50%.
50%. You’re right half of the time and half will be losses. This actually doesn't make sense, right. So let's suppose you have a system, let's right here. You have a system that is accuracy, that's the wrong spelling, but okay.
Accuracy of 50%, and you get 10 trades, at first you earn Rs.100, now there's 3,4,5 trades. And here are the losses. So, what is the net profit? It’s 0. This is a problem right, yeah, so you need to make more profit then. Exactly. Basically make more profit, and that solves everything right.
So now if you change this to, I'm gonna change the number to say 400. So you made profit 400 on each profitable trade, and each trade you lost only 100. So accuracy is 50%. Correct. The ratio of this profit & loss is called risk reward ratio.
Okay And I’ll write that here. This is your risk and your reward is much higher. Ratio , and this is 1:2 or 1:3 is fine, this is 1:4, it’s a little high, normally you don’t make it that higher.
1:2 or 1:3 for a trading system is great. Right, so this should look something like minus 100 plus 200. Got it.
Got it. So this is your risk management, all of this is your risk management. Understood. And also your position sizing comes under this. So your net. So your net pay over here is 1500 minus brokerage, minus STD, minus all the taxes, minus slippage.
Tanmay, let’s do one thing. Based on whatever we've learned, it comes down to this point where we’re making the system right. System System System System System. Finally, oh my God. But it's worth it.
Right. I think it has changed over. I think you need to know everything so far, to make a sound decision.
Correct. Nice. So, this is the, these are the rules to make a sound decision. Correct. Nice. So, this is the, these are the rules.
Okay, that we are going to make up right now. We don't know whether these rules make money. Correct, we don't know. So we have to test the system. Right now, we’re writing what to test based on simple logic. So what I'll do is I'll write the thing here, we'll discuss and you tell me the rule.
Okay, let’s do that. Okay, okay. So, first is, I'll tell you, we will, I just tell you this, we're trading the NSC 100.
This is a list of companies that we’ll trade. These are already large cap companies, so we won’t have small companies. So your trade is safe.
So basically, we have already filtered out the bad companies, right? If they're in the top 100, they'll be good. They'll be good. So the first thing will be like what's your observation. Actually you know this is not observation, this is like a buy entry. So I’ll change this.
I'll change this to, what's your buy entry. So what's your buy rule. Let’s discuss a bit and then you fill it up. What's your buy rule? What can be a buy rule? That the stock has, should have hit a 52 week high. Correct, and then you'll buy it, and then I'll buy it. Now this is a weekly chart.
So you want to wait for the candle to complete. When does the candle of a weekly chart complete? Friday afternoon 3:30 right. So at 3pm, yeah, you can place the buy order. So over here you can write 52 week high. 52 week high. Okay fine, and then give us a buy time.
Friday 3:30. Okay, let's change, because 330 market closes, let's make it 3pm. 3pm. Makes sense right Friday 3pm.
Excellent. This is our buy rule. When any stock in NSE 100, hits a 52 week high on Friday 3 o'clock we will buy it.
This is a specific right. Right. One of the NSC top 100 stocks that hits a, that hits a, all time high 52 week highs, that an NSC top 100 stocks that hits a 52 week high on a Friday by 3pm.
The other thing we need, the stock can also fall, 50% of the time though we know a system doesn't do well. So let's do stop loss. Now where will you place stop loss? What do you think is a good number, we can randomly pick any number. Yeah but what’s like, you don't want me to say 10%, because when you're selling, 10% volatility is too little right? Yeah exactly it's too little. That amount of movement is bound to happen.
So I think, and you don’t wanna do it half also because if it falls by half it's a lot. Yeah, it’s a lot. So anything in the middle, yeah, whatever in the middle 25-30. Okay, let’s do 30. Okay 30% is also good.
Okay, yeah, you could have selected anything. Now is the rule part, stop loss occurs here. Now your target. This is your profit target.
Correct. Right, it should be double right, at least 60%. Oh, perfect. Yeah.
It should be more than the loss. It should be 60 or 90, because you must have the ratio of 1:2 or 1:3. Otherwise it won’t work.
Okay, there is another thing is, when you're trading say, Netflix right, and you've bought it here and it's going up, your stop loss is just here, it’s just 30%. Correct. And let's say the target is somewhere here. And then it falls from here, then you almost made 60%. Yeah.
Maybe 59 then it felt. Wouldn't it be cool if we could move the stop loss, as in when it's going up right. So some rule to like, move the stop loss. So I'll right, it's called a trailing stop loss.
So, as you make more profits, you're moving as you're moving the stop loss, to protect your profit. Correct. And you’ll also feel secure that even if it falls you’ll make something. So there should be some rule for that as well.
We bought based on 52 weeks high, so to how many bars should your trailing stop loss be set? So you can say, 10 bars, I'd like to trail my stop loss every time it moves ahead. Every 10 weeks you'll, you'll pick a number here and say. 10 weeks sounds good. So let's do 10 weeks.
So, you have 10 weeks trailing stop loss, and it will keep moving every 10 weeks. If it doesn’t hit, cool, it’ll keep moving every 10 weeks. Also, the last thing over here is number, Nos Pos, which is number of positions. You have, you can't trade 100 stocks right.
There are 100 NSE stocks, you can't obviously trade all of them. You can't trade only three. So what's a good portfolio size. What do you think is a good portfolio and I'll tell you the answer or anything is a good portfolio size. 10 is a good number. 10 is a good number, 15 is a good number, 20-25 is a good number for this.
For this let's assume it's 20. Okay, that’s where you start with, so let's put 20. Okay let's put 20. Okay, last thing, how long should I test this? Last one month, no let’s make it longer, 2 years, 20 years. We just have to click a button! I had told in the beginning it’s 20 years, you knew the answer to this. 20 years test.
If you made these, if you made this trade for the last 20 years. Would you have made money or not? Correct. If this logic was running every single day for the last 20 years.
Entry Exit Entry Exit Entry Exit. Would you have made money over 20 years. So it's not buying and then leaving it. Correct. You're actually enter exit enter exit over a long period of time so this logic has to hold true. Correct.
So Tanmay it's quiz time. Oh my god. This is gonna be tough, I won't lie, okay. Okay, so these numbers.
Yeah. Excited? No. Good at math? I was good at math. Oh, you were. Yeah, yeah, you should be okay then. What's a system, bro? I’ll just send you a YouTube link of the last eight episodes.
Okay, cool. Let's do this again. What's this NSE 100? NSE 100, is the top 100 companies with the most market cap on the national stock exchange. Yeah. If we are trying to find stocks which are going to do well in the long term, just go with the companies that have already done well in the last few decades.
Nice. That's our sample pool where we'll pick the stocks from. Exactly, our universe. Yes. The other thing is, every system has an accuracy rate, what is accuracy? Accuracy is your win loss ratio, essentially, which is how often were you accurate and when you were accurate did you make more money, than when you were not accurate.
Yeah. So, accuracy rates, like it says that we should ideally at least have a 50% accuracy rate. But if I'm a genius, then why can’t I have a higher accuracy, it’s possible, right. Right. Next question.
What is risk reward ratio and why is it important? The risk reward ratio is simple, you need more reward than the risk you’re taking. If your reward is Rs.400, you can risk Rs.100 risk. But, if your reward is Rs.50, then there’s no use of risking Rs.200. Avoid those kinds of things.
Perfect. What next. Stop loss is shown as 30%, if you know your stop loss is 30% how do you decide a target? It’s the continuation of the previous question. Same, if you are taking 30% risk, then you must get 60% reward.
You can aim for 90% too, you should at least have 1:2 or 1:3 on a one ratio. Makes sense. I will ask a googly question now, we did not discuss this. Oh out of syllabus question. If accuracy is 50%, then that means, out of 10 trades, 5 is profitable, 5 is loss making. So, imagine you took 8 trades.
All 8 are losses. What does that mean? That means you need to take 16 trades. That's actually the right answer. I know, it doesn't mean that for 50% accuracy, out if 10 trades 5 will surely make profits.
Correct. You could get consecutive 10 loss trades. Yeah, so that means you can't judge your trades over a week or two weeks you’ve to judge over quarter or maybe six months, like your system. Over a quarter. Correct. Got it.
That is not that tough man, I wasn't that tough. I think you're getting pretty good at this. Yeah, I have to think more. My accuracy rate is gonna be 150%.
I am gonna be right more often than possible. Color doesn't match. Also the math doesn't make sense.
So, that’s it man I think. Oh you know what, I have to teach trailing stop loss. F*&# you. Let's let's understand this. Trailing stop loss, look when you.
Okay so trailing stop loss is very simple, right. When your profit is increasing, you shouldn't ever reach a point where you could lose it all. So ideally your stop loss should also keep increasing right. If your stop loss is here, you have told the system to sell the stock at this price, and your price has doubled, then why are you taking such high risk? Increase your stop loss. So if your stock moves from 50 to 150, and if initially your stop loss was at Rs.40,
Now if stock is at 150 and falls to 30 the next day, and you sold at 40, then you lose a lot there. you can set your stop loss at Rs.70, So that you can sell it as soon as it falls below 150, at 70. You save Rs.30. Correct. That's correct. I know. Okay guys, see you on the next episode with just me.
Not cool. So, let’s test this, sounds good. We’ll code this, and I'll open an app, press a button to backtest. We're ready.
We're ready to do the test can we. But, you know the drill. I hate you. This will happen in the next episode. See you guys on the next episode.
But before we go just want to remind you guys that these are the rules of positional trading strategy. If you want to learn more about other kinds of strategies like intraday strategy or a futures and options strategy, go check out LearnApp.com. They have 30 plus system courses which have the hypothesis, backtest and real time execution. The link in the description will get you two months of extra free access. And of course while trading you can analyze your stocks fundamentals and history in depth all thanks to Ticker Tape.
Check out Ticker Tape, link in the description. And before you begin trading one must have a D-mat account. So open your own D-mat account all these links are available in the pinned comments. Coming up next....