Friday, November 2, 2012

How To Get STAGGERING Returns?

Nifty went up for the second successive day today closing 25 points in the green. As mentioned yesterday, there are signs visible that we may not go down further and that the trend might reverse from the bottom made yesterday. Though, a pullback to 5630 was expected even in case of a bearish trend but the fact that it made a high of 5650 and that it even closed above that level of 5630 (closed at 5645 today) makes it look like the trend may have reversed now. If I have any short positions, I should be closing them now and start buying in small quantities. A confirmation that we are in an uptrend will come when the Nifty closes above 5730. We should be looking to fully invest our money at that stage.
A lot of people ask me what stocks have I invested in personally. Well, I do have some holdings but I prefer to put my money where I see good returns. And I find that in commodities. Technical Analysis and your discipline put to work together on leveraged products works wonders. I know some of you would be going - "Oh, Commodities. They are so risky!" Well, I'll explain why people call it risky. Let's take the case of Gold, where the minimum we can buy is 1 kg. and in multiples of that. Gold costing 31000 per 10 grams today means that one kilogram of Gold would cost Rs.31 lakhs. Now that doesn't mean that one has to pay Rs.31 lakhs to buy a kg. of Gold. In derivatives, whether stocks, commodities or currencies, one just has to pay a margin amount. Let's assume that there is a margin of 5% on Gold. In that case one would have to pay Rs.1.55 lakhs to take the position. Lets assume that a week after buying Gold goes up to 31500, thus gaining Rs.500 per 10 grams. That would mean a total profit of Rs.50,000 on a kilogram of Gold. Since the price of a kg. of Gold was Rs.31 lakhs, it translates into a return of 1.62% on the product. But when it comes to return on investment (since you had invested only Rs.1,55,000) it gives you a return of 32.26%. A very good return on investment, indeed. Now, Gold could very well have gone DOWN by Rs.500 which would have meant that you would have lost 32.26% of your money and would have been left with only Rs.1,05,000. Though, the loss on Gold was only 1.62% but you lost 32% of your money. That can be quite costly and quite risky when you put your entire savings to do that. And for the majority of the people, 1.5 lakhs is like their entire savings. But, unlike stocks, there are mini and micro lots available too. For example, Gold Guinea is a lot size of only 8 grams, which means the total product value is Rs.24,800 and a 5% margin on that would be only Rs.1,240 and a Rs.500 drop in the price of Gold would mean you would have lost Rs.400/- only. Still a 32% loss on investment but a lot more affordable. This is where Technical Analysis comes in handy. It ensures, in most cases (if you have good knowledge and experience), that about 70% of your trades turn out to be profitable. And if your rules are good - meaning if you maintain a risk reward ratio of 1:2, which means that for every rupee that is at risk, you are expecting a return of Rs.2 then it means that if you take 1 trade a day, it is about 20 trades a month. A 70% ratio would mean 14 of your trades would work out to be profitable and only 6 to be loss making. A loss of 30% on the losing trades would mean a 180% loss but on the remaining 14 trades you make a profit of 420% meaning a total profit of 240% per month. Of course, you don't gain so heavily because usually I look for about a movement of half a percent (instead of the 1.62% taken in this example) to book my profits. That would still mean a 7% profit on 14 winning trades and 1.5% loss on the 6 losing trades meaning a net profit of about 5% every month or a 60% return per annum. With a little more risk and some luck, it could go up to as high as 8-10% every month. Isn't that good? I would say, it's awesome. And that's where I invest most of my money. I know there is a lot of number crunching in this post and this may even sound confusing to some. But I'm there to help. Do drop me a mail or leave a comment below to let me know that you need help and we'll talk. Yes, I can manage your money on your behalf and we can work out an arrangement. Yes, I know, you will be missing out on the fun and the kick that you get from trading but ultimately, you will be getting what you desire most - MONEY. Please do subscribe to my posts, so that all posts are delivered free to your inbox and you don't miss any useful analysis of the markets in the future. Happy Investing!!!