Bombay Rayon Fashions Ltd

Axis Bank Ltd ("Manager to the Offer") on behalf of AAA United B.V. (the "Acquirer") along with Aktieselskabet af 1/8 2004 ("PAC1") and Ashwell Holding Company Pvt Ltd ("PAC 2"), being the persons acting in concert ("PAC 1", and "PAC 2" are jointly referred to as "PACs"), has informed this Public Announcement ("PA") to the equity shareholders of Bombay Rayon Fashions Ltd ("Target Company"), pursuant to regulation 10 and regulation 12 of, and in compliance with, the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and subsequent amendments thereto (the "SEBI (SAST) Regulations").

The Offer:

The Acquirer along with the PACs are making this Offer under regulations 10 and 12 of the SEBI (SAST) Regulations to the equity shareholders of the Target Company to acquire up to 2,84,20,000 (Two Crore eighty four lacs twenty thousand) Equity Shares, being 20.00% of the Emerging Voting Capital of the Target Company (the "Offer Size") at a price of Rs. 300/- (Rupees Three hundred only) per Equity Share ("Offer Price"), payable in cash, in accordance with the SEBI (SAST) Regulations and subject to the terms and conditions mentioned in the PA and in the letter of offer in accordance with the SEBI (SAST) Regulations (the "Letter of Offer"). The Offer Size of 20.00% of Emerging Voting Capital being 2,84,20,000 (Two Crore eighty four lacs twenty thousand) Equity Shares are reckoned on the basis of Emerging Voting Capital in terms of regulations 21(1) and 21(5) of the SEBI (SAST) Regulations.

Schedule of Activities:

Specified Date - April 29, 2011

Date of Opening of the Offer - May 30, 2011

Date of Closing of the Offer - June 18, 2011

Rammaica India Ltd

Systematix Corporate Services Ltd ("Manager to the Offer"), for and on behalf of Kyner Trading Pvt Ltd and Tien Trading Pvt Ltd ("Acquirers") has issued this Corrigendum to the Public Announcement ("Second Corrigendum") to the shareholders of Rammaica India Ltd ("Target Company"), which is in continuation of & should be read in conjunction with the Public Announcement ("PA") dated January 28, 2011, First Corrigendum dated March 11, 2011 and the Letter of Offer dated March 10, 2011, pursuant to and in compliance with, among others, Regulation 10 and 12 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and subsequent amendments thereto ("Regulations").

The terms used but not defined in this Second Corrigendum shall have the same meanings assigned to them in the original PA.

The Shareholders of the Target Company who are holding their equity shares in electronic / demateralised form shall read para 10.6 in the original PA and para 8.2 of the Letter of Offer related to the Open Offer.

MindTree Ltd

MindTree Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on April 21, 2011, inter alia, to consider the audited financial results of the Company for the quarter and year ended March 31, 2011 and to consider recommendation of final dividends, if any.

Zuari Industries Ltd

Zuari Industries Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on May 09, 2011, to consider the audited accounts for the year ended March 31, 2011 and to consider, recommendation of dividend, if any.

GM Breweries

GM Breweries Ltd has informed BSE that the Board of Directors of the Company at its meeting held on April 07, 2011, inter alia, has recommended a dividend on equity shares @ 25% i.e. Rs. 2.50 /- per equity share.

REVERSAL AND CONTINUATION PRICE PATTERNS

One of the more useful features of chart analysis is the presence of price patterns, which can be classified into different categories and which have predictive value.These patterns reveal the ongoing struggle between the

forces of supply and demand, as seen in the relationship between the various support and resistance levels, and allow the chart reader to gauge which side is winning. Price patterns are broken down into two groups—reversal and continuation patterns. Reversal patterns usually indicate that a trend reversal is taking place. Continuation patterns usually represent temporary pauses in the existing trend.Continuation patterns take less time to form than reversal patterns and usually result in resumption of the original trend.

REVERSAL PATTERNS

The Head and Shoulders

The head and shoulders is the best known and probably the most reliable of the reversal patterns.A head and shoulders top is characterized by three prominent market peaks.The middle peak, or the head, is higher than the two surrounding peaks (the shoulders). A trendline (the neckline) is drawn below the two intervening reaction lows.A close below the neckline completes the pattern and signals an important market reversal (See

Figure 5-1).

Price objectives or targets can be determined by measuring the shapes of the various price patterns.The measuring technique in a topping pattern is to measure the vertical distance from the top of the head to the neckline and to project the distance downward from the point where the neckline is broken.The head and shoulders bottom is the same as the top except that it is turned upside down.

Double and Triple Tops and Bottoms

Another one of the reversal patterns, the triple top or bottom, is a variation of the head and shoulders.The only difference is that the three peaks or troughs in this pattern occur at about the same level. Triple tops or bottoms and the head and shoulders reversal pattern are interpreted in similar fashion and mean essentially the same thing.

Double tops and bottoms (also called M’s and W’s because of their shape) show two prominent peaks or troughs instead of three. A double top is identified by two prominent peaks. The inability of the second peak to move above the first peak is the first sign of weakness. When prices then decline and move under the middle trough, the double top is completed.The measuring technique for the double top is also based on the height of the pattern. The height of the pattern is measured and projected downward from the point where the

trough is broken. The double bottom is the mirror image of the top (See Figures 5-2 and 5-3).

Saucers and Spikes

These two patterns aren’t as common, but are seen enough to warrant discussion.The spike top (also called a V-reversal) pictures a sudden change in trend. What distinguishes the spike from the other reversal patterns is the absence of a transition period,which is sideways price action on the chart constituting topping or bottoming activity. This type of pattern marks a dramatic change in trend with little or no warning (See Figure 5-4).

The saucer, by contrast, reveals an unusually slow shift in trend.Most often seen at bottoms,the saucer pattern represents a slow and more gradual change in trend from down to up.The chart picture resembles a saucer or rounding bottom—hence its name (See Figure 5-5).

CONTINUATION PATTERNS

Triangles

Instead of warning of market reversals, continuation patterns are usually resolved in the direction of the original trend.Triangles are among the most reliable of the continuation patterns. There are three types of triangles that have forecasting value—symmetrical, ascending and descending triangles.Although these patterns sometimes mark price reversals, they usually just represent pauses in the prevailing trend.The symmetrical triangle (also called the coil) is distinguished by sideways activity with prices fluctuating between two converging trendlines.The upper line is declining and the lower line is rising. Such a pattern describes a situation where buying and selling pressure are in balance. Somewhere between the half-way and the three-quarters point in the pattern, measured in calendar time from the left of the pattern to the point where the two lines meet at the right (the apex), the pattern should be resolved by a breakout. In other words, prices will close beyond one of the two converging trendlines (See Figure 5-6).

The ascending triangle has a flat upper line and a rising lower line. Since buyers are more aggressive than sellers, this is usually a bullish pattern (See Figure 5-7).

The descending triangle has a declining upper line and a flat lower line. Since sellers are more aggressive than buyers, this is usually a bearish pattern. The measuring technique for all three triangles is the same.Measure the height of the triangle at the widest point to the left of the pattern and measure that vertical distance from the point where either trendline is broken. While the ascending and descending triangles have a built-in bias,the symmetrical triangle is inherently neutral. Since it is usually a continuation pattern,however, the symmetrical triangle does have forecasting value and implies that the prior trend will be resumed.

Flags and Pennants

These two short-term continuation patterns mark brief pauses, or resting periods, during dynamic market trends. Both are usually preceded by a steep price move (called the pole). In an uptrend, the steep advance pauses to catch its breath and moves sideways for two or three weeks.Then the uptrend continues on its way.The names aptly describe their appearance. The pennant is usually horizontal with two converging trend- lines (like a small symmetrical triangle). The flag resembles a parallelogram that tends to slope against the trend. In an uptrend, therefore, the bull flag has a downward slope; in a downtrend, the bear flag slopes upward. Both patterns are said to “fly at half mast,”meaning that they often occur near the middle of the trend,marking the halfway point in the market move (See Figures 5-8 and 5-9).

In addition to price patterns, there are several other formations that show up on the price charts and that provide the chartist with valuable insights. Among those formations are price gaps, key reversal days, and percentage retracements.

SUPPORT AND RESISTANCE TRENDLINES AND CHANNELS

There are two terms that define the peaks and troughs on the chart.A previous trough usually forms a support level. Support is a level below the market where buying pressure exceeds selling pressure and a decline is halted.Resistance is marked by a previous market peak. Resistance is a level above the market where selling pressure exceeds buying pressure and a rally is halted (See Figure 4-1).

Support and resistance levels reverse roles once they are decisively broken. That is to say, a broken support level under the market becomes a resistance level above the market. A broken resistance level over the market functions as support below the market.The more recently the support or resistance level has been formed,the more power it exerts on subsequent market action.This is because many of the trades that helped

form those support and resistance levels have not been liquidated and are more likely to influence future trading decisions (See Figure 4-2).

The trendline is perhaps the simplest and most valuable tool available to the chartist.An up trendline is a straight line drawn up and to the right, connecting successive rising market bottoms. The line is drawn in such a way that all of the price action is above the trendline.A down trendline is drawn down and to the right, connecting the successive declining market highs. The line is drawn in such a way that all of the price action is

below the trendline. An up trendline, for example, is drawn when at least two rising reaction lows (or troughs) are visible.However, while it takes two points to draw a trendline, a third point is necessary to identify the line as a valid trend line. If prices in an uptrend dip back down to the trendline a third time and bounce off it, a valid up trendline is confirmed (See Figure 4-3).

Trendlines have two major uses.They allow identification of support and resistance levels that can be used, while a market is trending, to initiate new positions. As a rule, the longer a trendline has been in effect and the more times it has been tested, the more significant it becomes.The violation of a trendline is often the best warning of a change in trend.

Channel lines are straight lines that are drawn parallel to basic trendlines. A rising channel line would be drawn above the price action and parallel to the basic trendline (which is below the price action). A declining channel line would be drawn below the price action and parallel to the down trendline (which is above the price action).Markets often trend within these channels.When this is the case,the chartist can use that knowledge to great advantage by knowing in advance where support and resistance are likely to function (See Figure 4-4).

WHAT IS CHART ANALYSIS?

Chart analysis (also called technical analysis) is the study of market action, using price charts, to forecast future price direction. The cornerstone of the technical philosophy is the belief that all of the factors that influence market price—fundamental information, political events, natural disasters, and psychological factors— are quickly discounted in market activity. In other words,the impact of these external factors will quickly show up in some form of price movement, either up or down. Chart analysis, therefore, is simply a short-cut form of fundamental analysis.

Consider the following:A rising price reflects bullish fundamentals, where demand exceeds supply; falling prices would mean that supply exceeds demand, identifying a bearish fundamental situation. These shifts in the fundamental equation cause price changes, which are readily apparent on a price chart. The chartist is quickly able to profit from these price changes without necessarily knowing the specific reasons causing them. The chartist simply reasons that rising prices are indicative of a bullish fundamental situation and that falling prices reflect bearish fundamentals.

Charts Reveal Price Trends

Types of Charts Available

• daily bar chart
• Candlestick charts
• Line charts

 Charts Are Used Primarily to Monitor Trends


Two basic premises of chart analysis are that markets trend and that trends tend to persist. Trend analysis is really what chart analysis is all about.Trends are characterized by a series of peaks and troughs.An uptrend is a series of rising peaks and troughs. A downtrend shows descending peaks and troughs. Finally, trends are usually classified into three categories:major,secondary, and minor.A major trend lasts more than a year;
a secondary trend, from one to three months; and a minor trend, usually a couple of weeks or less.

WHY IS CHART ANALYSIS SO IMPORTANT?

Successful participation in the financial markets virtually demands some mastery of chart analysis. Consider the

fact that all decisions in various markets are based, in one form or another, on a market forecast.Whether the market participant is a short-term trader or long-term investor, price forecasting is usually the first, most important step in the decision making process.To accomplish that task, there are two methods of forecasting available to the market analyst—the fundamental and the technical.

Fundamental analysis is based on the traditional study of supply and demand factors that cause market prices to rise or fall. In financial markets, the fundamentalist would look at such things as corporate earnings, trade deficits, and changes in the money supply.The intention of this approach is to arrive at an estimate of the intrinsic value of a market in order to determine if the market is over- or under-valued.

Technical or chart analysis, by contrast, is based on the study of the market action itself. While fundamental analysis studies the reasons or causes for prices going up or down,technical analysis studies the effect, the price movement itself. That’s where the study of price charts comes in. Chart analysis is extremely useful in the price-forecasting process. Charting can be used by itself with no fundamental input, or in conjunction

with fundamental information.Price forecasting,however, is only the first step in the decision-making process.

Market Timing

The second, and often the more difficult, step is market timing. For short-term traders, minor price moves can have a dramatic impact on trading performance. Therefore, the precise timing of entry and exit points is an indispensable aspect of any market commitment.To put it bluntly, timing is everything in the stock market. For reasons that will soon become apparent, timing is almost purely technical in nature.This being the case, it can be seen that the application of charting principles becomes absolutely essential at some point in the decision making process. Having established its value, let’s take a look at charting theory itself.

The monster exposed

The monster exposed

There are essentially three outcomes to exiting a trade. One, exiting at a profit. Two, exiting at a loss. The shades of grey lie in the third scenario where we consider exiting at a predefined profit, letting our profits run with a trailing stop loss and exiting at the stop loss level. It is in these areas that traders have the most problems. 

Let's deal first with that nasty thingy called “loss”. Let us try and understand the nature of this monster.

Even God can't help you here

Wouldn't it be great if you did not have to ever take losses on your trades? Well, there is one person we know who never had to take a loss on the market at all. God. Unfortunately, we don't know how he does it. And we never will. 

Oh yes! We did ask him, when we took a few phone calls from panicky traders a couple of weeks ago. Desperate souls with quavering voices and sweaty palms holding huge loss-making positions and not knowing what to do with them. (Have you ever heard a trader with a profit speak shakily?) At that point, we picked up the hotline to heaven and dialed the magic number. And the answer we got was always the same. It's too late. 

God didn't tell us his fail-proof strategy. What he did instead was to give us lesser mortals a computer and the option of cutting our losses. So here we are, taking the circuitous route of covering the whys, whats and hows of “stop losses” in detail.

Some ugly truths about the stock market

Having decided to make a living trading equities, it would do us good to step back a little and look at the kind of animal we are dealing with: the stock market. 

There is no way of predicting what the market will or will not react to or how it will react: From genuine earnings surprises to rumours of income tax raids on the big brokers, from the Nasdaq to the Prime Minister's knee problem, from FII buying to the overthrowing of the Fiji government, there is nothing that the market doesn't take a view on. 

One of Murphy's laws is, “If anything can go wrong, it will.” This is one of the inescapable realities of life and markets. What's more, the market has the annoying habit of reacting to just about anything, anyway. More often than not, the market will react to events that have very little significance in the long run. But such events, which would be the tiniest blips in the scale of time, would have moved the markets sufficiently to wipe you out of home and hearth. 

A trade made based on the strongest tip or the best research is just as likely to go wrong (or right) as the one picked by an anteater poring over the stock pages:

The market does have its own logic. A logic that is a messy amalgam of the opinions of trillions of people. You could try fundamentals, technicals, techno-fundamentals, financial astrology, tealeaf reading and tarot cards, but the market will do what it will. You would be a genius to be reading it right more often than not. 

Losses are as integral a part of trading in equities as profits: Since markets are so unpredictable, you have to live with the truth that, just as sure as sunrise, there will be trades on which you will take losses. Like we said earlier, only God doesn't lose money on his trades. (Incidentally, we are of the firm belief that the good Lord is the greatest Punter of them all. He created the world, put man and woman in it and then went short on mankind. He is yet to cover his position. Looking at the mess we are in, it is unlikely that he will for a long time.)

Why a stop loss strategy at all?

What comes through from all this is just one thing: Markets are unpredictable and the only, repeat only, way to protect yourself against the market's unpredictability is to use stop losses. 

Most importantly, if you wish to make a living out of trading on the stock markets, you cannot afford to lose large portions of money on every trade and still hope to stay in business for the long haul. The market has effortlessly emptied the deepest pockets, simply because there was no strategy to protect capital. 

Look at it this way. Putting in a stop loss is not a sign of lack of conviction in your trade. It is a sign of lack of conviction in the mood of the market.

Trading is war

Try thinking of trading in equities as going to war and of every trade as an attack. It's okay to lose an occasional skirmish, but the objective is to win the battle. And that would be possible only if you, having aborted your attack, are able to come back again the next day and launch the next one. You have to stay in the game. You have to be alive to be able to come back and fight another day. And the only way you can be alivethe next day and not be a faceless statistic in the annals of history, is if you have a stop loss protecting your capital from major erosion.

Lose the battle but win the war

The stop loss is the point at which you decide that a particular attack has failed. The point at which you retreat from the battlefield with your capital intact, nurse your wounds, recuperate and watch the market for the next opportunity. 

Without a strategy for cutting losses, you run the risk of losing so much on every trade that you are a financial and emotional disaster before the first week is over. You, in effect, martyr yourself trying to win the war of stock trading without arming yourself with a survival kit. They may declare a national holiday in your honour, but that is not going to do your bank balance any good.

ZZZZZZ...

OK. We have now come to a point when we realise that if we go any further we run the risk of you falling asleep at your terminals. You have taken a peek at the dark side of the market and understood why you need a stop loss to protect yourself from the market's mood swings. Now pick up Sharekhan’s Smart Charts, which presents the best positional trading calls in the market today. Each call is introduced along with a recommendation (Go Long/Go Short), a price target, a stop loss and a chart depicting the trend in the stock. Log in to your trading account with Sharekhan now and start trading. Check the monthly performance of Smart Charts here. If day trading is what excites you, take your pick from Sharekhan’s Day Trader’s HIT List now

Why bother protecting profits?

Why bother protecting profits?

How is anyone supposed to answer the question "why bother protecting profits?" The answers are so obvious. And “elementary”, as Holmes would say. Still you would be amazed how often traders allow their profit making positions to turn cancerous. 
Au contraire 
The market abounds with seemingly contrary adages. Someone exhorts you to “cut your losses and let your profits run” while someone else warns you to “never let a profit turn into a loss.” Someone else wisely advises, “Nobody lost money booking profits.” Leaves a trader quite puzzled about what to do.

It's simple, really. The one way to reconcile these sound but contradictory homilies is through the use of a protective stop loss. How is a stop loss different from a protective stop loss? While a stop loss is used to control your absolute losses in the context of the reward that is expected from the trade, a protective stop loss is used to ensure that the rewards that accrue from a trade are protected. 

There are two ways of taking a profit. One is to set a pre-defined profit taking target and exit the position at that level. The biggest drawback of this strategy is that if the trade has more profits to offer than what you have taken with a pre-defined profit target, you would not be in a position to capitalise on it. The only way to make the most of what the market has to offer, the only way to “...let your profits run...” is by using a protective stop loss. 
Taken for a ride! 
The other drawback of using a pre-defined profit target is that the stock may never make it as far as the profit target at all, despite making lower profits! Most of us lose money on our trades not because we don't see profits, but because we don't know how to protect our winnings. Our favourite analogy to describe the situation is that we get on to the notorious Mumbai local at Vashi with a ticket for Chatrapati Shivaji Terminus (VT to those who don't believe in being politically correct). But unfortunately, the train reverses at Wadala and by the time we get off, the train is at Panvel! 

Often trades that start making money will fall short of the reward expectations. If we used only an original un-updated stop loss to protect us, it is very likely that not only will our profits erode but the stock will also move down to change a profit making trade into a loss making one, as we watch helplessly. 

While the original stop loss is good enough to make sure we don't lose more money than we intend to, the protective stop loss (which is essentially the original stop loss updated to protect some portion of profits) will make sure we take home at least some of the profits that we have fought so hard to make. 
Profits can be so elusive 
The protective stop is also the answer to the trader's quintessential dilemma of when to book profits. Get out too early and you may miss the bulk of the move. Don't get out early enough and you may end up giving a large portion of your profits back to the market. (And you thought taking profits would be a relatively painless process!) 

So which is the best time to exit a profit making trade? When you have made enough money? (Can someone please explain this elusive concept of "enough money"?) Or is it when your friend who gave you the tip, sells his position? (We would treat that friend like a prince, because that's what he is. Most tip-giving friends usually don't bother to tell you when to sell. Unless it is a week after they have sold, when the stock is trading 20% below its current peak!)
A protective stop loss puts the decision right into the hands of the ultimate arbiter, the market itself. It allows us to let the market decide when we have to exit a profitable position. If the market, in all its benevolence, feels like we deserve more profits than what we wanted in the first place, the protective stop loss makes sure we are there to receive the largesse. 

If the market, in all its spitefulness, decides we don't deserve the ambitious profit targets we have set for ourselves, the protective stop loss will allow us to get out with most of the gains we have made. At the very least, it ensures that we don't incur losses that erode our precious trading capital. 

If you want to experience all this first hand, pick up Sharekhan’s Day Trader’s HIT List, which captures the trading ranges of all the stocks that are currently the market’s flavour. This product is meant for day trading and all positions need to be squared off by 3.30pm. The list contains 20 liquid stocks.

Trade well!

Taming the beast

Taming the beast

Everyone knows about the unpredictability of the markets. Everyone knows that using stop losses is an effective method of dealing with uncertainty. Despite this, we also seriously doubt if most traders use stop losses. Why? It’s not because they don't realise the perils of trading without one. It is not because they find the arithmetic of setting a stop loss so difficult that they can't figure it out. It is just that they can't get themselves to do it.

Stop loss is not a four-letter word

We remember the time when we advocated the use of stop losses to a stock market veteran. He was quite upset that we were talking about losses even before putting the trade on. “Shubh shubh bolo,” he had admonished us.

Most traders relate to stop losses as being something negative and pessimistic. Frankly, we don't see why. We don't know of anyone who burnt his or her tongue screaming “Fire”. But we do know plenty who are thankful for their foresight in buying a fire extinguisher. Like we said earlier, using a stop loss is not a sign of your lack of conviction in the trade. It is a sign of lack of conviction in the mood of the market.

A “mental” stop loss is no stop loss

The one thing you must know for certain before you put out a trade is what your cut loss level is going to be. And you must put this figure in at the time of entering the trade. You must actually key in the trigger and stop loss levels. A “mental” stop loss rarely works.

The value of this method is easy to see. First, you clearly define at the outset the loss you are willing to take on that trade. Second, you set the process of defining risk in motion while you are feeling calm and unthreatened by the market. This way, you have the advantage of a logical and rational mindset when you define your stop loss beforehand.

But once the trade has been initiated, this mindset is very difficult to achieve. Once you have a position in the market, you no longer control the fate of your trade. The market does. And when you are sitting in front of the trading terminal, you are reacting (and not acting) on the spur of the moment to the market's every move. That is no the frame of mind to take rational decisions in. Hope, fear, anger, joy, disappointment, greed--a variety of such emotions--stand in the way of your efficiently executing a stop loss and getting out of the trade before getting burnt.

So how is a stop loss set?

The simplest way of setting a stop loss is by deciding how much, in absolute terms, you are willing to lose before the trade is put on. And squaring off the trade when you have lost that amount. Though it may sound simple, traders find it the most difficult to implement. How does one decide how much one is willing to lose?

The risk-reward ratio

The most efficient way of setting your stop loss is by setting it in relation to how much is sought to be made on the trade. You will agree that a trade that offers a gain of 10% with a risk of losing 10% is not worth looking at. Why? Because, to start with, every trade already has a 50:50 chance of going right or wrong. The risk-reward equation of 10% either way does not improve these odds substantially. But if the same trade offered a gain of 10% with the risk of losing 2.5%, then the trade would make sense to you. Because this way the odds are stacked in your favour. The probability of making 4 times the amount lost is built into this equation.

So then, the most efficient way of setting the stop loss level is to estimate the amount of profit potential in the trade and then divide the figure by four. This, when subtracted from the initiation price in the case of a long trade, will give you the level below which the trade must be exited.

Illustrating the risk-reward ratio

Assume that stock X is trading at Rs200 and you have reason to believe it will move up to Rs300. The way to trade this call would be to put a stop loss at Rs160. How? The minimum profit expected equals Rs100 (Rs300 less Rs200 equals Rs100). This divided by 2.5 gives Rs40. This when subtracted from the current market price of Rs200 will give the stop loss level of Rs160. That is, 200-((300-200)/2.5).

If, on the other hand, you expected the price of stock X to halve, then you would go about shorting it with a stop loss at 240. Again 200+((200-100)/2.5).

Remember that what is important is only the relationship between the risk and reward. The absolute numbers do not matter. So if there is a trade that you think can earn you 40%, work with a stop loss level of 8-10% below the current price by all means.

Three weeks in a trader's life

Let's take some examples. Suppose you make 10 calls a week. How much money do you lose if you used the 1:2.5 risk-reward ratio?

.	Average week		Bad week		Horrible week
No of trades that made money	6 out of 10		4 out of 10		Only 3 out of 10
% gain on winning trades	6 * 2.5%	15%	4 * 2.5%	10%	3 * 2.5%	7.5%
%  loss on  bad trades	4 * 1.0%	4%	6 * 1.0 %	6%	7 * 1.0%	7.0%
Net gain/loss	-	+11%	-	4%	-	0.5% J

Look at the performance in the horrible week. A net gain of 0.50%. Certainly nothing to write home about. But the point to be noted here is that by using a stop loss you have managed to protect your capital and keep it intact!
The brilliance of this strategy is not only the risk-reward ratio, but also the leeway it provides you to control losses. You are guaranteed to make losses on some of your trades. And you don't need a second opinion on that. The objective in stock trading is not to make money on every trade (again one has to look to the skies for a method of doing that), but to make money consistently.

I've lost more times than I've won. I am good!

There have been many successful traders who claimed that the number of bad trades actually outnumbered the ones that made money for them. But, net-net, they still made money because they had no large losses and a few big profit trades.

We always thought these claims were a bit exaggerated. Till we worked out the arithmetic ourselves and realised that it need not be so. If a successful trader claims his losses actually outnumber his gains, but that he makes money overall, we have no good reason of accusing him of exaggeration. But we still believe a good trader should make at least as many gaining calls as losing calls.

In order to make more gaining calls than losing calls, follow Sharekhan technical team’s advice to a T. For day trading, use Sharekhan trading product, Day Trader’s HIT List, which captures the trading ranges of all the stocks that are currently the market’s flavour. The positions need to be squared off by 3.30pm. The list contains 20 liquid stocks. Pick up your List now and log in to your trading account to begin making gaining calls

Ups and downs of leveraging

Ups and downs of leveraging

"...panic unwinding of margin trading positions led to the 1987 crash on Wall Street..."

"...excess leveraging has led to the creation of a bubble in the market...."

"...SEBI imposes higher volatility margins..."

What is leveraging? What is margin trading? How do these exaggerate market movements?

"Give me a place to stand on, and I can move the earth"? Archimedes, the great Greek philosopher, was confident of achieving this because he had realised the power of leverage--the action of a lever. A lever is a simple mechanical device that rests on a pivot and helps lift a heavy load with minimum effort.

What is the connection with finance?

Companies borrow capital (debt) to enhance return on equity. The expectation of companies is that they would be able to get more returns than their cost of debt and hence improve the return on equity.

How does leveraging work in the securities markets?

Just like companies, security market participants believe that if they can earn higher returns than their cost of borrowing, they will be able to boost their returns on capital. Hence, leveraging in the securities market refers to money borrowed to cover part of the cost of purchase of a security. In our context, security stands for stocks.

Did you say part of the cost?

Yes. Remember that companies start with equity capital for their business before borrowing to leverage that equity capital. Similarly, stock market participants have to bear part of the cost that covers their commitment. In stock market language, the upfront money that the participants pay is called “margin”. The balance is borrowed at a certain cost.

How does it help?

Let us take a simple example. Assume you figured out that XYZ would go up by 15% next week. You have Rs110,000 at your disposal. If the closing price of the stock is Rs11,000, you will be able to buy ten shares. In case the stock does move up by 15%, you will end up with stock worth Rs126,500 (Table 1: Case A). 

Now, imagine if somebody offered to finance your purchase on the condition that you pay up 20% of the value as margin and pay him a borrowing cost of 0.25% per week. Taking Rs110,000 as your 20% contribution, the lender would be ready to fund you to the tune of Rs440,000.

Then, you could actually take a position in the stock worth Rs550,000. In other words, you could buy 50 shares of XYZ. Now assume that the stock gained 15%. You sell your shares for Rs632,500. After you repay Rs440,000, the borrowed money, and the interest of Rs1,100, you are left with Rs191,400. Adjust it for the capital that you placed as margin money. Lo! Behold! You have a profit of Rs81,400 or a return of 74% in one week! Look at what leveraging can do for you. (Table 1: Case B).

	15% Price rise		15% Price fall
	Case A	Case B	Case A	Case B
Capital	110,000	110,000	110,000	110,000
Borrowing	0	440,000	0	440,000
XYZ
Purchase value	110,000	550,000	110,000	550,000
Realised value	126,500	632,500	93,500	467,500
Cost of borrowing	0	1,100	0	1,100
Profit	16,500	81,400	-16,500	-83,600
RoI (%)	15.0	74.0	-15.0	-76.0

What if the stock falls?

A good question indeed. Let us rework the profits in the event the price falls by 15% instead of going up 15% in the period under review. The 50 shares of XYZ will be worth Rs467,500. After repaying Rs441,100 to the lender, you would be left with Rs26,500. In other words, a loss of Rs83,500 or minus 76% in one week! It can almost wipe your entire capital. If you had not leveraged, you would have lost only 15%. (Table 1)

So, how does the lender protect himself?

The lender runs a big risk of the borrower defaulting. Hence, he normally increases the “margin” requirement to compensate for the decline in market prices in order to protect his capital.

A double-edged sword

Leveraging is a double-edged sword. You can expect phenomenal returns despite taking on a fixed cost if your instinct is right and the market plays itself out according to your expectations. But if it does not, the results could be catastrophic.

If margin trading is your scene, here are some good stocks you could bet on. Sharekhan’s Stock Ideas presents our best stock picks in the market today. The investment ideas come with a price target and a time frame over which gains can be materialised. Happy investing