CHAPTER 1

Orientation note

1.1 – A unique opportunity

I’m excited about this brand new module on Varsity, wherein we will be discussing two important and closely related market topics – ‘Risk Management and Trading Psychology’. While risk management may seem straightforward, ‘psychology’ may sound boring. Trust me; both these topics can potentially open up new realms of trading. Risk management, for instance, is not what you are thinking – it goes beyond the usual topics of position sizing, stop loss and leverage. While trading psychology is a reflection of your actions in the markets – helps you introspect and find answers to why and how you made a profit or a loss in a particular trade or investment.

Given the exhaustive nature of these topics, I tried looking for ideas on how best I can structure this module, and what chapters to include, and to my surprise, there are no contents related to these topics. Of course, you can find tonnes of content online, but they are all fragmented and lack continuity. This gives us both the opportunity and the responsibility to develop some dependable content around these topics, centered on the Indian context. We will have to work as a team here – we will take up the responsibility to post the content and you will have to take up the responsibility to enrich it by posting queries and comments.

1.2 – What to expect?

At this stage, I can give you a brief orientation on what to expect, however as we proceed, if necessary I’ll take the liberty to alter the learning methodology, although not too drastically.

So there are 2 main topics we are dealing with here –

  1. Risk Management
  2. Trading psychology

Risk management techniques vary based on how you are positioned in the market. For example, if you have a single position in the market, then your approach to risk management is very different compared to the risk management techniques of multiple positions, which is again completely different compared to the risk management techniques of a portfolio.

Given this, we will look at risk management from multiple angles –

  1. Risk Management from a single trading position
  2. Risk management from multiple trading positions
  3. Risk management for a portfolio

In my attempt to explain the above, I will cover the following topics –

  1. Risk and its many forms
  2. Position sizing – guess this one is mandatory to cover
  3. Single position risk
  4. Multiple position risk and hedging
  5. Hedging with options
  6. Portfolio attributes and risk estimation
  7. Value at Risk
  8. Asset allocation and its impact on risk (and returns)
  9. Insights from the portfolio equity curve

I’m guessing these topics will give you a completely different perspective on risk and how one can manage risk.

Further, we would be discussing trading psychology both from a trader and an investor’s perspective. The discussion would largely involve cognitive biases, mental models, common pitfalls, and the thought process which leads you these pitfalls. Here are some of the topics we would be discussing in this section –

  1. Anchoring bias
  2. Regency bias
  3. Confirmation bias
  4. Bandwagon effect
  5. Loss aversion
  6. Illusion of control
  7. Hindsight bias

Of course, we will build upon this as we proceed. This is going to be an exciting discussing these topics.

Stay tuned.

39 Responses to “Orientation note”

  • RITUKANT MAURYA

    Looking forward to get experience trading psychology in Indian Share Market Context. Read many books on the subject like Mark Douglas – The Disciplined Trader, Trading in the Zone etc. Very excited to get it.

    • Karthik Rangappa

      Will put in all efforts to do a good job 🙂

  • msdtime

    No pdf yet of previous module!

    • Karthik Rangappa

      Will put it up soon. Thanks.

  • purvank joshi

    I eagerly waiting for risk management management in f & o , especially in options trading… which may include in above list!?!!

    • Karthik Rangappa

      Yes, will be covering all that and more!

  • Ramesh

    Hi Karthik, can you suggest good books for risk and trading psychology apart from Marcus Douglas books which I have read already

    • Karthik Rangappa

      I will let you know shortly.

  • Ruchit

    Eagerly waiting for all the upcoming stuff from you guys!

    • Karthik Rangappa

      Cheers!

  • Subbu

    Sir,
    Pardon me I am a little bit off topic.
    With the confidence received from Zerodha’s lessons, I was able to clear nism equity and common derivatives exam with 90 and 75 % marks respectively.I want to accelerate my career in the brokerage industry. I am currently planning to pursue CFA charter course. However before that, I seek your opinion on which course would be most relevant to the capital markets analysis and strategies. I am also considering cdms( certificate in derivative market strategies) offered jointly by nism and Moody’s. Thus I am full time confused. Can you please throw some light on this?

    • Karthik Rangappa

      Subbu, happy to know you could clear the NISM certifications. If you are serious about a carrier in the investment or trading industry, then I’d advise you to explore CFA.

  • Gagandeep

    The content is written really well. I give blessings to the person who write this 🙂 . I am eagerly waiting for the 10th module. May i know when it is scheduled or is it scheduled?

    • Karthik Rangappa

      Thank you 🙂 I’ll take your blessings on behalf of my entire team at Zerodha.

      It should be done in 2nd half of this year.

  • Ashutosh

    Excellently articulated.. Eagerly waiting for this.. Everyone knows how to play cricket, hit the ball, bowl etc.. but the ones who are able to manage the softer nuances of the personality are the ones that go on to make it big… and i believe that this module would be facilitating the right temperament and thought processes. Great Work Sir… Many thanks for taking up this pain….

  • Jitendra Nikam

    Dear Karthik,

    First of all thank you very much for your write-ups they are very useful and simple to understand.
    Coming back to Psychology I would like to share my experience (this might be useful while you cover Psychology topic).
    1) As a trader: I started with trading (with leverage money) and incurred a loss. As in few stocks I didn’t book profit and in few loss. In few stocks i booked profit very early and hold loss making stocks for long term. Everyone says let your profit run and book a loss. BUT, i find it difficult me implement. YOUR GUIDANCE WILL HELP ON THIS.
    2) As investor: So, i changed my style and become investor. But, the main problem is I am not able to hold any stocks for more than a year. Reason being if a stock goes from 100 to 200, i continue to hold it and if it starts southward journey i book the profit at 130. And it again start going up. And problem starts when I use same thinking for other stocks and book profit at 130 and it goes till 250. And this thing continues. People says we should review our investment and book accordingly and I get many messages for stocks like unitech (1L invested become 10K)etc.
    3) Options (no future): here again I keep on holding loss making trade and profit making one sell early. And this experience affects next trade.
    4) Don’t want to keep idle money in trading account, jumping the gun investing in hurry at high price.

    Once again thank you very much for reading such a long mail. Eagerly waiting for you article.

    Thank you.

    • Karthik Rangappa

      Jitendra, the points you mentioned are all relevant. Good news is that these exeperiences are not unique to you, many, including me have (are) going through these. It takes time and a good understanding of our our actions to get a grip. Hopefully, this module will throw some light on all these and more.

      • Jitendra Nikam

        Thank you very much Karthik….

        • Karthik Rangappa

          Welcome!

    • kiran

      Hi Jitendra,

      I am in the same situation as you are..! But, now I am working on
      1. Risk/Reward ….Planning the trades with risk/reward especially in out of money options
      ( books I am going through
      The Complete Guide to Option Pricing Formulas (2007)
      Option Pricing Models (2007)
      Options Trading for the Conservative Investor (2010)
      This are going to help in understanding the greeks and timing your entry/exit

      2. For controlling the emotions, Please go through
      Trading for a Living Study – Study Guide (2014) ( this has two pdf, One is main summary / other has 170 questions answers.. plz try answer all 170 question …this will have impact on your trade)

      u can mail me for the PDF COPIES..i HAVE COLLECTED 200-300 BOOK ONLINE

      • RITUKANT MAURYA

        Hi Kiran, Happy to see that you have collected so many books in pdf form. If you don’t mind, could you please share few relevant books with me. my email id is: rkmaurya82@rediffmail.com. Thanks in advance. Regards,

      • Jitendra Nikam

        Dear Kiran,
        Thank you very much for reply. I will try to read these books. If possible could you please share link where we can get access to your library.

        Regards,
        Jitendra

      • Shivakumar

        please send me pdf files regarding trading

      • Shivakumar

        Please send pdf files regarding trading to email id. shivu932@gmail.com

      • kunal katariya

        hey kiran, i read your note. Can you please share few relevant books with me. my email id is kunalkatariya105@rediffmail.com. Thanks

      • YOGESH

        Hii Kiran, can you plz send me those collected books about trading at yogeshgirmal101@gmail.com . Thank you.

      • Puneeth

        Hi kiran…can you please send me that PDF files to my mail I’d shetty.puneethvs@gmail.com

      • Krishna Sai GV

        Hi Kiran,
        Could you please send books on options and Trading for Living Study Guide to my email gvkrishnasai@yahoo.co.in.
        Thanks in advance and Regards.

      • Chandan Kumar

        Will be pleased if you share few relevant books with me at chandancae@gmail.com

      • Deepanshu

        Hi Kiran,
        Please share the books.Email id is jdeepanshu93@gmail.com

        Regards,
        Deepanshu Jain

    • akashsuvarna74@gmail.com

      can You please send the pdf files…. akashsuvarna74@gmail.com

  • Ramesh

    Hi Karthik,

    Did you get a chance to look at what are the books recommend for risk and trading psychology.

    Regards,
    Ramesh

    • Karthik Rangappa

      Not as of now, Ramesh. Thanks.

  • bbhalaji

    Hi Karthik, thanks for starting such a wonderful topic. Some days back I realized that a risk management/money management is mroe important that your strategy. But I also have this question in my mind – to make big money, you have to take big risk. Is this not contrary ? Please comment on this. Also, can you please add a module on effect of different factors such as interest rate hike, pharma policies, USD/INR , Fed hike etc on the market /sectors from your experience. This will be helpful for people like me who have no background/idea of economics. Thanks.

    • Karthik Rangappa

      It depends on which school of thought you come form. Value investors for instance follow ‘margin of safety’, where they take on very little risk but manage to get multibagger trades. Of course, this happens over multiple years. However, for a scalper, to make big money, he has to bet higher amounts.

      I’ve explained some of these things already, however it is scattered across. Check this – http://zerodha.com/varsity/chapter/impact-of-events-brexit-interest-rate-parity/

  • Amol Sawool

    Hi Dear Karthik & Zerodha team…..hearty greetings !!! I hv been associated with Zerodha since more than 1.5 years & honestly, as far as educational material is concerned, I have not found any other material (even some of the good books written by greats) as engrossing as Varsity. I wish you keep up the good work, may be you can try & accelerate pending modules with their PDFs especially. Learning has seldom been this delightful……

    • Karthik Rangappa

      Thank you so much for the kind words Amol. Will try and finish the PDFs soon. Thanks.

  • anup

    is it possible to perform backtesting with pi?

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Chapter 1 Trading Psychology and Risk Management
 
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