Module 9 Risk Management & Trading Psychology

Chapter 1

Orientation note

105

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.

105 comments

  1. RITUKANT MAURYA says:

    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.

  2. msdtime says:

    No pdf yet of previous module!

  3. purvank joshi says:

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

  4. Ramesh says:

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

  5. Ruchit says:

    Eagerly waiting for all the upcoming stuff from you guys!

  6. Subbu says:

    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 says:

      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.

  7. Gagandeep says:

    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 says:

      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.

  8. Ashutosh says:

    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….

  9. Jitendra Nikam says:

    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.

  10. Ramesh says:

    Hi Karthik,

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

    Regards,
    Ramesh

  11. bbhalaji says:

    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.

  12. Amol Sawool says:

    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……

  13. anup says:

    is it possible to perform backtesting with pi?

  14. Rakesh says:

    Hi kiran
    Please send pdf to email [email protected]

  15. prakash gadhavi says:

    traning cors hindi and gujarati nahi he

  16. sripathy chandrasekar says:

    Hi kiran
    Please send pdf to email [email protected]

  17. Arjun says:

    I am reading the book by rolf dobelli , the art of thinking clearly. Every trader must read this book. Nice work by zerodha versity, keep it up👍🏻👍🏻👍🏻

  18. Biplob Dutta says:

    in PDF when ?

  19. sankar says:

    Dear Sir,

    Beautiful guidance and hats off.I could not see download for chap 5 and chap 9 in PDF. Please provide

    Thanks

  20. Gopalakrishnan B Chettiar says:

    Dear Mr. Kiran,
    I am newbie to stock market dealing; which I had started doing a year before after my retirement, for living, but in vain to make attractive gain even to meet my daily living. FYI, I am presently doing investing (not trading) to very very limitedly from my saving – I had invested about Rs. 300,000 in one year. I do book profit sometime to meet my expenditures.
    I do want to become full time trader / investor after acquiring deep knowledge.
    Therefore, kindly send relevant books to my Email ID – [email protected]
    Thank you beforehand.

    • Karthik Rangappa says:

      You need to ensure that you do not risk much of your capital, especially since you mentioned that you’ve just retired. I do not have any books in PDF form.

  21. Hardik Upadhyay says:

    Please provide download pdf option for this module also.

  22. Hardik Upadhyay says:

    Please provide ‘Download PDF’ option for Module 9 also.

  23. Ilango says:

    Hi Karthik, when is the pdf for 9th module expected

  24. raghuram says:

    Dear karthik,
    Is it a good idea to go long or short for gap up or gap down openings at 9:15 itself without going much into all the technical analysis ? For example, if a stock’s previous close was 100 and it opened today at 105. I can buy at 106 and put stoploss at 105 and target as per my risk. Same strategy for gap down openings. Will not it work?

  25. pradeep says:

    please update pfd for 9th module.. love to learn trading from u guys

  26. Ron Kalra says:

    Hi Karthik,
    Do you have any plans to have a module or course on day trading. would love to have you do this for all of us.
    many thanks in advance

  27. Ron Kalra says:

    also i know this has nothing to do with you but can i request you to have Ichimoku cloud indicator on you pi software. i have emailed before requesting this in your support email address but didn’t received any response.

  28. Shrikant says:

    Sir, please put “chapter 9” in pdf. Thanks

  29. Naman says:

    Does liquidity decrease during the bear market ? Please share your experience about market behavior during the recession (Year 2008). How much different is bear market from bull market ?

    • Karthik Rangappa says:

      If market volumes are any reflection of liquidity, then I remember the 2007/08 as years flushed with high volumes. 2008 was crazy – it had become a routine to see 1-1.5% drop on the index. I regret not picking up my long term stocks then 🙂

  30. Anjali Murkute says:

    THANKS A LOT KARTHIK SIR, YOUR WEBINARS AND VARASITY MODULES ARE REALLY HELPFUL, I HOPE YOU WILL CONTINUE EDUCATING US.
    CAN I REQUEST YOU TO ADD ‘OPEN HIGH LOW CLOSE’ ON CANDLE STICK IN THE CHARTS.

  31. Anjali Murkute says:

    IM SORRY, I GUESS ITS THERE, THANKS ANYWAY

  32. prashant says:

    awaiting PDF download feature here.

  33. Sanjay says:

    I say..wow..

    Such a lucid language..very nice

  34. Tanveer Hussain says:

    Hi Sir
    Please write the module on “Value Investing…..also…

  35. Rajendra Kumar says:

    Hi Sir,
    If it would be good in Pdf format better to read.

  36. Anoop says:

    The pirate image is really amazing. 🙂
    Kudos to the drawer.

  37. shafik s says:

    Dear Nitin and karthik sir,

    why don’t you open a university courses where people can get to do certificate courses based on content like in varsity.
    This varsity content is in real sense revolutionary in financial thinking of society.
    By certificate courses people can verify and confirm their own level of understanding of the subject.

    Thank you very much.
    shafik s.

  38. CHETHAN S says:

    how to download pdf files of all the modules

  39. RAJU SHINDE says:

    Sir,
    Is there any trading concept of Supply and Demand zone? Please guide

  40. RAJU SHINDE says:

    Sir,
    Is there any trading concept of Supply and Demand zone? Please guide

  41. Harpreet says:

    hello sir.
    can you provide some intraday stock selection techniques

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