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 –
- Risk Management
- 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 –
- Risk Management from a single trading position
- Risk management from multiple trading positions
- Risk management for a portfolio
In my attempt to explain the above, I will cover the following topics –
- Risk and its many forms
- Position sizing – guess this one is mandatory to cover
- Single position risk
- Multiple position risk and hedging
- Hedging with options
- Portfolio attributes and risk estimation
- Value at Risk
- Asset allocation and its impact on risk (and returns)
- 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 –
- Anchoring bias
- Regency bias
- Confirmation bias
- Bandwagon effect
- Loss aversion
- Illusion of control
- Hindsight bias
Of course, we will build upon this as we proceed. This is going to be an exciting discussing these topics.
Stay tuned.
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.
Will put in all efforts to do a good job 🙂
Dear one
I am unable to download module 9 pdf suggest me to how to download it.
Its not really available yet. Will put this up in a month’s time.
No pdf yet of previous module!
Will put it up soon. Thanks.
Kartik, i desperately want those pdf files,please put it up asap! Thanks
YOu can download it, its on the module home page – https://zerodha.com/varsity/module/markets-and-taxation/
I eagerly waiting for risk management management in f & o , especially in options trading… which may include in above list!?!!
Yes, will be covering all that and more!
Hi Karthik, can you suggest good books for risk and trading psychology apart from Marcus Douglas books which I have read already
I will let you know shortly.
Eagerly waiting for all the upcoming stuff from you guys!
Cheers!
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?
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.
sir what you think about CFP(certified financial planner)
CFP via a fee-only RIA (Registered Investment Advisor), is probably the way forward, Vishanth 🙂
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?
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.
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….
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.
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.
Thank you very much Karthik….
Welcome!
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
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: [email protected]. Thanks in advance. Regards,
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
please send me pdf files regarding trading
Please send pdf files regarding trading to email id. [email protected]
hey kiran, i read your note. Can you please share few relevant books with me. my email id is [email protected]. Thanks
Hii Kiran, can you plz send me those collected books about trading at [email protected] . Thank you.
Hi kiran…can you please send me that PDF files to my mail I’d [email protected]
Hi Kiran,
Could you please send books on options and Trading for Living Study Guide to my email [email protected].
Thanks in advance and Regards.
Will be pleased if you share few relevant books with me at [email protected]
Hi Kiran,
Please share the books.Email id is [email protected]
Regards,
Deepanshu Jain
Hi Kiran
Please share the books.
Atul
Will do shortly.
Hi Kiran
Please mail me the documents to [email protected]
Thank you in advance
Hi Kiran, Happy to see that you have collected so many books in pdf form.
my email id : [email protected]
Hello Kiran, i am new to the stock markets want to learn about the art and psychology behind it. Kiran if possible for u can u share these books pdf with me to help me for better understanding. Thank you. My email id is [email protected]
Hi Kiran,
This is Asif Mulla. Please send me all PDF books.
sir can u pls also send me the pdf if its not too much trouble , thank you in advance.. my email is [email protected]
HI Kiran plz email me all pdf books plz..
can You please send the pdf files…. [email protected]
Hi Karthik,
Did you get a chance to look at what are the books recommend for risk and trading psychology.
Regards,
Ramesh
Not as of now, Ramesh. Thanks.
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.
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/
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……
Thank you so much for the kind words Amol. Will try and finish the PDFs soon. Thanks.
is it possible to perform backtesting with pi?
Yes, you can. Check this – https://zerodha.com/expert-advisors/
Hi kiran
Please send pdf to email [email protected]
traning cors hindi and gujarati nahi he
Hi kiran
Please send pdf to email [email protected]
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??????
Thanks for the recommendation. Cheers!
in PDF when ?
This week.
Dear Sir,
Beautiful guidance and hats off.I could not see download for chap 5 and chap 9 in PDF. Please provide
Thanks
Sure. Will do.
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.
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.
Please provide download pdf option for this module also.
Please provide ‘Download PDF’ option for Module 9 also.
The module is still ongoing, will upload the PDF once its done.
Hi Karthik, when is the pdf for 9th module expected
When the module is complete. Another 3-4 chapter to complete this.
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?
Hmmm, tricky this one. Maybe you should backtest this and figure out if it did make sense on a historical basis.
please update pfd for 9th module.. love to learn trading from u guys
That will be done once the module is completed, Pradeep!
Happy learning!
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
Yup, plan to do that sometime soon.
Thank you
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.
Sure, will pass the message to the team. But unfortunately, I cannot give a timeline on when this can happen.
not a problem at all but thank you very much for taking the effort
Cheers!
Sir, please put “chapter 9” in pdf. Thanks
Will do after Chapter 16!
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 ?
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 🙂
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.
That’s an integral part of the candlestick charts, Anjali.
IM SORRY, I GUESS ITS THERE, THANKS ANYWAY
Cheers!
awaiting PDF download feature here.
Will take some time I guess. We are fixing minor typo across the module.
I say..wow..
Such a lucid language..very nice
Happy learning!
Hi Sir
Please write the module on “Value Investing…..also…
I’ll try Tanveer 🙂
Hi Sir,
If it would be good in Pdf format better to read.
We already have PDFs available for all modules, except for the 9th module. This will be available soon.
The pirate image is really amazing. 🙂
Kudos to the drawer.
Credit goes to the illustrator 🙂
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.
Thanks for the feedback, Shafik. Certification is something on our minds 🙂
how to download pdf files of all the modules
Scroll to the end of the module page and you will get the download pdf option – https://zerodha.com/varsity/module/introduction-to-stock-markets/. PDFs for all modules, except 9 is available.
When can we expect .pdf of Chapter 9?
Next month for sure.
Sir,
Is there any trading concept of Supply and Demand zone? Please guide
That would be the Support and Resistance itself.
Sir,
Is there any trading concept of Supply and Demand zone? Please guide
hello sir.
can you provide some intraday stock selection techniques
I’ve listed down the checklist here – https://zerodha.com/varsity/chapter/dow-theory-part-2/
Friends how to download this
?????????? THANK YOU KARTHIK ??????????
Happy learning!
I am unable to download module no 9 & 10. Can you help us…?
Module 10 PDF will be up when we complete the module. 9 will be up today/tomorrow.
Sir please write one module about excel analysis for stock , F&O ASAP….!!!!
And thank you for the varsity modules. I read 7 of them.
Honestly the best material ever on market…
thank you,….
Thanks, Pramod. Will try and include this bit in the financial modeling module.
Thank you sir …
for your effort to spread financial literacy….
Happy learning, Pramod!
Hi Karthik , In this Risk Mgt Module their are so many chapter to read. Pls can you tell importance one for day trader & knowledge purpose. Thanks
These are all important once, Chanu.
Sir please also make module on ”HOW TO MAKE CARRER ON STOCK MARKET” Means in broking industrial,matual funds industria.
That seems like a decent idea, will try and do that.
l am a senior citizen of 67 years old.Reading had been my pleasure since my adolescence but I do not know computer’s basics and had been suffering. some time back I got interested in share market and started looking forward through you tube etc. As luck would have been in my favour,I came across with ZERODHA VARSITY and your DEDICATED DEVOTED HARD WORK, PERFECT in all spheres to my knowledge and best expectations. Congratulations to entire zerodha team and my regards. Keep it up. Have you all a nice life.
Thank you so much for the kind words! I’m glad you liked Varsity and will continue to enjoy reading here 🙂
Sir yah content agar Hindi mein mil jaaye to aap ki aseem kripa hogi
It will be available soon 🙂
We are working on it, it will soon be made available.
Risk Management & Trading Psychology…. this chapter convert in hindi….plz
Ok..
hello respected sir
all lessons are very good but please I request you to if possible please make a video lecture which is very useful for the Zerodha customer to learn exactly all the technical things and keyword which is used in the theory part.
thanking you
Ranjeet Maurya
Unfortunately, we don’t have the bandwidth to make videos, but please do check out https://learnapp.co/ for video lectures.
Please update in hindi version also
Sir is series ko b hindi mai translate kr dijiye 🙏🙏🙏
Thank u sir
You are doing a grt job.
A teacher has a big heart who engcourages students to ask questions.
Looking forward for Risk Management & Trading Psychology
Thank u.Regards.
Abdul
Happy reading, Abdul.
Sir Karthik sir.
Please update the content of risk management and trading psychology for iPhone users also. It will be very much helpful.
Thank you.
You mean the app is not showing this module for ioS?
Hello Karthik,
Firstly thanks to you for putting so much efforts in making the investing community aware of the financial concepts in such clear and crisp manner.
I have gone thro almost every article that you have written and wanted to know something on HEDGING.
Can you please create a chapter/chapters on HEDGING which is also used as Risk Management strategy?
Thank you once again
Kishor, glad you liked the content. Do check this chapter – https://zerodha.com/varsity/chapter/hedging-futures/
Thank you for such amazing content. 😄
Happy reading, Akshar!
What a brilliant way idea to explain this concept! Thank you so much for sharing with us!
Happy learning, Jayesh 🙂
Hello Karthik,
I started learnt stock marketing 1 year ago mostly through your course, and it helped a lot and I am happy to say, I am net profitable for last 4 months.
There is something I struggle a lot with, and I wonder if you could help me with any suggestions. It’s trading psychology and risk management. It’s a bit long post with specific situations I deal with. And for the record, I am a mix of swing trader and day trader using Futures and Options extensively. I ideally want to execute my orders once a day at market closing time, but I can’t keep myself from micro-managing my portfolio and day trading.
—
Like everyone, I struggle with trading psychology and risk management. I decided to solve it by writing my notes in a text file.
I basically wrote about different scenarios such that if X happens, I will do Y.
But what messed up is that I still miss them on daily basis. Sometimes I forget what I note. Other times, I get greedy or panicky. I even write a trading journal and mention all my blunders there every day, but I still repeat them.
I can give some example where I missed up.
1. Yesterday I could have got 25% more gains if I had stuck to my strategy instead of exiting at a small sign of reversal.
2. Today my investment went down by 7%, which is big for the Options position. All I could do was panic and think about what to do. I had a rule written saying “I exit the market for a day if I had X amount of capital loss, which I completely forgot”.
3. There was also another mental rule which I forgot to write. I forgot to execute it too. It said, if the stock falls by x% below the previous closing price, I should exit. But all I kept thinking about was what to do, and didn’t do anything because I couldn’t remember what I wrote in my notes.
I basically froze and panicked the whole day today losing 7% instead of exiting at 2.5% loss today. It all makes sense now to me, and now I am wondering why I didn’t do it, but earlier my brain just shut down.
So, please tell me suggestions on how to strictly follow through with strategy and risk management without shutting off my brain with emotions. How do you do it?
Thank you so much for reading my question.
Firstly, congrats on staying profitable, thats a bright sign 🙂
The things you’ve explained, are very common, especially in your early days. The true solution for this is to grow dispassionate towards the money at work for you. You need to develop a clinical approach, the feeling between you and your capital should be the same as that of a doctor and the patient on the operation bed. I understand this is easier said than done, but I’ve noticed this over and over again, traders who are successful and stick to strategies are the folks who are detached from the capital at work.
This won’t happen overnight, but it will at some point.
One thing that you can do is to try and reduce your risk size, you bet smaller amounts (deliberately) so that you can get used to developing a strong mindset to follow the strategy.
Hope this helps.
Hi Karthik,
Thank you very much for your response. I was not really expecting it because of the length of my message.
You are right. I actually did a post-mortem of my last 2 days trade. To do that, I introduced a VaR (Value at Risk) field in my MS Excel trade journal. To keep it simple, I decided VaR is the value I will lose if my trade falls by 10%. For FUT contract, it’s 10% of the contract value, for options, to keep it simple, I pegged it to 100% of contract value (since after 10% loss in stock underlying, options will barely be any worth). I am a programmer and have developed custom reports earlier. So I even implemented this field in my live P/L report tool to easily monitor it from now on.
Here is what I found. My typical VaR is 3.5 Lakh. On Tuesday, I made 3 Lakh profit. So instead of booking any of it, I reinvested it + added 50K from my own funds, both in options trade. So, on Wednesday, my VaR was 7 Lakh was **twice** my risk appetite. So that’s where I messed up really. From now on, I am going to consult VaR before increasing/decreasing positions at the end of the day instead of doing it at a whim. Ideally, I am planning to reinvest only 25% of the gains from now on.
I also ordered a printer last night so I can print my notes and their revisions easily whenever I need to. I think it might be easier to glance at strategy notes when they are on printed paper rather than a text file on a computer. Humans are lazy. Nobody wants to scroll through 2 pages of a text file to look for a line. Maybe the printed notes will help me follow my strategy more strictly, and help me remember it.
I think you are right about the doctor-patient relation. It should be like that. I will try to do it more often. Every day I write a journal and mention how much more profit I would have made if I had stuck to my strategy. Looking at those number of missing gains helps a little in being strict. I also read your Trading Psychology module frequently, hoping it settles deep inside my brain.
If I am honest, there is just one thing that prevents my very strict risk management, and that is the stock market bull run. I am always worried that once it ends, my opportunities for swing/momentum trading will diminish. So I feel I should make the most out of it while it lasts. Clearly, this emotion is not helping me though and just making me lose money.
I agree VaR is a better measure of the stock’s volatility. I don’t know your capital size, but 10% of contract size is quite a hit for many traders, but I’m sure you’ve done your math.
At some stage, you need to develop a basket of strategies that you can deploy given the situation in the market (no need to fear the end of cycles).
Good luck.
Hi Karthik,
Thank you very much. I said VaR of 10% of capital size because it’s to calculate it and remember it. It’s like the worst that can happen. But, my ideal exit is at 2.5% loss of the trade.
I also ran some test yesterday. I calculated annual gains in F&O stock during the last 10 year time. Except 2009-10 (after the financial crisis) where it was 450%, the max median annual gain in F&O stocks since is 150%, whereas the max this year is whooping 600%.
But you are right, being greedy and risking too much is not going to help me. I need to keep developing new strategies in future.
Thank you.
Good luck 🙂
Looking Excited..!
How did Satyam stock fall as much as 78% in a day? No lower circuits back then?
F&O stocks dont have circuits.
Sir, Please Make a Chapter for Hedging with options. For Hedging Small Size Portfolios.
Noted, Vivek.
Sir Any updates.
just started reading nicely structured thank you
Happy learning!
Please suggest Trading psychology books.
I’d suggest you check the inner worth module on Varsity – https://zerodha.com/varsity/module/innerworth/
I was doing quants today and tbh I got totally hopeless before coming to this website!! This is life saver 💯
Happy learning, Arba!
In varsity have 14 chapter , For trader point view which chapters should be read
Please do read through the entire module to get a good contextual understanding.
its request to you please translate lesson “Innerworth — Mind over markets” in hindi. Hindi walo k liye bahut helpful rahega.🙏🙏
That will be tough but I will make a note.
Video available?
Guys, Could you please help me with Youtube link for this topic? I can seem to find one for it.
We dont have a vidoe on this yet, but making a note of it 🙂
You can find all the other videos here – https://www.youtube.com/@zerodhavarsity8927
I don’t do futures and options trading. I do only Equity trading and investments. So, I would like to know if anyone has become successful so far in stock market trading and investment, without doing futures and options at all. If there is any, can you please give me some names. Eagerly awaiting your replies 🙂
Saleem, yes. There are multiple examples of wealth creation via stock market investments.
Karthik sir, what about doing a separate module on ” Quantitative Finance”?
Do check this – https://zerodha.com/varsity/module/trading-systems/
sir i saw some techniques like ICT, Liquidity, market Structure etc.. do they work in our equity market are they only for forex trading. should i learn them or not
It depends on the content, Akash.Things like liquidity is applicable to all assets.