Cover Orders Explained

COVER ORDERs Explained

Market orders have always been a vulnerable affair, to an extent for the equities and a great deal more for Futures and Options and in that volatility, we are always looking for some “Cover”, some sort of safety net that can protect us from a free-fall. That is exactly what a cover order does. Continue reading

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Circuit Breakers – Traders’ Safety guard

Circuit BreakersA circuit breaker is a fundamental concept wherein trading is frozen for a few hours, or in a worst case scenario, the day’s trade is suspended for a stock if its value increases beyond or decreases below a predetermined value, which is calculated based on the previous day’s closing price. Circuit breakers are specific to exchanges, wherein, the percentage change in value after which it gets activated varies with stock exchange while some stock exchanges may not even have this concept. E.g., Bombay Stock Exchange has an upper circuit breaker of 20% and a lower circuit breaker of 10%. If a security closes at Rs.200 on a day and if the stock reaches Rs.240 on the next day, then the circuit breaker is auto activated and trading of that stock is halted. Similarly, if the stock falls to Rs.180, again trading is halted. Continue reading

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Bracket Orders and Trailing Stop-loss Explained

Bracket Orders

The world moves too fast and is often too difficult to keep track of. Markets move even faster and in all this turmoil, bracket orders come as a great boon in managing your risks. As the name goes, Bracket orders “bracket” your “orders”. However stupidly simple that may sound, that’s what it actually is.

Benefits of Bracket Order

  1. Bracket orders make sure that your profit or loss lie between two limits of an acceptable profit and bearable loss that you set.
  2. Because the maximum loss is limited,the margin requirements are really low (between 2% and 2.5%) compared to the 10-11% margin requirement in other risk based trades.

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Collar Strategy

It remains a well-known thing that the derivatives are wonderful instruments to take advantages of the different phases in the markets. They not only offer leveraging advantage but also ensure efficient hedging opportunities in the overall portfolio. Let us discuss one such options strategy which not only hedges a naked long position against downside risk by offering insurance but also finances the cost of that insurance. Sounds interesting? This strategy is termed as a Collar; let’s drill down into the strategy for a better understanding. Continue reading

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Double Top and Bottom formations

The theory of technical analysis predominantly takes human psychology into account where it is believed that the price patterns are result of how market responds to similar situations that arise time after time. In other words it is believed that the crowd reacts similarly in given circumstances that lead to predictable price pattern formation, which form the base of a chartist or a technical analyst. Let us discuss and understand one such price pattern that despite remaining one of the favorites in the financial markets is ironically interpreted incorrectly more often than not. Continue reading

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Long Call Butterfly and Long Put Butterfly

Derivatives are designed to take advantage of changing market volatility and patterns. Several futures and options strategies are present in today’s environment that allows traders not only to hedge their positions but also make profit by cutting the cost and risk. Let’s discuss two such options strategies that are used actively in the financial markets to take advantage of sideways market action. Structurally the way of execution for both the strategies remains almost similar to each other it’s just the use of either a call option or a put option that makes the basic difference in these strategies. We work out with the factors and mathematics that work for both the strategies before we take an illustration for each of them. Continue reading

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Moving Averages

The popularity of moving averages in the financial markets has grown tremendously over recent past. Every now and then we come across headlines such as “Nifty breaks below 50 day moving average“ or “Crude Oil trading below its 200 day moving average”. What does all that mean? And what is their significance? Let us explore the term and its key features in a detailed discussion.

As the name suggests a moving average is an average that continues to move forward with the price, where the data for the latest day is added while the data of the first day is dropped on a rolling basis. Therefore to get a 5 day moving average one needs to add the closing price of last 5 days and divide it by 5, on the next day one needs to add the closing price of the previous day while remove the price of the first day of the series, which makes it a close trend following indicator. Continue reading

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