From IIT to market: Secret of Neeraj Gupta’s successful trade management

Q: How did you come to the market?
A: My association with the market has been there since my childhood. My grandfather, as well as my father, has been investing in the market ever since I remember. But, the association was always cursory in those early days.

It was only while I was doing my engineering from NIT Bhopal did I seriously start looking at the market. I used to have discussions on the market with my father and some of my friends from college. Those were early days of internet trading, and, every time I operated my father’s account to buy shares that he asked me to, there was an adrenaline rush and a sense of belonging.

After my engineering, I took up a job in an IT firm and opened a trading account with a broker. I used to dabble in the market with some intraday trades and did some investing. I immediately realised that intra-day was not my cup of tea. In those initial days, my participation was more on account of fundamentals.

Both my father and grandfather were investors and had bought shares like those of Reliance, HDFC Bank and ITC among other blue chips, which we still hold. Hence, my approach to markets in those days was fundamental.
My father has taught me the nuances of investing and how important it is to hold your nerve and not panic when the world around you is falling apart.
I started out in 2007. I was doing well as the markets were good too. But, when it tanked in 2008, it did cause a dent on my portfolio.

Thankfully, those were initial days, and I was still testing waters. So, I was not fully invested. After the first fall, I bought more shares, based on the fundamentals of the companies. Then, the market fell another 20-30 per cent, and I added more. In those days too, thanks to my father’s lessons, I did not average the stock bought earlier, but bought new ones based on my study.

Even today, in my investment portfolio, I do not average on the way down. When the stock turns and is back in an upward trend, I buy the stock again.
The period 2007-10 is what I call my first phase of the market. Since then, my participation in the market was mainly by studying some fundamentals of the company. I used to look at some important ratios of the company and compare it with others in the sector. Then, I picked the best of the lot. But, somehow, I was not comfortable with the approach mainly because I did not trust the numbers that the companies were posting during this period.
This was also the time I was studying for my MBA entrance. I started gathering information on the markets and was introduced to technical analysis. After my MBA from IIT Delhi, I took up a job with an IT company in Bengaluru.

As luck would have it, one of the seniors in the organisation was very good with technical analysis. Being alumni from IIT Delhi, we bonded well. I learned a lot from him. He introduced me to Elliott waves and other indicators. Till then, I was mainly using trendlines and moving averages.
In this second phase of my market exposure which began in 2010, I was more into technical analysis. But, in my college years, there was little trading that I could do.

After 2012, I concentrated more on technical analysis for my trading. I learnt from the Internet by reading blogs and watching videos on technical analysis. I dabbled for a couple of years using technical analysis, but there was no concrete process.

By the end of 2013, I realised that there has to be a system, a well-defined process by which I have to approach the market. I devised a few price action-based systems and back-tested those. A few of them failed even after back-testing, but some succeeded. I started trading these systems and increased my capital gradually as I gathered more experience and confidence in my system.

These systems included derivatives which I had picked up since my MBA. Though I knew the theory behind those, applying it in real life was altogether a different ball game mainly because of the size and leverage that derivative products offer.

I tested the systems I had designed in the derivative market by taking baby steps in the initial days. The purpose was to see if I could earn a steady income before I could take the big step.

From 2014 onwards, I increased my capital and stuck to a disciplined approach to trading. By now, my learning period was over. Though, having said that, the market always teaches you something new every time. My trading style is to take care of all such eventualities.

I wanted to give myself the chance to trade full time. I have given myself a three-year period to try out trading, and there have been no regrets in that decision. I have done well in the market despite markets going down in most part of the previous year.

Q: How do you trade in the market? Can you walk us through a trade?
I only trade in largecap stocks with a 1-3 months holding period. I apply derivative strategies mainly to give cushion to the underlying trade. If my analysis is wrong, the derivative strategies will cushion my losses. If it is right, the leverage helps improve my returns.

Let’s take a recent example of a trade that I took in December 2018 – ITC.
Since I mainly prefer trading on the long side, I look out for important support levels which the stock will respect and move higher. In the case of ITC, 270-275 levels was an important support area.

When the stock entered this area, I took my first entry by shorting the 275 put. ITC hovered in the 275-280 range till February 2019. It reached 273-274 levels and bounced back immediately. For me, this was a good signal that the stock will move higher as there is good buying support at lower levels.

I converted my written (sold) 275 put option to a future position in the stock. Since time lapsed, the put option lost value.

After taking the futures position around the 280 levels, I sold the 285 call option creating a covered call position.

Now, in ITC, the 281 level is a small resistance area, and the next support level in the stock is at 265-268. So, I have to be careful here as the stock is close to the resistance. If it falls, it can travel quite a distance.

I shift to the hourly chart to look for a breakdown. If at all it happens, I shift my 285 call to the 275 strike price level. But, if the price continues to go higher by crossing 282 price point, I will cover my 285 call option at a small loss and sell the 295 call option.

Last week (this interview was taken on March 19, 2019), the stock was moving in the range of 290-295, and I continued holding the position—295 call. My next resistance is around 300 levels. But, today (March 19th), I shifted my option position to April 2019 expiry.

This brought me extra premium. So, if the stock goes back to 280 levels, I need not move the option as the premium in April is high. This premium now acts as a cushion for downside volatility.

If the stock goes down to 265-268 levels, I will again sell the 275 call option. But, if the 265-268 support zone is broken, I will book my losses and come out.

Since I am eating a lot of premium in the entire process, my losses are cushioned. If everything goes right as per my calculation, I will be taking a 25-point profit. But, in the worst case scenario, I am stopped out, and I will be losing 7 points.

(The following portion of the interview was taken on April 5th, 2019)

ITC respected the 300 resistance and fell back to 292-293 levels confirming that it may stay here for some time. I decided to exit my trade the next time the stock would try to retest the top of 300. I managed to get an exit at 297.
This trade in a span of three months gave me 26 points out of which around 16 points came from my future position, and 10 points were contributed by options selling.

The other reason I exited from the trade was that another trade opportunity with a better risk-reward ratio presented itself in the form of India Cements.

So, essentially, I test the waters by selling a put option while initialising a trade. If the pulse is right, and the stock is showing signs of strength, I will square off the option position and move it to futures. However, I will manage the trade trying to extract as much as I can and cushion my losses.

Q: Do you trade any other strategies?
A: I also trade the Nifty which is basically using the Elliott waves. I have studied the characteristics of some indicators like the RSI (Relative Strength Index), the MACD (moving average convergence divergence) and the ADX (average directional index) on different stages of the Elliott wave count.
In an up move, there are five waves in direction of the trend and three waves that are counter direction and are called correction waves. In short, a cycle will have eight waves though there may be many smaller waves within these.

One of the things that I have observed is that, in the third wave, the most important wave the RSI will give is a divergence signal. But, this is the time the divergence will not work. Most people are trapped taking a counter-directional trade on the RSI divergence in the third wave. Likewise, for each wave, I have studied the behaviour of various indicators.

This helps me in two ways. One is, even if my Elliott wave count is wrong, I can look at the indicator to get a feel of where the market is. Secondly, in a wave, I will know which indicator is expected to peak at what levels, and I am ready for the indicators to tilt their hand before taking a trade.
While trading Nifty I take both the long and short position in the market. Many a time Nifty acts as a hedge for my other positions in the market.

Q: How many trades do you keep open at any point of time, and what is your track record?
A: I normally have 7-8 open positions at any point in time. I initiate a trade if it offers me a 1:2.5 risk reward ratio. I used to look for a 1:3 trade but those were few and far between.

While theoretically, the trade starts with a 1:2.5 risk reward trade, the options that I use in my trade eventually improves the performance. In the case of ITC trade, I was looking at a gain of over 25 points for a risk of 7 points – thus giving a risk-reward of 1:3.5.

I hear people talking about the risk of using derivatives in trading. But, if you know how to use it, it can give you very good returns and can be your edge in trading.

Q: Apart from trading these strategies, you also have an investment portfolio. How did you build this portfolio?
A: My investment portfolio is generally theme-based and is a top-down approach to stock picking. I look for sectors that are expected to do well for the next 3-5 years.

Though I call it an investment portfolio, the stock picks are not strictly picked up using a fundamental analysis. However, I look at them before buying.

I use technical analysis inputs to pick up stocks like breakouts after a 12-15 months consolidation. I look for sectors that are breaking out.

Like currently real estate looks good as a theme, but none of the stocks in the sector is breaking out. However, Can Fin Homes and Godrej Properties are the strongest. I will wait for them to breakout and then enter. Presently, PSU banks are breaking out after a long time.

Just like I use themes to pick up stocks, I also use it to avoid stocks. Like in the automobile sector, the electric vehicle will cause a lot of disruptions in the space creating uncertainty. I would avoid this space. The second thing I look to avoid is the poor quality of promoters.

Presently, 60 per cent of my portfolio is in trading, and 40 per cent is in investing. I started off with 80 per cent trading and 20 per cent investing. But, as I gained confidence I added more to investing.

In investing, I do not use a stop loss. But, as mentioned earlier, I will average my position after it goes down only when it resumes its uptrend.
My returns have been a CAGR of 26 per cent for the last five years, and I have a win-loss ratio of 60-40. Two of my winning trades take care of the four losing trades that I incur for every 10 trades taken. But, the four profitable ones give me a good return.