Nooruddin Fidai | Creating magic out of moving averages

Shishir Asthana

Leonardo Da Vinci’s words, ‘Simplicity is the ultimate sophistication’ rings as true for trading as it does for other fields.

However, many technical analysts and traders in the market complicate their recommendations or strategies by using multiple indicators and jargons to impress fellow traders and novices.

Moving averages are the simplest overlays on a price chart, and give a clear picture of the price movement. Yet it is often ignored by technical analysts and ‘experts’ because of the number of loss-making trade it generates.

Nooruddin Fidai (@nsfidai) however has made a career successfully trading moving averages.

When Fidai rose to speak at the Investors Carnival in Goa after a sumptuous dinner few were in the mood to listen to a speech on moving averages. But, once he took the stage, all were mesmerised by the technique's simplicity and magic.

From selling shoes on the street of Mumbai to trading, addressing trader’s conferences and training and mentoring other traders, Fidai has come a long way. He is also a hotelier and an ex-banker.

In this interview with Moneycontrol, Fidai demystifies moving averages and talks of his journey as a trader.

Edited excerpts

Q: How did your market journey begin?

A: I was introduced to the markets soon after I started my job as a banker in 1990. Those were the days when the market was picking up and I was at the right place at the right time. This was one of the few positive coincidences I had seen in my life thus far.

I was born in Hyderabad and moved to Mumbai when I was 9. I am the youngest of eight siblings and we all moved to Mumbai since our father worked here. Life in Mumbai was tough as we did not have a proper house to live in. We changed seven homes in six years, including living in the factory godown where my father worked.

Even now when I am asked what I have achieved as a trader, my spontaneous response is that I now have my home in Mumbai. The importance of having a roof over your head that you can call your own is occasionally appreciated.

Despite the hardship, our father ensured that each of us was given the best possible education. I completed my tenth with good marks and selected the commerce stream for further education. By this time the family needed all working hands onboard. I had taken admission in Bhavans College, Andheri but to help my family I used to sell ladies footwear on the streets of Versova.

After completing my 12th I managed to get a job at a chartered accountant’s firm as an audit assistant. One of the audits I did was with DCB Bank and as luck would have it, I was working in the bank the next year.

The second-year into my degree college the bank announced they had vacancies and one would need to clear an entrance exam to get selected. I was in no mood to apply for the job but a relative challenged me that I will not be able to clear it. I not only cleared it, but I also topped the exam. Providence played its part again, the girl who stood second in the banking exam would become my life partner in the next few years.

While at the job I saw many of my colleagues apply for initial public offerings (IPOs) and I was pulled into the craze as well. I started to learn about these IPOs and the ones that did well in the market.

My friend and I started a pool by collecting money from colleagues. In the 1990s, we collected Rs 200 per month per person. Those who could afford it contributed more to the kitty. We also borrowed Rs 40,000 at 18 percent interest to make the fund sizeable.

The idea of this pool was to invest and trade in IPOs. The fund had a three-year lock-in. We accumulated Rs 1.2 lakh by the end of 1991 which shot up to Rs 10 lakh by 1992-end.

When the market tanked after the Harshad Mehta scam our kitty also shrunk. At the end of three years, the fund had generated 60 percent after deducting our fees of 10 percent and the interest payout of 18 percent.

Though it was a profitable and pleasant experience, the incident did not get me hooked in the markets. I kept on investing and building up my portfolio slowly while at the same time continuing as a banker.

I worked with DCB Bank for around 13 years from 1990-2003 but moved to the middle-east on a good offer. However, I did not get along with my boss and quit the job in 15 months and decided to trade full-time.

Q: How was your trading journey?

A: I began trading full-time after I returned from the middle-east. I had some savings from my trip abroad and a small portfolio but I did not know anything about trading.

I bought a computer in mid-April 2004 and borrowed a friend's CD which had the technical analysis software of Metastock, which I downloaded and we can start making money. I had no idea what technical analysis is or how the software worked.

Then on May 17, 2004, the market fell 16 percent in a single day (Pokhran Nuclear test by India) and a major chunk of my portfolio went down with it. I had the intention to trade but my capital eroded even before I could start. My friend who was supposed to help me with the trading software also got busy with his job.

Pushed to the wall I decided to start learning the ropes myself. Thankfully my wife was working, so the pressure of running the house was not there.

I read up on the rudimentary tutorial of Metastock for each indicator and started using it in the market. In those days there was no online reading material to educate oneself. My trial and error cost me money and my portfolio came down from Rs 5 lakh to Rs 50,000 in six months. Worst still I was nowhere close to breaking the code of making money in the markets.

But slowly the code revealed itself, it was all along in front of me. Whenever I opened my Metastock Software the first chart that I saw had five lines that were displayed along with price and volume. I had found my moving average or MA. It was there as a template in front of me. Though I never used to study the MA the picture was registered in front of me every day.

Whenever the MAs converged and crossed there was usually a very strong move in direction of the lines. The convergence of the five MAs would give a long trade.

Using the MA I was able to rebuild my portfolio from Rs 50,000 to Rs 5 lakh in a year without taking any leverage. Markets in those days were supportive and stocks were flaring up in front of me.

Looking back I took a lot of risks. Though there was no leverage trading and I invested the entire money in a single trade. After earning around 30 percent in the trade the position was shifted to another stock where the moving averages were converging and crossing over.

While I was picking up the threads of trading my nephew Nooresh Merani (@nooreshtech) who was studying computer engineering would come and sit with me during his vacations. We were also joined by a few other relatives who would all gather around the computer and put our heads together.

Those were the days when data from the market would come late in the night at around 9 p.m. From 9 pm to 3 am I would sit and study charts to scan the markets. At times there was no data on account of some glitch and I had to manually feed the data in which would take hours. But it was those gruelling hours that finally paid off.

While my trading journey picked up smoothly, my journey as a trainer just saw a moving average crossover.

It all happened when we were trading and a kid who stayed in our building came in to collect the cable subscription amount. He used to see footwear outside the door every day. One day he came in and asked what we do. I told him we study the markets and trade in it. He showed interest to learn about it and asked if I was willing to teach him for a fee.

I had no idea if there was something like professional training in technical analysis and told him it would take Rs 5,000 to discourage him. In those days it was a substantial amount for informal training. To my surprise, the kid – Sohail knocked on the door the next day with the fee. I started working with him and sat for a couple of hours after the market closed. Sohail picked up fast, started trading and making money. As a result, his lifestyle changed. Looking at him others wanted to learn and started coming to learn.

This was the time we started Analyse India. During this period we started putting our recommendation on the Moneycontrol message board. In those days there were very few of us who were giving recommendations, as a result, we acquired good followership. We were contacted by broking houses for seminars and training sessions across the country. During that period I travelled across the country giving seminars and on training sessions.

In April 2006 I opened a sub-broking office as a diversification from my trading. The business did well till 2013 when the market volume collapsed. Brokers started cannibalising their sub-broker clients and I decided to exit from the broking business. I also gave the reigns of Analyse India to Nooresh who was a partner and withdrew all my money from the market.

I decided to take a sabbatical from the market and entered the hotel business with a friend. Between 2014 and 2017 I travelled to the hotel every day which was on the Mumbai-Nasik road. The daily travel took a toll on my health and I developed an ailment which prevented travel. I then became a sleeping partner in the trading business.

Though I now had time in my hand I was not in the best of health to trade as aggressively as I used to or travel to various locations to train for long hours at a go. Nooresh then suggested that I need not travel to train, I can do it as effectively by training online. That was the beginning of my second innings in the market. I also started trading, but only on the longer timeframe.

It was in one such training session when a student from Kolkata approached me and asked if I can be his mentor. The mentorship program took off which is not only about teaching the strategy to trade but also about position sizing, money management, the psychology behind successful trading and hand-holding through the initial trades.

Q: How do you trade using moving averages?

A: My trading involves exponential moving averages. I use five moving averages – 4/9/18/50 and 200-day exponential moving averages (DEMA). The reason I select four days is that it is one day less than a working week, 9 day is one day less than two working weeks, 18 days is around two days less than a working month and 50 and 200 days moving averages are empirical and widely followed.

I trade the moving average crossovers. However, I do not trade every crossover of the five moving averages, there are certain conditions or filters that need to be satisfied before I enter the trade. I look at volumes – convergence on good volumes generally result in a profitable trade.

The size of the candle also matters at the point of convergence. A big candle is an indication that the market can move in the direction of the convergence. The same strategy can be used on a smaller intraday time frame or a longer timeframe.

Further, there are three possible combinations of moving averages that can be used, depending on the trader's risk profile. The convergence of 3 moving averages or 4 or 5 can be taken. Thus one can use either the 4-9-18 or the 4-9-18-50 or 4-9-18-50-200 moving average crossovers. The important point to note is that the moving averages should in chronological order.

Further, the four period moving average is important as it is the shadow of the market and follows prices very closely. During a vertical move in either direction, the four periods can offer an important support or resistance point to book full or partial profit. In case the move is slower the 9 periods moving average will be the cushion and for a sluggish move, the 18-period moving average can be used. Based on the momentum one can use the moving averages to act as support and resistance point.

Avoiding certain crossovers are also important to succeed in this form of trading. Smaller bodied candles at the point of convergence or a signal when the market is moving in a small range will give whipsaws.

One can also use the convergence in the underlying stock to trade in the options market. If a buy signal is generated at the convergence a slightly out-of-the-money (OTM) call option can be bought.

Apart from moving averages, I use support and resistance based trades.

There are only two points where you can buy or sell using this strategy. You can either buy at support which offers the lowest risk or you can buy at the breakout of the resistance, where the risk is high but you have momentum in your favour. Similarly, one can sell near the resistance where the risk is lowest or a breakdown from the support where the risk is high but momentum favours the short seller.

The good part about this form of trading is that one can use options very effectively. A long straddle – a buying at-the-money (ATM) calls and puts option at the support and resistance can offer a good trading opportunity. When the market tilts its hand and moves in one direction we can square off the other leg.

If the market is at the support level and we buy a call and put and then the market falls we can square-off the call option and hold on to the put. Now support can be in various forms – it can be a trendline, a moving average, previous high or low or a big candle.

There are certain support levels which are very hard to break like the 200 DEMA. Rather than taking a long straddle one can simply buy a call option when the market reaches this point. A small bounce around the 200 DEMA is enough to book a decent profit. If this support breaks the fall can be big and one can capitalize by buying puts.

Q: You were amongst the earliest trainers in the market, what do you think a candidate should look for in a trainer?

A: One of the first things I get asked is how many of your trades are right or what is your success rate. Frankly, that is a wrong question to ask. Success is a combination of your wining ratio and your risk-reward. A strategy can win only 30 or 40 percent of the time but if it has a risk-reward of 1:4 or 1:5 and above then the number of times your calls are right does not matter.

Selection of a trainer just by looking at how many trades are profitable is the wrong approach. One should select a trainer or a training course depending on their requirements.

If one cannot leave a job and wants to trade on the side he can pick up a trainer who teaches end-of-the-day (EOD) strategies or longer timeframe strategies. Similarly, someone who has retired or is waiting for a job and has time to sit in front of the terminal can look for a trainer who teaches more aggressive strategies. A good trainer will shorten the learning curve and prevent one from making the mistakes that he did.

Irrespective of the training the most important aspect of being a successful trader is to practice and take actual trades. Paper trading is not going to help you fight the emotional battle.