It is said if you follow your passion success will follow. A common factor among all successful men and women across all streams, be it business, art, sports or any walk of life is passion for their work. For them money is a by-product. Successful traders and investors also fall in the same league.
We may seldom see people build things they like when they can afford to source them. Not all who love cars and can afford to buy them would actually build one on their own. Similarly, most market traders prefer off-the-shelf technical analysis packages and try to adjust their trading strategies according to tools these ready made packages offer.
But, passion drives a handful of people to venture into uncharted territories. Pune-based Prashant Shah is one such passionate trader who decided to go that extra mile and develop a technical analysis package from the ground up to suit his needs rather than compromise on his trading style.
Shah trades from a software that has been designed by him and his 14- member team at Definedge Solutions, a company co-founded by him. Apart from designing the package Shah's passion for technical analysis can be seen from the fact that he has accumulated almost all possible qualifications on the subject of technical analysis.
Shah is a Chartered Market Technician (CMT), a Certified Financial Technician (CFTe) and is also a holder of the right to the Master of Financial Technical Analysis certification designation for the original research conducted by him on Line Break charts swing trading techniques.
Shah is also an author of a book titled ‘Trading the Markets the Point and Figure way’. He, along with his team, trains prospective traders. A distinguishing feature of Definedge is they hold an annual Market Analysis Conference where some of the best traders in the country discuss their style and knowledge of trading.
Like almost every successful trader Shah had to go through the grind both in his trading and in personal life.
In an interview with Moneycontrol’s Shishir Asthana, Shah discusses his passion for the markets, his trading strategy, experiences from training and learnings from fellow traders through the annual conference.
Q. Prashant, you are among the few technical analysts who have accumulated a number of certifications and used the knowledge to become a successful trader rather than just stick to reading charts. Can you take us through your journey to where you are currently?
A. Sure, I will give a very brief background. I belong to a lower middle-class family residing in Pune. I was entrusted with responsibility at an early age and had to take up work along with my studies. I was interested in accountancy and was studying to become a chartered accountant. Though I had cleared my entrance exam but had to give up the pursuit as our family had to take on debt for my sister’s marriage.
Thanks to a reference from a friend I managed to get a job as a sales executive in a broking firm in January 2005. I did very well on the job and was promoted and awarded frequently.
During this time I came across many traders and clients who used technical analysis to trade. I was fascinated with the subject and read everything that I could on it. I gained confidence in price analysis when I advised our clients to exit just ahead of the 2008 market fall.
I searched for courses on technical analysis and undertook them to enhance my knowledge. I read almost every theory of technical analysis. While studying for one such exam I came across the Point & Figure (P&F) way of charting through a book by Jeremy Du Plessis, who is an authority on the subject.
I was also fascinated by Thomas Dorsey’s work on Breadth and strength analysis. Ever since I have traded by combining these principles. By end of 2015, I had gained enough confidence to quit my job and start a business with a partner.
Q. Most of the traders generally use the normal technical charts, what attracted you to P&F?
A. There are many reasons why I was attracted to P&F. Apart from the simplicity of the chart, an important point is that unlike other charts where time is plotted against price, P&F has only price as a dimension. The price patterns on these charts are clear and objective. Entry levels, stop loss and exit levels are very clearly visible and defined.
I as a person prefer a process-oriented approach to trading. I have removed subjectivity and predictions from my chart analysis and trading. It is a noiseless way of looking at the markets and trading it, which is where P&F fits in beautifully as it brings clarity minus the noise.
Q. But, since P&F are noiseless it would mean fewer trading signals, in that case, is the risk-reward still favourable?
A. Fewer number of trades is desirable. It means that productivity of the trader improves, which is very important. As for risk or positioning of the stop losses, P&F offers the flexibility to pre-define it.
I am generally a futures trader and I will take a trade only when the stock comes within my defined risk parameter of 2% of the capital.
In P&F there is a projection system called count. This helps me in gauging the risk-reward even before I enter my trade.
Q. Can you explain your trading strategy?
A. I am essentially a momentum trader and use the P&F charts to execute my trades. Generally, I get around 20-25 trades in a month but it is a function of the market. Like in January 2018 I took 40 trades but in February 2018, it was much lesser at 10 trades.
Apart from prices, I use two important features for picking up on which stocks to trade. One is breadth and the other one is relative chart strength.
Breadth is the number of stocks that are in the bullish phase as compared to a number of stocks in the bearish phase. When breadth is going up it is a bullish sign and when it is coming down it is bearish.
But I have noticed that there are different zones in breadth which I like to call the neutral zone and the extreme zone. If breadth is in the extreme zone, breakout trades will not perform well.
Entering into a trade is easy but exiting is the tricky part. No one has yet mastered exits. I use this extreme or exhaustion phase to exit from my position. If the breadth is neutral I will ride the trend but if it enters the exhaustion zone I will tighten my stops and exit. I would not take a new position if the breadth is in this zone.
Breadth analysis is done not only for a group like, say, Nifty stocks, but also for sectors. There are 20 sectors and if you include the sub-sectors there are 45 of them. If 80-90 percent of the sectors are falling we can safely say that it is nearing an exhaustion and this situation cannot last for long. That’s when I preparing for my exits from my short position.
As for relative strength, it is searching for stocks that are relatively strong among its peer in the group or the sector. In a bullish market, I would choose the sector with the best breadth and within that the stock that is performing the best.
Improvising on the exits has helped me improve my overall risk-reward ratio to 1:2.5. As for hit rate of the strategy, it is around 45-50%. Since I have turned fulltime I have had 2 losing months.
Q. So, if the market is trending, do you add to your position or sit in the original position and ride the trend?
A. There are two conditions in which I will add to a position. First is the breadth should be neutral. Secondly, there is a formation called the follow-through in P&F, I will take a trade only when this occurs. So, yes I do add to my positions but it is only occasionally. I have a rule that I do not keep more than five positions open, especially if they are in the same direction, I would also look at my overall position before adding.
Q. Is this the only strategy you trade or are there others?
A. In futures, this is the strategy I follow, but we have a strategy in the cash segment. It’s a multi-column breakout where we get 2-3 signals in a month. It is like managing your cash portfolio using technical analysis.
Q. Generally, a trader uses a readymade package to trade, what prompted you to design one?
A. Since I was following the P&F strategy I needed a flexible package which could allow me to play with the charts. I had built my own indicators in P&F but needed a proper software to work on. So when I started I wanted to develop the software for myself. I discussed with my partner, who is a software person and architect for the software, that’s when we decided to make the software not only for our use but also to commercialise it by making it public.
When you have your own software you have the flexibility to play around with it and go deeper into developing new tools. That’s when we decided to train traders to use the software and also various trading systems.
It is in teaching that you learn more. For me, training and developing the software has helped me a lot in becoming a trader that I am present.
Q. Definedge organizes the annual trader's conference, what were the idea behind it and your takeaways from it?
A. We keep on meeting and talking to various traders and learn a lot from our individual interaction. There is an unlimited way of making money in the market and different traders have different styles of trading. But it is not necessary that the way I trade and make money anyone else can do the same. It requires a lot of conviction in your strategy before you become consistently profitable.
We hold these conferences where the traders present their strategies in front of fellow traders and other participants where we learn from each other. The takeaway is the principles behind the strategies. In our sessions, we tell our participants that it is not important to learn what they are doing but how they are doing it. I, for example, do not even look at the name of the company whose chart is displayed, for me getting the principle behind it is important.
Q. You are exposed to both professional traders as well as learners, what separates the two in term of mindset and what are the common mistakes by learners?
A. Conviction. An expert trader has a very high conviction on his strategy. If there is any holy grail in the market then it is your conviction on your process and method.
Conviction comes from knowing the weakness of your strategy and not only by knowing your strength. That is what an expert trader knows. Conviction comes from practising and taking the trade thousands of time. You can buy software, you can attend seminars, read any number of books but you cannot buy conviction. You have to work for it. You have to practice on your charts.
I read it somewhere, which is very applicable to trading, that you should not practice till you get it right but you should practice till you do not get it wrong. As Bruce Lee said that I do not fear a man who has practised 10,000 kick only once but I fear a man who has practised one kick 10,000 times.
An expert trader focuses on process while a newcomer is focused on making money. The market will surprise you in terms of return if you follow the right process.
Another thing I noticed is in back-testing a strategy many new traders over-analyse or over-test a system, which in itself is a disease. While it is very important to backtest a system one should know what to read from the data. It is important to know the nature of your system or instrument.
For example, a triple top formation on a P&F chart is good for certain instruments but might not be good for others.
Tweaking a strategy is the biggest problem for a novice. One should give time for the strategy to perform rather than keep on tweaking every so often.
The other important thing is record keeping. For me, record keeping has helped a lot in improving my trading. In my training, I generally ask the participants to maintain a record of all your trade and mark a column where you mark the trade as for right or wrong irrespective of the outcome.
Q. Since you train traders, do you see a pattern of who will turnout to be successful and who all are still a long way off?
A. In talking to traders one can get an idea of where the trader is in his journey. If someone asks about buy-sell indicators, we know he is a long way off from becoming a profitable trader.
Generally, positive people are good traders. People who are cribbing and complaining and blaming others have a difficult time to be a successful trader. During our training, we try to convey points of positivity and focus which will help to become successful.
Q. Successful traders with whom we have interacted have said that trading has changed them in many ways. Have you experienced the same?
A. Absolutely. I have changed a lot. Market humbles you a lot. It has changed me in my personal life and in my business. I practice noiseless trading in markets and in life I practice noiselessness. I do not engage in unnecessary arguments or conversations. I do not disrespect anyone’s work or method. P&F also has a different meaning for me it is process and focus which the market has thought me.
Q. What are your plans for future?A.
In Definedge we are blessed with a very good team where we intend to build innovative platforms and give solutions in all types of solutions in trading all segments of the market including forex and mutual funds. I want to contribute to the fraternity of traders either through training or conducting seminars or developing tools. As a trader, I want to trade more and increase my exposure to the market.