Weekend Special | A consistent trader who designed his tools of trade

Shishir Asthana

Motivational speaker Gabrielle Bernstein often points out in her lectures that to allow your passion to become your purpose will one day become your profession. The driving force of anything that has ever been achieved is the passion that drove the men and women behind it to achieve what was once considered impossible.

Passion for trading is Junaid Shaikh’s credo. A mechanical engineer with an MBA in IT, Junaid’s infatuation for trading began when he heard his batchmates from finance stream talk about the markets and the potential of making money.

Though Junaid worked as an IT manager with a renowned insurance company, his heart was in the markets. His love for markets saw him interacting with experts in finance and treasury division in his company. It was his passion for the markets and the hard work behind it that resulted in Junaid now running a trading desk and managing family money ahead of any of his more experienced peers.

Junaid has had a positive month in every month he has traded professionally. In the current fiscal he is already up by 20 percent on his trading capital, this at a time when we have seen most traders and fund managers posting negative returns.

Junaid has used his knowledge of software and technical analysis to develop nearly 200 strategies. He has also created an indicator called Z-trend which was made public recently and has received a favourable response from users across the globe.

Though trading takes a lot of his head and heart space, Junaid continues to code and takes up assignments. A love for music, fitness, and life adds to the chirpiness in Junaid frequent tweets where he is seen helping aspiring traders.

In an interview with Moneycontrol’s Shishir Asthana, Junaid speaks of his journey, trading strategy and future plans.

What inspired you to get into trading?
I was intrigued by the markets from my MBA days. Though I was specialising in IT most of my friends were from finance. All they used to talk about was stocks and how much it used to go up. I was fascinated by the markets and read up as much as I could trying, to understand how the market works.

With time I became friends with some sub-brokers and was getting information from them and my friends from MBA. It seemed like it was easy to make money and thus decided to jump in.

Was it easy, how was your initial experience in trading?
Not at all. My first trade was in silver which a broker friend of mine told me about. I bought silver at around Rs 29,000 a kg took a quick profit of around Rs 5,000 on the trade. Silver moved up to Rs 74,000 and came back but I was mostly an observer in it.

I then started dabbling in Nifty and Bank Nifty. The trades were basically taken when my broker used to call up and say that today Nifty or Bank Nifty was looking good to move up. But slowly I was losing money and after a period lost my entire capital.

Was your broker friend using some strategy to generate calls?
No, he had taken some subscriptions from one of the services that give calls and also he had friends in the market who gave him these calls. Unfortunately, these services are still operational.

How did you stop depending on others for calls?
While my adventures in the market was going on I was also reading up on charts. Coming from a software background I started using various technical packages and testing the charts. I bought a software which was also sold as a trading system – which generates buy and sell signals on its own, for around Rs 2.5 lakh. This was a complete waste of money. The only good thing about the software was that it allowed coding and I could play around with the indicators.

I started coding on these technical packages after coming back from office late in the evening and on marathon sessions of around 14 hours over the weekend. This work schedule continued for nearly two years. I modified some of the indicators and observed how they work in various markets and timeframes.

Looking back on those days I used to start trading immediately after I developed a system. There was no fear in those days as I had no responsibility. Today I would not be able to trade as fearlessly.

But developing a system is the easier part trading on it is a completely different ball game. In those days though my system was generating calls I was not following it on account of personal bias.

Say, if my signal was a break out I would not trade it but wait and think that I would enter when there is a pullback but the market would never pullback and I would be left waiting. I would come out of winning trades by getting out even before my signals would tell me to. Similarly, I used to let the losses run thinking that it is only a small correction.

But, it was just one trade that changed me. I decided to simply follow my system and see what happens. I entered when the system said I should and exited when it said that I should exit. I did not let anxiety get in the way. In the end I made good money. This trade gave me the confidence that if I follow the system I will make money.

However, things have changed since then. It started trading with having no systems, then having a system which I did not follow. Later I had systems which I followed and did well in trading. Now I have a system, which I follow but I also use my experience and knowledge of the environment to trade. If it is going to be a week where there are going to be some government announcements or an event is going to take place, I will trade thin, if at all.

How was the money management in your early days, did you over trade?
Thankfully no. On each trade my bet size used to be small, it still is small, but that is subjective and is dependent on the overall portfolio size. But now if my confidence is high I go all out and if it is low I am willing to sit on cash.

Coming to your trading system, what timeframe do you trade?
I trade swings, rarely any intraday trade. My trading time frame is 15 minutes and the trades on an average last for 3-7 days. My system is so designed that I will rarely get a loss or cost-to-cost exit on the same day. My back test results show that if the trade has to lose money it will do in the first three days. After three days the probability of me taking a loss on the trade is very small.

So I am careful in the first three days. I have developed strategies to protect me in these three days. I create option strategies to minimise my losses. My stop loss is always in place, but I still use the options to reduce the losses as much as possible.

What are the win-loss ratio and average win to average loss on your trades?
I make Rs 2.5 for every rupee I lose and my win-loss ratio is 50-50.

You have developed around 200 strategies. What are the general profitability numbers in most of the strategies?
The win-loss is between 40 – 60 percent and the average win varies between Rs 1.2 to Rs 3 for every rupee loss. The problem with the ones where the wins are Rs 3 for every Rs 1 loss is that they have big drawdowns.

For me, the key to selecting a strategy is how much is the drawdown or how much the system lost in the past has and the second is how much is it like to give me. A system over a long time will give more money if the drawdown is less.

How many strategies do you generally trade and can you give us a peek into these strategies?
I trade only two strategies. One is the swing strategy and the other is rotational strategy.

In the case of the swing trade, I will wait for the market to break the high of 21 bars on the 15 min chart. Only if it remains above it for one bar will I then consider entering the trade? My stop loss will be the low of 21 bars.

In case the stop loss is hit I wait for at least 2 bars to close below it, I do not keep a hard stop. Most of the times what happens is that the stop loss point is touch and the market reverses.

In case of a sharp drop in the price, which is generally on account of some news flows or international market move, I will write calls or buy puts and hedge my position. The hedge does not negatively affect my returns but it actually helps in maintain my drawdown.

If the market has moved in my direction and I am in potential profit situation, there are a few things I will check. First is if the price is near any strike price (option strike price) where the open interest is high. If it is then it is highly likely that there will be a pullback.

The second thing I check is the Z-trend bar (a proprietary indicator developed by Junaid, explained later). On a long trade, if on the 15 minutes time frame the Z-trend bar turns red then I will definitely sell calls, if the red bars continues then I will continue to sell calls. If the Z-trend bar turns green I will take the hedge out and let the market run. I will not hesitate in cutting my hedge position, even if there is a small loss.

This gives me the flexibility to hold on to my trade. If the Z-trend bar is red and falling and it hits my stop loss point I still can wait for two bars below the stop-loss point.

It actually helps me in milking the trade better. Say if the market has moved in my direction and has touched a high of 3.5 percent from my entry point, which is called maximum excursion. Now my system with its trailing stop loss will give me an exit of 2 percent. But because of these hedges I stand a chance of getting a return of 2.5 percent. In effect I am improving my returns on each trade by these hedges.

I hedge aggressively with options. My option position is at times 4-5 times my primary futures position.

How do you trade the other strategy – rotational strategy?
It is mixed with z-trend and the 21-period breakout strategy. It's more like a pullback entry in a strong trend. If the market has moved above the 21 day period and then it gives a red bar on the Z-trend which is above the previous swing high, I will look to enter. There is one more condition here that this occurrence has to happen near the highest open interest for better yield.

You rely a lot on open interest for either taking a trade or placing a hedge, what is the rationale behind it?
When I was learning to trade while I was working in the insurance company, there were a number of knowledgeable people, from the treasury and finance departments, with whom I used to interact. One of the thing that was commonly pointed out by them was the highest open interest. So I started looking it up, googled it, read about it and then observed it for nearly a year to see how beautifully it works.

Can you tell us about the indicator you developed – Z-trend?
For me, Z-trend was born out of the pain of losing. When a trade was in a strong trend and continued to move in my direction, even a single negative bar would be enough to take me out of the trade, only to see the trade recovering its path and moving higher. Same happened when the market was falling and I would think that it is the bottom and buy, but the market used to keep on falling.

The third was during a pullback. I have seen many people use the Fibonacci lines as support to take a pullback position, but for me, it did not work. For me, where will the pullback end was the third challenge.

In search of finding a solution to these problems, I came across Heiken Aashi charts (off-shoot of Japanese charts which uses two candles data). Heiken Aashi solved a lot of problem for me but when I backtested it I saw that there were a number of whipsaws that pure Heiken Aashi signals would give. It would slowly but surely wipe out my account over a long period.

I then used Heiken Ashi on my strategy and found that it improved my performance, but still it needed some work as the whipsaws continued.

So I started improvising on Heiken Ashi candle by adding some smoothening tools to it and that gave birth to Z-trend. This has helped me reduce the whipsaws by 25-30 percent. What happens is when the trend is ending the Z-trend bar becomes small and that is the time to become cautious about the market. In Nifty and Bank Nifty I have seen that it takes a maximum of two or three small Z-trend bars for the trend to change.

I have made this indicator public and have got a very good response from users also.

What was the biggest hurdle for you to become a trader?
When I started off trading I was fearless. But this resulted in irresponsible behaviour. I used to be in a trade when there was no reason to be in it, I was putting all the money on the trades.

I identified and worked on this attribute and have since mellowed down on the impulsiveness. I have realised there will be other trades to earn from, but an irresponsible trade will take many days to recover from. I still have my bouts of irresponsible behaviour but I try to manage it better.

In your social media posts, you have spoken of giving free training for a select few aspiring traders. Can you tell us about it?
Training is not something that I intend to do as a business, but I had made a commitment to myself that I will train a few traders to help generate positive returns on a monthly basis. The only criteria are that these traders have to be passionate about trading, they need to have the capital to trade and they need to be struggling to be a consistently profitable trader. But teaching a strategy is only a small part of the job. I will be hand holding these traders for a couple of months till they grasp the mental aspect of trading too.

Being a developer yourself, have you tried automated trading?
Yes, I have tried automated trading and it was profitable too, but the cost of doing it is prohibitive given the brokerages, and systems needed to run it. In order to recover the cost, I would have had to increase my volume but that was beyond my risk profile. I stopped it two years back but am still open to starting it again if the transaction and operational cost comes down.

What are you working on these days?
I am working on some models on the trend of a bunch of stocks and its impact on the portfolio.

Any recommendations for the budding traders?For the new traders, I would suggest that they should find a method where they are comfortable. Spend more time in understanding and observing the strategy till it becomes second nature.