When author George RR Martin of Game of Thrones fame said a reader lives a thousand lives before he dies, he probably had Nishant Arora in mind. A computer engineer with an MBA in marketing Arora has literally read his way up in life going through various professions.
Quitting a high paying multinational job within three months because it was not challenging enough, Arora plunged head first into the corporate sale of printers. Though initial rejections were discouraging they were overcome through persuasion and gaining knowledge by reading by everything about the product he was selling. Within two years, Arora was confident of selling anything.
This confidence resulted in him venturing on an entrepreneurial spree. Arora turned into a serial entrepreneur, starting businesses ranging from dealership of multiple consumer companies and an event management firm.
During this time Arora continued with his reading and taught himself to play the guitar, piano and mouth organ by reading about them. In one such reading spree, he came across books on investing and trading. Arora felt he had found his mojo and dug deep. Before long, he was successfully investing and trading.
His journey to becoming a successful trader and an investor was just as arduous as most others. But unlike other successful traders and investors, Arora wanted to shorten the learning curve for others who were struggling to turn successful. He started a Facebook community for traders and investors who want to learn the ‘how’ behind the process of trading rather than ‘what to trade’.
In an interview with Moneycontrol’s Shishir Asthana, Arora talks about his journey, his process and the investing community that is growing up in size just like his portfolio. Below is the transcript of the interview.
Q: Before we get into the details of your trading, can you tell us about Techno-Funda Society.
A: I have been in the market for nearly a decade. I started by investing and then moved to trading. Over the last few years, I have realised that resources needed for trading and investing are not easily available. Either they are very basic or very advanced. There was a clear disconnect between what was needed and what was available.
That’s when I decided to start a Facebook group under the name Techno-Funda Society (TFS). Within six months, we touched a membership of around 7,000. What we do not do in TFS is discuss specific stocks or what to buy or sell. We discuss the ‘how’ of investing and trading.
We were pleasantly surprised at the success of the group. The general perception is that most participants in the market look for tips, but what we found out was contrary to that. I have also been writing a blog for the last five month on the process of trading and investing.
One of the first things that we come across is the misconception between trading and investing. The general perception is if we take a position and sell it in a short time it is trading and if we hold it for a long time it is investing. Time of holding is perceived to be the difference between investing and trading.
Q: Let’s now talk about your journey to an investor, trader and educator.
A: I do not have an educational background in commerce. I did my computer engineering and an MBA in marketing and IT. After completing my education, I worked for a reputed MNC company. I soon realised that I was just one of the 40,000 employees and there was not much to learn in a big company. Within three months, I quit my job and worked for a small dealer of computer products at one-fourth the salary.
This was a hard-core sales job where I was required to sell printers and computers to corporates. In the first 6-7 months, there was nothing to show for my efforts. I was sent back from the gate. It was depressing given my educational background. I did not lose hope and with persuasion and product knowledge I hit it big in a year’s time.
All along I had the entrepreneurial spirit and wanted to branch out on my own. After two years in the job, I started out on my own. I set up a series of businesses. I ventured into the distributorship of a number of personal care and food product companies. We then forayed into event management and exported consumer products to south-east Asia. Post that, we ventured into medical tourism by bringing patients into the country.
I am also a voracious reader and continued with my reading while these businesses were running. On one such reading spree, I landed up reading up a book on Warren Buffett. When you are introduced to Buffett, you end setting everything aside. I gravitated between Warren Buffett, Charlie Munger, Benjamin Graham, among others.
This was a completely new world and journey for me. Using learnings from these books, I managed to pick up some multi-baggers. In Warren Buffett’s type of investing, I realised that he was the main trigger for value unlocking. Not only his name added value but he was in a position to dictate how the company should run. In my case, this was not going to happen. For me, it was going to buy and wait. There was a small chance that investing would have become a full-time profession unless I had a huge capital.
That got me thinking. If I cannot be a trigger, what else can I do to generate capital? While I was running other businesses and investing, I came across a book called Market Wizards by Jack Schwager, in which he had interviewed successful traders. Schwager opened the doors to a new and exciting world.
As I learnt and improved my trading, I found that though it was consuming a major portion of my time, it was rewarding at the same time. Hence, I started trading full-time and decided to shut my other businesses. Even now, I use the profits that I generate from trading and plough it into investing.
For me, trading helps build my profit and loss account while investing builds my balance sheet.
Q: Can you tell us in detail how you invest and trade? Let’s start with investing.
A: While investing, I follow three conventional methodologies. First, I look for value plays. Two, for stocks that are positive growth stories, and finally the workouts.
In value, I look for companies trading at a fair valuation based on discounted cash flows. Here too, there are badly managed companies or those that are in a bad sector which are at times available at distress valuations. In those that do not have any earnings to discount, I look for asset valuation.
Take the case of the MTNL trade I undertook in 2013-14. It was a badly run company which was running into huge losses. Though there was nothing in the P&L account, it has vast assets. In 2013-14, I was available at Rs 9 per share when I bought it. Within eight to nine months, it was trading at Rs 35 per share. These are the type of companies where one has to be ready to sacrifice quality provided they are cheaply valued.
Finally, there are workouts. These are basically event based such as mergers, acquisitions or spinoffs. They offer positive short- to medium-term value-unlocking opportunities.
Q: And your trading strategies?
A: I am an opportunist trader. I trade various strategies. I have trades going on for a few days to a few minutes. I have swing trades running in the background, while I look for day-trading opportunities. I am basically a technical trader but not the conventional type.
The general perception is that a technical analyst is a tea leaf reader who sees patterns and decides which side the market is going to move. However, I feel technical analysis is a study of people who are buying and selling. The market is about people and not about patterns.
My study is about people. Here I try to study the battle between the bulls and the bears. The fiercest battles are fought near the areas of support and resistance.
To look it at in another way, a stock price rises to seduce sellers and falls to attract buyers. If they do venture in, we find support and resistance, if not, we get trends. If price rises and sellers do not get seduced to sell, then we get a breakout and if they get seduced to sell we get a resistance. I try to view the psychology of traders at these various stages.
Q: Were you always a price action trader or did you try other trading strategies before closing in on the current form? What has been your Eureka moment in trading?
A: I started like everyone else by going through the grind. Thankfully, I found out quickly that this type of trading does not work. Trading is not scientifically driven. Price cannot go up, then correct to 38.2 percent and rebound each time as some Fibonacci traders think.
Traders are not driven by science but by emotions. Behind every technical pattern, there are emotions of people involved. It took me six to seven months to realise this.
My Eureka moment occurred in my first year of trading while I was trying to win on every trade like everyone else. Here, one assumes each trade will turn out to be a winner. However, if the trade does not move on desired lines, one gets dejected. Trading in this mind-set leads to losses.
This was the time I read books by Mark Douglas which changed my life as a trader. In it was a wonderful concept which states that what matters is not about the number of times you win, but about the amount you win when you are right. I began reading books on position sizing, risk management, and trade management. I learned that in trading even being right 50 percent of the time is a high number. Your strategy has to be such that you should be making money even if you right 30 percent of the time.
This realisation changed my life. You cannot win every trade. Every beginner, including me, trades on a trade-to-trade basis. His emotions are attached to every trade and he takes them personally. Rather than analysing every single trade, you should analyse a block of trades. Every trade is just a data point in the distribution curve of your trading career, so why give it so much emphasis. The realisation of this fundamental thought was the Eureka moment for me.
If you consider my trading record over the last five years, I have had winning trades only 47 percent of the time. But my win trades were 4.5 times bigger than my losing trades.
Q: How do you identify which stocks to trade?
A: I trade only in large capitalisation stocks and that too only in the futures market. I pick my stocks by going through the NSE website. I do not use any screeners or software. What I am looking for is the list of gainers and losers, stocks which have seen a volume spike or where open interest has shot up. I look at anywhere around 100-150 stocks and each stock on three different timeframes.
I then prepare three lists of stock. The first is the urgent list, where the stock is in trading territory. Here, I will be placing the order immediately at market open. The second is the waiting list where the chart looks positive but the price is not in the area which will offer a positive risk reward. Third is the no trading list. A stock from the urgent list will be a day trading stock if there is a volume and open interest spike.
Q: How do you decide your exits?
A: There are two ways in which I exit from my position. One, if there is price deterioration and second, when my trailing stop-loss is hit.
A lot of people in the TFS community talk of their stop losses being hit on a regular basis. This is because most keep a stop-loss based on affordability. For instance, one says I can afford to lose Rs 5,000 on a trade. So, they keep a stop-loss based on the capital they are willing to lose and not on any technical parameter.
I feel there are three conditions that need to be satisfied while placing a stop loss. First, it should be a technical point, either a pivot or support or resistance. Second, the distance from my entry point to the stop-loss should not be more than two percent of the capital. Third, the minimum earning potential should be two times the risk. If even one of these are not satisfied I will not undertake the trade.
Q: You mentioned about looking at three -timeframes while selecting a stock, can you elaborate on that.
A: In any form of trading, be it swing trading or day-trading, I trade through three timeframes. Let’s take swing trade, where the hourly chart will be my primary timeframe. The higher timeframe will be the daily chart. I will only trade if the trend of both these charts is the same. I look for an entry on a pullback in the lower timeframe, which will be the 15-minute chart.
I wait for the price to correct on lower volumes in the 15-minute chart while seeking an entry. I enter, build upon my position and scale out from my position on this lower timeframe.
I use the primary timeframe for setting up stop losses and potential exit points, while the higher timeframe is used for trend seeking.
There is a proportion of timeframes that I use. I prefer the same to be in the four to six range. If the trading timeframe is 15 minutes, then the primary timeframe will be an hourly chart and the higher timeframe will be the daily chart which is built after over five hours of trading in a day.
In my intraday chart, I use the 3 minute as trading, 15 minutes as a primary and hourly chart as higher timeframes.
Q: What advice will you give to a retail trader?
A: First, know what type of participant you are – a trader or an investor. Two, read books accordingly. There are many mentors and teachers who compare trading to swimming, saying you cannot learn swimming by reading books. I differ. I believe trading is like a brain surgery which cannot be performed without getting your basics right.
Q: But how does one know whether he is capable of being a trader or an investor.
A: There are two types of personalities: Type A and Type B. Trading need reflexes and investing needs intellect. If you are an intellectual who does not like action, then you are best suited for investing. Those who may or may not be intellectual but still likes action are best suited for trading. The best part about technical analysis is that it is not difficult to learn. While fundamentals require a commerce background and a lot of patient learning, not many people are willing to put in the hours.
Q: Since you have been interacting with a lot of beginners, how important is strategy and technical analysis in the overall scheme of things.
A: To be a successful trader you need a balance of three things - method, mind management and money management. On a scale of one to 100, strategy will have the minimum allocation of around 20. The other two will be 40 each.
In a trade, irrespective of the strategy, you will never know the outcome. Analysis needs to be good, but a lot of beginners while trading or investing lose out due to analysis paralysis. There is a big difference between an analyst and an investor. Similarly, there is a difference between a technical analyst and a trader.
A trader while beginning generally enters a market thinking it is a lottery and that he will make it big. But when he loses, he is shaken. He then thinks he should learn a strategy to give him an edge, but after a few losses, he is again disillusioned. He then looks at the chart more closely. The problem with over researching is you discover new things every time. If you are look at the clouds for long enough, you might think that the cloud is in the shape of an elephant or a dog. Same is the thing with technical analysis, you end up discovering patterns which are not obvious.
Analysis or method or strategy is the smallest contributor to a traders' success.
Mind management plays an important role. In real life, suppose someone is a sad person. When his trade moves into positive territory, he will book profits soon as he is happy when the trade is in profit and does not wants to miss out. If someone is angry, he would get upset if a trade goes against him and will blame the market for taking away his capital.
Most people talk about greed and fear being the dominating emotions in trading. I think the other two emotions should be revenge and recovery. Most people get in revenge mode as if the market owes them something. Beginners get into recovery mode as though the market knows they have lost money and deserve it back.
There are innumerable examples of very intelligent people losing money in the market. It is not because their analysis was bad but it was their mind management and risk management that let them down.
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