Tejas Khoday: Journey of a commodity trader to founder of a discount broking firm

Tejas Khoday, in interaction with Moneycontrol's Shishir Asthana on the sidelines of Traders Carnival, talks about his trading days, strategies and business plans.

Edited exceprts

Q: Coming from a family which had nothing to do with stock markets, to trading with professionals and then setting up a broking firm at a young age, how did it all happen?

A: I first came across the stock markets in my school days when I accidentally stumbled upon CNBC-TV18. I remember that I had bunked school to fix the old television at home. I became instantly curious about the fluctuating numbers on the ticker tape. I didn’t get any answers to my questions as nobody around me or my family was even remotely involved in the stock markets. So, I began searching for answers all by myself and one thing led to another.

Since I didn’t have any guidance or mentors in childhood, I decided to give up science in high school to pursue commerce and economics instead. I had an inclination to start a business very early on. In hindsight, it was a great decision and I haven’t looked back since. I went on to complete my education with a Masters Degree in Finance. After finishing CFA Level 1, I became bored with studying, and jumped into the practical world by joining a start-up brokerage firm.

I started trading in the year 2006-07, just before the bull market had peaked. At the time, I didn’t have any experience, so I followed tips given by my friend’s father, and tried to learn on my own as much as possible. Back then, everyone was making money easily by investing in IPOs. I had borrowed money to invest and I was making enough pocket money to keep going.

The neighbourhood uncle, who was friend’s dad, was a punter in stocks. He asked me to buy DLF shares in the IPO and I promptly invested. I watched the stock price for about 5 months and I couldn’t have been happier. Although I was able to earn profits with a small capital size, something didn’t make sense. I didn’t think it would be so easy and that everyone that dabbled in stocks would make money so effortlessly.

A few months later, the markets imploded. That’s when reality struck and made me realize that it’s not all rosy in the markets, and I had only experienced the surface. The companies that were regarded as the rising stars had gone bankrupt and my neighbourhood uncle, who was heavily invested in stocks, died of a heart attack after suffering major losses.

The 2008 financial crisis has had a profound impact on how I perceive things. Instead of being deterred, I became more determined to be a part of this game. I extensively studied the markets, technical analysis, crowd psychology and wanted to be a part of the stock market industry. It was then, that I joined Zerodha, a start-up based in Bangalore. At the time, stockbroking was the most frowned upon profession.

Over the years, I worked in stockbroking, proprietary trading at Futures First where I was involved in trading energy products such as Natural Gas & Crude Oil on NYMEX, ICE, CME and traded actively in Indian markets too.

Q: What was your earlier trading strategy, and how did you evolve as a trader?

A: Initially, I was interested in trading the lesser-known, undiscovered gems so to speak. I thought that there was money to be made in stocks whose information is not yet fully discovered or discounted by the markets.

Over time, I realized that it is not practically possible to accurately estimate the performance of such companies for various reasons such as the lack of transparency, cooked books, and my lack of bandwidth to do in-depth research. The probability of picking and sticking to a multi-bagger is extremely rare, considering the market conditions.

I swiftly shifted my focus to trading after the 2008 financial crisis and focused on momentum for the most part, and on occasion, I would stake my profits for high risk-reward trades. I would often use pyramiding for reversal trades to maximize the potential profits and be willing to risk most of my profits for a bigger gain.

Such a strategy is only practical if you have withdrawn some realized profits from the trading account, and still have a surplus profit which can then be used to protect your capital if your leveraged trades go wrong. If your trading income is really important to you, then pyramiding is best avoided. I learned my lesson after getting stopped out on trades which went in my direction but my stop losses were too tight for the fear of losing my capital.

Over time, I evolved into a trend-following trader and avoided reversals as the margin of error is too small for highly leveraged trades. In options, 4-legged options strategies such as Iron Condor and Iron butterfly were my favourite.

The most under-utilized options strategy among retail investors continues to be the covered call. They are most suitable for traders with reasonable capital so that it can be deployed across various stocks and indices.

As on date, I barely get any time to trade as I am busy running the brokerage business at FYERS. I am currently not able to devote any time to trading.

Q: What were some of your best and worst trades?

A: My best and worst trades have both been in commodities. I prefer them over equities because there are fewer variables involved, and fewer external factors that influence the prices of commodities as compared to equities.

Some of my most memorable trades were in gold. I had started trading physical gold for my friends throughout 2010-2012, which gave ample opportunities. Trading in the physical market was quite an experience. In April 2013, when gold crashed overnight like a slam dunk, I was short when the market closed and during the US trading hours, it crashed further. The next day, I was astonished to see that there were no bids in the market from time to time.

This was new to me. When inquiring with the bullion dealers as to how they are dealing with the price crash, they were in a bit of a panic. It gave me the confidence to hold on to the short position and it turned out to be a great trade.

Another successful trade that comes to mind is the USD/INR breakout in May 2013, right about the time when gold crashed is when the dollar strengthened against INR by around 10 percent in 2 months. I was able to capture a large chunk of that move.

Given that the leverage is approximately 50 times for currency futures, it was a big deal for me, although my account size wasn’t big enough to make me a millionaire! It gave me a sense of conviction that I had the ability to catch trends.

My worst trades have always been reversal short trades. There is a thin line between ego and determination. It only takes a few seconds to cross over to the other side and become defiant. I learned to be humble if trades go wrong after repeatedly shorting some stocks after the Modi rally. I guess it’s because I had found success shorting in a well-timed manner before.

I follow a top-down process to identify trading opportunities by looking for a trend in the larger timeframe, and confirming if the trend is intact in shorter timeframes, and then looking for trade setups. I avoid using too many indicators and like to keep it simple with price and volume information and maybe one or two basic indicators.

Too much information can paralyze a trader, and give rise to doubts instead of confidence. I mostly rely on price action and patterns. One needs to learn how to identify the market phases. It will help create different trading strategies accordingly. What works in a bullish market won’t work in a sideways trending market and so on.

In the intraday timeframe, the winning ratio has to be high. If you have a very low winning ratio, then transaction costs will add up and eat into your capital even if you manage to break-even on a gross level. Hence, I would play for uneven and often varying risk-reward trades just to maintain a sustainable win ratio.

The risk-reward can be low as long as your win ratio is high. I believe this is especially true for intraday traders who take positions in multiple stocks/instruments. You’re not always going to get a big move and might get whipsawed unnecessarily. Successfully avoiding whipsaws and maintaining a decent win ratio is essential to success. Anything above 40 percent is really great.

Q: What are your reasons for starting a brokerage firm?

A: After having traded with several brokerages and facing issues with their platforms, I was fed up. I felt that traders deal with enough uncertainty already, and the least they deserve is a reliable brokerage that can cater to their requirements without jeopardizing them or creating any conflict of interests.

When we started FYERS, we had set out with the agenda to transform the trading and investing landscape by focusing on technology. We are also among the very few brokers in India that do not indulge in prop-trading activities. This was a conscious decision we took at the very beginning as we wanted to focus on broking rather than trading, so that we can safeguard the interests of our clients and not expose them to the risk of the broker’s MTM.

As an active trader, I found that the brokerages in India are severely lagging in technology and customer-friendly services. They also lacked robust trading platforms that I had used as a prop trader. It was almost as if the brokers were 5 to 10 years behind what traders expected of them.

I was determined to improve the trading experience for Indian investors and thus, we applied for a broking license with NSE. At first, everybody laughed at the idea as my team and I was very young at the time and nobody had received a broking license at such a young age. For me, there was no looking back as I had gone all-in and there was no backing out no matter what!

To everyone’s surprise, we were granted the stockbroking license and a new and promising journey began in late 2015. When we started FYERS, the focus was on 2 main aspects: technology and transparency. Our extremely narrow approach helped us get the patronage of active day traders and by word of mouth referrals, we have been able to build a customer base of 30,000 without any marketing or advertising efforts. Instead of publicity, we put our efforts into building a great product.

We were the first brokerage in India to introduce TradingView with drag and drop trading functionality, which makes it super-easy for scalpers and intraday traders.

Other than that, we realized that traders have custom requirements and to be able to cater to them, we launched Trading APIs to help them integrate with other platforms such as Amibroker, TradingView, MT4, NinjaTrader etc. Tech-Savvy traders who use Python, Java etc. to code their trading strategies can also use our API for trade execution.