Here's a peek into the life of a successful trader. His work is over by 10 am, after which he sits and reads a journal or a book or watches the TV series – Billions. At the end of the day, the trader goes to the gym. Fridays are compulsorily meant for friends, and he takes about 2-3 road trips with his family and friends in a year. Not to mention watching most of the movies as soon as they are released.
Meet Kirubakaran Rajendran from Chennai who designed Trading Bots — An automated program which trades using a given set of rules — to do his trading. His current lifestyle was achieved after years of back-breaking work and learning from every possible mistake one can do and probably more.
However, Rajendran is not a conventional trader. He is among the few option traders who trade on an intra-day basis, more so without looking at option Greeks or technical charts. A student of statistics, Rajendran is in his 'zone' when surrounded by numbers. He has not only broken the code of successful trading, but also automated it with bots, which can be used by retail traders.
In an interview with Moneycontrol, Kirubakaran Rajendran talks about his humble beginnings, his years of struggle to become a successful trader and his various trading strategies.
Q: Can you walk us through your journey to the market.
A: It was my inquisitiveness that brought me to the market. It was during the 2007 boom when I just glanced through the news that Mukesh Ambani was among the richest person in the world because of his stake in the Reliance Group of companies. The news somehow stuck with me and got me thinking that if the owner of the company is among the richest persons in the world, surely his shareholders would also be rich. That got me started in looking for ways to participate in the market.
My humble beginnings only helped me in my resolve to chase my dream. I come from a middle-class family from Chennai. My father, a government office clerk and my mother, a tailor, had a tough time in providing for my basic education. After my schooling, I joined Loyola College for a graduation course in Statistics.
It was a good 30 minutes bus ride from my home to college. I utilised this travel time reading. This was in 2007 and all the papers were talking about was the wealth generated in the markets.
In South India, there was not much of an investor awareness in 2007. No one in my family knew anything about the market, there were no workshops back then, no Quora to help with information. The only way I could manage to get some help in my education on the market was through a small Indian community group on Orkut.
After reading a bit about the market, I decided to take the plunge at the beginning of January 2008. But just before this, I had noticed that the stocks that were in news used to go up for a few days. This was my 'strategy' of making money in my earlier days. I started off with a small Rs 5,000 account, money that I managed to save from my scholarship. But then by January 21, 2008, in less than a month, I was back to square one, thanks to the lower circuit in the market.
Q: How did you come back to the market?
A: My next tryst with the market was after I got a campus placement in Infosys with a salary of Rs 15,000 per month. I used to work in the night shift in those days. I did not have an IT background and was tasked with doing a routine job.
I decided to automate the work so that I can get more time to read on markets. But in order to automate, I had to learn to compute, as my background was in statistics, and I had very little computing knowledge. I looked up ways to learn to code and automate my office work. As a result, a work which would take two hours was completed in 10 minutes giving me enough time to read.
In the beginning, my boss did not know about it, but when he did, he appreciated the work and got me transferred to mainstream computing.
Nonetheless, I kept on gaining as much knowledge as I could on the market from books, sites, and forums. I also started trading again. In those days I continued to trade in the way I did in early January 2008 – on the news.
Buying stock on news and then holding it for a few days and selling it. I was making money in some trades and losing in others. This was when I was lured by options. I heard people say that it was the fastest way of making money. You put in Rs 100 and make Rs 1,000 in a few days.
I read a bit on options and then decided to trade long strangles – buying both Calls and Puts. I had seen and read that stocks generally move sharply after results, so I decided to take such a trade. Ironically, I decided to take a long strangle trade in the company I worked, Infosys.
A day before the result, I had built a position of Rs 1.5 lakh in Infosys strangles. I remember that I couldn't sleep that day with such a huge position. The next day, results were announced before market hours and when Infosys opened that morning, the value of my strangles had come down to Rs 20,000. I had lost more than three months of my salary in a single day.
This was a big lesson. Rather than running away from the market, I dove deeper into reading and researching what makes a successful trader click. This is when I decided to move from news-based trade to rule-based trade.
This was also the time when I read the book 'How I made $2 million in the stock market' written by one Nicolas Darvas, who was a ballet dancer by profession. It acted as a trigger that set me off into the fascinating world of trading. I realised that if a person with no background can make a good amount of money, then even I can. There is no closely guarded secret to trading success.
Q: How did you move after this ‘enlightenment’?
A: I put my computing knowledge to use and started building rules-based trading systems and testing them. Over the years, I may have tried and tested hundreds of trading systems. I have automated these strategies which would eliminate emotional decision making. If I found that they were working well in back-testing, I tested them in the market.
This was when I made my next big mistake. I borrowed money to trade in the market.
When my trades were profitable, there was no issue. But, even when there was a single loss, I would relate it to some day-to-day expenditure and weaken myself psychologically. So high was the positional leverage, that a single day fluctuation in my trading account was equivalent to a month's salary. It was taxing to trade in those days. I was trading Nifty futures but the lot size was more than what one would call comfortable.
In such a case, if there were three to four consecutive losses, I would change the strategy. It is said that algo trading takes emotions out of your trading, but with consecutive losses on a leveraged position, you start doubting yourself and your trading system. You will bring back discretion in your trading and move around in circles.
I somehow traded this way with bouts of profits and losses for a few years until I read a story which changed me from a normal trader to a consistent trader.
It was about a Greek wrestler named Milo who lived many years back. He was one of the greatest wrestlers from Greece who had won six consecutive Olympic medals. Everyone wanted to know what his secret was and how he managed to be so strong and successful.
The story takes us to his village where Milo started his training by lifting a newborn calf while his competitors were trying to lift bulls in their practice sessions. Now anyone can lift a calf, even you and I can do that, there is nothing great in it. So how did Milo become great by doing that?
Milo used to carry his calf everywhere he went. Over time, the calf put on weight but Milo was still carrying him around. Milo's body and mind were getting used to lifting the calf even as it slowly grew. By the time the calf became a bull, Milo could lift it effortlessly, while his competitors were still struggling to lift the bull.
This story opened the concept of position sizing for me.
I realised that it was not only the trading system but the trader who, by putting in various checks and balances in his trading system, makes money.
I realised that instead of putting all my capital or more specifically the borrowed capital, I should have started by trading with one lot. This way I would get used to the trading system without letting the daily market fluctuations affect my mental peace.
I followed this and progressively increased my lot size, as a result, I stuck to my system. After that, everything started falling in place.
Q: What are the strategies you trade?
A: I trade multiple strategies, all of which are automated. I trade in the weekly Bank Nifty in the options market and stocks in the cash market.
Many traders approach a strategy as trend following or one that is a reversal to the mean and then try to fit the back-tested data to the strategy. I, because of my statistics background am more comfortable dealing with data and deriving a strategy based on the output.
In Bank Nifty, I trade by selling options. It is known that selling options lead to money making two out of three times. So, I decided to work around options because of this bias.
I downloaded around 14 years of data from the NSE site and got down to designing my strategy. I am basically a day-trader, so I was looking to design a system where I would make money in most days and lose only a small amount in days where I am wrong.
I looked at the daily range but slightly different than how it is conventionally viewed. Rather than looking at the difference between high and low of the day, I looked at the difference between open and low and open and high. I plotted the data to get a normal distribution curve.
What I found out was that in most cases, Bank Nifty does not move beyond 1 percent from their open. The data corroborated with the conventional wisdom that says that the market stays in a range 70 percent of the time. Using this information as the basis I designed my options strategy around it.
I also found out that I will make money by selling call and put options if I select strike prices beyond these one percent range. However, there was a problem. If the Bank Nifty goes in one direction and beyond the range, the strategy would lose 2-3 months of profit in one day.
I looked for other data points to protect myself. I looked at open interest data to see where there is a position build-up and sell my options around them.
In this strategy, which I currently trade, I have three stop losses conditions which take me out of the trade if I lose around 1.5 percent of the capital. Using these stop losses, the strategy is now posting around 30-35 percent annualized return. Drawdown has never extended beyond 15 percent. Irrespective of the volatility level, the strategy has made money.
The period when this strategy is making losses is when there is a volatility shift from a low volatility phase to high volatility.
I start off the week with strangles but as the week progresses I take short straddle trades – selling call and put options at the same strike price. I do not use option Greeks for my entry or exits, nor do I do any adjustments to my original position as that would require me to sit in front of the screen. What I have observed is that when Bank Nifty moves beyond one of my extremes, it can continue to move in the same direction. It is better to accept it and exit rather than firefight it.
In the case of stocks, I trade in stocks which are in the derivative list. This way I do not have to worry about circuit filters preventing my exits.
Here, my data analysis has gone against conventional wisdom. What I have found is that if a stock gaps up at the opening, irrespective of the trend, the price tends to come down. Similarly, if there is a gap down, its price tends to go up, irrespective of the trend.
There is, however, a caveat here. I optimize the gaps — for example, I will weed out stocks where the gap opening is only 0.5 percent or if it is too large — say 4-5 percent.
Another strategy that I trade is by looking at the volatility file that is updated by NSE on its site during trading hours. I look for stocks where the volatility has gained the most but the stock is among the top losers. Such stocks tend to give explosive moves the next day or within a few days. It is better to trade in these stocks than a fixed set of stocks.
In positional trades in the cash market, I trade by buying high and selling higher. Here I look for stocks that are touching new all-time highs or 52-week highs.
I run a query at the end of the month to check out for such stocks. I then rank them based on the distance between the month end close and the 52 high levels. Suppose a stock made a high of 520 but closed at 500, I divide the two to get a ratio of 1.04. I calculate the ratio of all such stocks and buy the five strongest ones and balance them on a quarterly basis giving them enough room to perform.
This strategy is similar to the ones where relative momentum is used but here I enter a stock only when they were making 52-week highs. When the market crashed in 2008, there were no stocks touching 52-week highs from February 2008 to April 2009. Relative momentum would have given some whipsaw trades.
Q: And how are the returns?
A: The Bank Nifty option strategies I trade have generated an average return of 30-35 percent, without including the liquid bees which I use as margin. Including Liquid Bees, the return moves up to 40 percent. In positional stocks also, the return is between 30-35 percent. The trades are generally profitable 55 percent of the time and the average loss to win ratio is between 1:1.5 to 2. The gap based strategy has a slightly higher return.
Q: Can you tell us about your Trading Bots
A: My team and I have automated trading using the mobile app – Telegram. This way it becomes simpler to use for a retail trader. My site www.squareoff.in has multiple trading strategies that a retail trader can use.
When you subscribe, you get a trading bot which essentially does the trading for you. These are Black Box strategies. Rather than following the advisory method, we decided to use the trading bot route. When you buy an advisory service and get trading advice, by the time you enter the trade along with many others, you notice that price has already moved up.
In the case of trading bots, you will get a link at 09:30 am which you have to click, and enter your login and password. Then, one needs to enter his trading capital, risk percent, and profit percent and send the message to the broker. Say if someone has a trading capital of Rs 1 lakh, he can enter that and mention a risk or stop loss level of 1 percent and a profit target of say 1 percent. The trade will be executed and if any of the two levels are hit, the trade is closed. Our trading bot is presently connected to two brokers – Zerodha and Upstox.
The Bots are available at a nominal one-time charge, plus there are many free trading bots available on the site.
We have a team of five members who support the site. Subash Hundi, who heads the technology part of the business, used to be a branch manager with Karnataka Bank, which is just across the road from our office. A BITS-Pilani graduate, he is very strong technically and offered to work for free in order to learn the market. That's the level of passion in our team which works on something new continuously.
Q: What are your plans going forward?
A: We are working beyond price and volume by using alternate data sets. In a developed market, some large funds are using satellite images of the car parks outside Walmart to get an idea of how the company is doing.
We have started using machine learning in our trading. Presently, we scan the stock exchange announcements. A company in India has to first notify the stock exchange before it is released to the media.
Recently, we saw that the breakup between Amararaja Batteries and Johnson Controls put up on the exchange and was covered by media after a lag. The stock plummeted only after the news was flashed on TV channels. If you are attentive and manage to do it faster than when it is made public there is a good opportunity to trade profitably.
Q: You are among the few traders who use Quora more often than Twitter, why so?
A: I prefer Quora over Twitter because it helps in explaining a concept clearly without having word count restrictions. Further, the Twitter world is too crowded and noisy.
In Quora, I get the benefit of the experience of other traders and experts. There are occasions when famous authors have come and corrected me or helped in clarifying my doubts.
On Quora, I post strategies that I have back-tested. Even the ones that do not work have been posted so no one wastes their time behind it. I have posted over 700 articles on Quora which has seen 5 million views.
Q: Any words of advice to an aspiring trader?
A: For an aspiring trader, I would say always have a clear set of simple rules. Do not trade if you cannot explain in two lines. The more you complicate, the less likely the strategy would work.People generally go for strategies which give higher returns without looking at the drawdowns. For example, if a strategy gives a return of 40 percent per annum with a drawdown of 15 percent, it is certainly better than a strategy giving 90 percent returns but having drawdowns of 40-45 percent. Chose the ones where risk is lower.