How Vishal Mehta undertook a journey from discretionary to system trading for consistent gains

A voracious reader, if you are looking for Vishal, is easy to find him at a cricket field. When in Mumbai, he never misses his Sunday cricket sessions with his society buddies.

In this interview with Moneycontrol, Vishal Mehta talks about his learning from the market, his different stages of growth and trading style.

Q: Vishal, you are an old hand in the market, how did you start your journey?

A: I have been exposed to the markets from a very early age. My father was a BSE broker and I regularly visited his office. My earliest memories are of listening to the tape – it used to start with a quote of the 21st Century and then move on to other companies alphabetically. It did intrigue me but frankly, I never envisaged a career in markets back then.

After completing my graduation in statistics in 2002 I had three career choices before me. Since I was a good cricket player I could have moved ahead with it professionally. I liked and still do like music and had a choice of becoming a DJ, and the third option was to join my father’s business.

While I was still thinking through my plan,s my father informed me about a seminar in BSE on Technical Analysis. That seminar was my first exposure to markets after my childhood trips to the office. The first thing that I saw in the seminar was a price chart and like a child in a sweet shop, I was hooked to it.

All I remember of the seminar is that if a stock is trading above a 200-day moving average (DMA) it is good and one that is below it has to be avoided.

After the seminar, I did a little bit of probing of my own and concluded that if money can be made by trading from the charts, I might as well do it on an intra-day basis. My father introduced me to a sub-broker of ours who looked at intra-day charts for his trading. It is here I learnt more about technical analysis. I was fascinated with the software which was being used – Spider Software and thought of working with the company to get more insight into it.

Since our broking business was not doing too well after the burst of the dotcom bubble, I decided to apply for a job there and managed to get it. From Spider Software, I moved to another company which was supply technical analysis package – Reliable Software. I worked for around one and a half year in these companies and might have met over 1,000 traders in India during this time.

My job was to help build queries for these traders and provide support to the software. This interaction helped me a lot in understanding the psyche of a trader.

While working in 2004 I was also trading with a sub-broker who was a perennial bear. He taught me to sell a stock on every rise. That was my first introduction to trading with a plan in place. However, the market was not right for shorting in 2004 as it was the start of a major bull run. The experience taught me risk-management, though not before I lost money in the market.

This was also the time that my uncle gave me Rs 10 lakh to trade in the market which eventually resulted in my first biggest profit and then loss.

I gradually accumulated 10,000 shares of UCO Bank in the price range of 22-25. This was the biggest position in the market I had ever taken. UCO Bank started moving up and touched a price of around 38-39. I was advised by fellow traders to exit, but my inexperience took the better of me and I told them back that I intended to buy the top end Maruti car from the winnings of this trade. I pegged my dreams to an unrealised profit. As you may have guessed, the stock soon started falling and in desperation, I sold it at Rs 14. The bottom of the chart on that fateful day was because of my trading.

The trade made me realise that making big money is as easy as losing them. My journey of wins and losses continued. My Rs 10 lakh account went up to Rs 15 lakh, but in the end, it depleted substantially. I gave back the residual money to my uncle, the remaining amount later. Apart from trading losses, another reason for the drop in the capital was that I was a prolific spender. I used to spend a lot of the money that I made in the market.

Soon, I realised this cannot go on for long. I needed a steady income and for that, I need to improve my resume. I joined an MS Finance course offered by ICFAI Hyderabad.

My connection with the market continued while I was in Hyderabad. I had taken my laptop with me to check charts every day. I used to explain technical analysis to my batch mates. Dhaval Vyas, who later became an analyst, was my roommate, and he came up with interesting stock picks in those days. I remember many of his multi-baggers and his call of Unitech, which moved from Rs 30 to Rs 1,300.

Looking at the charts of the stocks he recommended I saw that one thing was common among them. They all crossed an all-time high mark before starting on a new journey. To this day I use this important filter in my investment portfolio.

Q: How was your second innings in the market?

A: After my education in Hyderabad, I got a job with ILFS Investsmart as a technical analyst, one which I hated. My job was to give an intraday call to the retail traders. I remember my boss shouting at me because eight out of 10 calls were correct. He expected all of them to be right.

But it was during my stay in ILFS Investsmart where my first big profit was booked. There was a rumour about some activity in a company called Jai Corp. I immediately looked up the chart and found that it had made a new all-time high and met my criteria for buying.

The stock was hitting the upper circuit every day and moved from Rs 300 to Rs 350. I kept my buying order and surprisingly, got a fill at around Rs 350.   The stock kept on moving higher to Rs 500 and I was on cloud nine. But then it started moving lower and went all the way to Rs 150. Since the position was of around Rs 15,000 (50 shares), I, like most new traders, moved the stock into the pile of 'short-term-trades-which-became-investments' and forgot about it.

Then suddenly Jai Corp started making a meaningful presence in my portfolio. The stock again started moving higher and continued hitting the upper circuit. It touched an unadjusted price of Rs 15,000, becoming the highest gainer in Asia. At its peak, the stock in my portfolio was worth Rs 7.5 lakh.

This was where I learnt another lesson from the market. Near the top, the company announced a big airport project near Navi Mumbai. The stock started falling from the top, which taught me that a stock can move without news and when the news comes you should be out. Unlike in the UCO Bank case, I managed to book a profit and exit at a value of around Rs 5-5.5 lakh.

This incident also taught me the importance of risk and money management and the perils of having a concentrated bet.

My career was also taking a turn for the good. I got a chance to work with Reuters. This gave me the chance to meet the institutional buy-side players likes bankers and corporates. What came to me as a surprise back then was everyone used charts and technical analysis, though they were not forthcoming about it.

The training-and-support assignment with Reuters allowed me to train central bankers in Sri Lanka, Maldives, Nepal and Bangladesh.

From Reuters, I moved to Bloomberg where I was the Chart Advocate for Asia and interacted with Asian traders. I was the link between what traders wanted on their charts and the central office. This offered me the opportunity to interact with thousands of traders across the globe and understand their way of thinking and approach to the market.

During my tenure in Reuters and Bloomberg, I felt the need for further educating myself in technical analysis. I heard about this course called Chartered Market Technician (CMT) and completed it in 2006-07. I was among the first 20 CMTs in the country.

Since not many people knew about CMT back then in India, I approached their head office in the US and after some deliberations, they decided to set up an office in India. Because of my network in the industry and thanks to my work experience, they asked me to be the chairperson. I was invited to the US along with a friend and had the opportunity to meet Gerald Appel, the founder of the technical indicator MACD (Moving Average Convergence Divergence), and Ralph Acampora, considered to be the grandfather of technical analysis.

The Indian chapter of CMT recently organised, for the first time in the country, the annual summit of CMT where world-renowned technical analysts like Martin Pring, Ralph Acampora and JC Parets came to the country.

Q: How have you progressed as a trader?

A: As a trader, I was making all possible mistakes but that did not stop me from trying every strategy that I could think or read about. Back then I used to be a discretionary trader, but I was so bad that you could take a contrarian call on my trade and make money. My problem was discipline, or rather, the lack of it.

Thankfully I am a voracious reader. I came across two books – Stock market edges by Philip Reschke and Short term strategies that work by Larry Connors. The books talked about quantitative edges, which was contrary to what I had seen or read.

Most of the traders in the market buy a breakout or buy above the high of a green candle (bullish candle). I, however, buy at a red candle (bearish candle), but one which is nearing the end of the bear move. This gives me the opportunity of buying fear and selling greed. By the time the chart shows a green candle and other traders enter their position I am already out of the trade.

This systematic strategy is best explained in Larry Connors book where he talks of the 2 periods RSI (Relative Strength Index) strategy with proper entry and exit rules.

One reason that the systematic strategy rung a bell was that long back I met a trader in Calcutta called Subhadip Nandy who showed me how his system was giving buy and sell signals on the chart. I could not relate to it back then, but when I read Larry Connor’s book, I could immediately relate the two. I downloaded all 18 books written by Larry Connors and finished it in a week.

What the books taught me was that you need to find edges in trading. The edges may be small, but they offer better than a 50-50 chance of winning. If I can position size these edges properly, I would, in the long run, turn out to be a winner.

The issue in front of me now was implementation. I was tired of being a discretionary trader and wanted to be a systematic trader now that I had a set of well-defined rules to trade. I liked the system approach as individual trades did not affect my ego. In discretionary trading, a few stop losses would rattle me.

Connors' strategy was back-tested in the US markets and was working well. But I needed to run these strategies in the Indian market and test them by considering all parameters including position sizing, size of the portfolio among numerous other variables.

I tried hunting for a programmer in India who could do it but could not find one who could include all the variables. Finally, I reached out to Larry Connors’ programmer Matt Radtke in the US and hired his services. Thanks to my job in Bloomberg and Reuters I could afford to do it.

I backtested around 25 strategies and am live with only two strategies. Because the backtesting result was strong I am relaxed and confident of them. The 2 period RSI strategy gave me a return of 45 percent last year.

Consistency in my returns came only after I converted from being a discretionary trader to a system trader.

Q: Can you describe your trading strategy?

A: For the 2 period RSI strategy, my work starts at the end of the previous day. I first chose companies which are trading above the 200-period simple moving average (SMA) on the daily chart. The stocks should not be below Rs 50 or above Rs 5,000 and be part of the derivative list. Then I run a filter to select those companies which have a 2 period RSI value of above 50. I then look for stocks that have moved more than 3 percent during the day.

After we get the list of stocks that meet all the criteria we sort them based on ROC. Higher the ROC better is the chance of mean reversion. The top 10 stocks that make the list forms the trading universe.

The next morning our program places a trade in all the stocks at a level of 1 percent above the previous close. Stop loss for our trades are above 3 percent above our short selling price. Our target is six percent.

The chart of Biocon explains the strategy where the second last big green candle on the daily chart was our trigger. The intraday chart shows our entry and exit.

Out of the 10 stocks that we short one or two may be stopped out, some may not be triggered while others may be profitable. In our backtesting, we have found out that 80 percent of breakouts fail.

The second strategy is on Bank Nifty futures. This is an adaptation of a strategy that is followed by a Chennai based trader Kirubakaran Rajendran. While he trades the range breakout using options, I do it using futures and tweaking some other parameters. But the underlying principle is the same.

I buy the Bank Nifty future if it crosses the previous day high by a certain percent and sells it if it breaks below the previous day low by some percent. We book a profit at two percent and keep our stop loss at 0.5 percent. There is no trailing stop loss as backtesting results have proven that trailing in intraday does not work.

This strategy has given me a return of 30 percent last year.

My long term plan is to use as much artificial intelligence in my trading and bond with like-minded traders to jointly develop strategies. I intend to develop more option strategies and try to convert Larry Connors strategies into options strategies.

Apart from trading I also have an investment strategy where the trading profits are deployed. Trading is a very stressful profession and it pays to have an investment portfolio.

I still like to buy stocks that are at their all-time highs and do not bend the rule. I follow the maxim that no position is a good position. But now I have added a new criteria’s using William O’Neal’s CANSLIM strategy.

I have started building my portfolio recently and thanks to the market in the last two months it has given a 10 percent return. The best stock for me has been Affle India, which has given a 63 percent return in 10 months but not before stopping me out four times.

Here I would like to add a note for all budding traders who are developing a strategy that they need to think of the inherent characteristics of the instrument you are using to build a strategy.

Say for example if you want to develop a volatility breakout strategy it would be better to test and trade it on Bank Nifty rather than Nifty. Similarly, a non-direction option strategy will perform better in Nifty.

Q: You have been training in technical analysis and trading strategies long before the current breed of trainers came in. There is a lot of controversy in social media around training. Where are the fault lines?

A: Most of my professional career has been in training. These days there is a debate in the social media that a trainer should also be a good trader.

My limited point is that while it helps if an established trader is a trainer but that is not the necessary condition. It is not so in most other fields. Coaches need not be good players.

In any case when one is paying a hefty fee to attend a training session, one should do the due-diligence beforehand rather than crib after attending the conference.

The problem is many attendees come to these trading sessions with the mindset of making as much money as the trainer, if not more, from the moment they step out of the training session.

This might have been said many times before, but it needs to be reiterated that a strategy is only a small portion of a trader’s success. Money and risk management, coupled with discipline and a strong mental make-up, constitutes the major chunk.

Despite me being a trainer for so many years and interacting with world-class trainers, it took me years to be a consistent trader. I still attend many training sessions with other trainers. I might have easily spent over Rs 15 lakh in attending these sessions.

But I go in with the intention of not learning the strategy from the trainer, but to get one pearl of wisdom which can enhance my strategy. In most cases, it has been a fruitful experience.