Hello folks, welcome back to the Mind over markets by Varsity, a newsletter to help you trade and invest better.
In this issue:
Videos for the futures module
How to trade when expecting a crash
What not to do in a bear market
Illegal forex and CFD platforms
Videos on the futures module
We recently launched the Varsity video series with the first three modules, in case you missed it. Videos for the Futures module are now live. Check them out, and if you have any questions, please leave a comment at the end of the chapters.
Futures Trading (Video Series) – Varsity by Zerodha
Futures Trading involves trading in contracts in the derivatives markets. This module covers the various intricacies involved in undergoing a futures trade including margins, leverages, pricing, etc.
Are you preparing for a crash?
It’s stunning how the market mood went from absolute euphoria at the end of 2021 to total despair in 2022 so far. The markets have had a shaky start to the year so far. Though the headline indices are holding up, about 50%+ of NSE 500 stocks are down between 20-40% from their 52-week highs—especially the new-age stocks.
There are worries over the end of the easy money era in the US, inflation, rising interest rates in India, the US, etc. Some people even think we’re headed for the mother of all crashes.
As I was thinking about this week’s newsletter, I came across this wonderful Innerworth post. Check out this excerpt:
The market seems to be going down. Is it time to think about gloom and doom? Perhaps. At least some market analysts seem to think that the masses have lost confidence in the economy, and these perceptions contribute to the bleak outlook many traders hold of the future. High-interest rates have made many think of running. Many are ready to duck and cover. If the economy is ready for a downturn, it may be time to start thinking like a contrarian.
This was written sometime in the early 2000s, and these are the exact same worries in the markets today. It reminds me of the popular but clichéd quote attributed to Mark Twain:
History doesn’t repeat itself but it often rhymes.
Regardless of whether we’re headed for a crash, the markets are constantly evolving, and regimes keep changing. Predicting them is hard, and making money by trading them is even harder.
The post had an obvious but brilliant point:
There’s no right or wrong way to trade. Some traders prefer safety. They prefer to trade only during a solid bull market where everyone is enthusiastic and the indexes go nowhere but up. But the markets don’t always go up, and there are times when you have to think creatively and go your own way. To trade like a winner, you must think outside the box, guessing what the crowd will do next, and anticipating how the movement of the masses can benefit you. The astute trader knows when to follow the crowd and when to go against it.
There’s no holy grail when it comes to trading and investing. Every strategy or style works sometimes, and nothing works all the time. When you are trading, it’s better to stick to what works for you and what suits your temperament and emotional makeup. This might mean you’ll be out of some trades that might look easy in hindsight, but that’s ok. You can’t trade everything all the time.
Like we’ve discussed in the previous issues, when money is involved, it brings out the worst behaviour in us. It could be getting caught up in the euphoria or the despair of the masses.
You’ll have to develop the ability to have some level of detachment from the market moods and trade your system. It could be trend following, being a contrarian, or whatever works for you. Don’t keep jumping between things or keep looking for some magical strategy— there isn’t one.
More importantly, most of these macro headlines and predictions tend to be nonsensical. Keep track of them, but take them with a bucket of salt. Having a healthy level of scepticism is also equally important.
I remembered this from an old Stanly Druckenmiller interview:
The only other thing I’d say is that too many investors look at the present. The present is already in the price. You have to think out of the box and sort of visualize eighteen to twenty four months from now what the world is going to be and what securities might trade at.
What a company’s been earning doesn’t mean anything. What you have to look at is what people think it’s going to earn. If you can see something in two years is going to be entirely different than the conventional wisdom, that’s how you make money.
My first boss used to say the obvious is obviously wrong. If you invest in conventional wisdom you’re going to lose your butt.
Are You Preparing For a Crash? – Varsity by Zerodha
The market seems to be going down. Is it time to think about gloom and doom?
How to survive a bear market?
It’s just stunning how quickly the market sentiment went from euphoria in 2021 to despair in 2022. People are predicting the “mother of all crashes.” So, what should you, as an investor, do? Well, we all know what to do, but when we see red, we tend to forget everything.
I reiterate a few investing basics that you should get right in this post, especially when the markets are bearish.
How to survive a bear market? – Z-Connect by Zerodha Z-Connect by Zerodha
Illegal forex and CFD platforms
You might have come across ads by forex and CFD trading platforms where people are making lakhs just by pressing a button. These platforms have become a big nuisance, blatantly selling greed by offering 100-200X leverage. People are guaranteed to lose money on these platforms because the platforms themselves are on the other side of all trades.
These platforms are illegal. RBI had issued multiple advisories, and we had also written a post a while back warning people about these platforms.
RBI has recently issued another press release warning that resident Indians transacting on such unregulated platforms can be prosecuted under the Foreign Exchange Management Act (FEMA).