Rohit Katwal Profile picture
Sep 12 13 tweets 5 min read
One of the least talked topics in stock market is Winning Probability, Risk Management and Position Sizing.

Holy grail does exist but it's not a strategy. Its mindset. Ever wondered why top traders despite different trading styles average between 4-8% returns pm?

A Thread 🧵
Key to good trading is understanding your:
1. Winning Probability - How many trades you win out of 100?
2. Risk Management - How much you lose vs how much you win. Risk:Reward?
3. Position Sizing - How much quantity you execute which impacts your loss / profit?
What are the benchmarks of good returns for your trading style?

1. Investors look for 16-18% compounded returns.
2. Swing Traders are looking at 18-30% returns with passive trading and investing.
3. Traders across spectrum look at 4-8% per month in general.

But question is..
Considering Traders, all these traders have different:
1. Trading Styles
2. Time Frames
3. Technical Analysis
4. Execution

Yet profit varies from the range of 4-8% even for best of traders. From options perspective some are trading ITM/OTM/ATM, then why this generalization?
#FoodForThought

Every trader has developed into his/her trading style an understanding of Risk Management and proper position sizing. That's why a trader selling ITM options of Rs. 500 and another selling OTM at Rs. 40 are yielding overall same results on total capital.
Which busts another myth around trading that has been propagating. If you trade ITM/ATM then you are a real trader. If you are trading selling cheap options, you are not a trader. Which is wrong at so many levels. I know great traders making a living through either ATM/ITM/OTM.
Understand difference between OTM/ITM/ATM and select your niche.

OTM Traders
- Pure Theta Decay due to 100% extrinsic value & lesser delta
- Only Selling
- Safety in distance and hedging
- Bigger position size
- Total ROI / Trade ROI based Stop Loss
- Win probability is ~70%
ATM Traders
- Directional Play and Big Theta Decay as maximum theta at ATM Options
- More Trading less adjustments
- Stoploss based approach
- Moderate Trading quantity wrt total capital
- Winning probability around 50%+
- Buying/Selling can be done
ITM Traders
- Pure Direction Play
- Maximum Intrinsic Value
- Stoploss and Target gets Bigger
- Position Sizing can get further less compared to others
- Winning Probability is 50% plus
- Ideal for Option Buyers/Sellers as less theta decay
Different traders can achieve different trading results with these parameters. Yet there are great traders who have outlier results then what is written but please understand that it needs world class trading skill in Options and takes years of practice.
Based on this, understand in attached image, how with different probability, risk management and position sizing all traders achieve an overall same result.

OTM / ATM / ITM have different Quantities, Win Probabilities and R:R have different win/lose but same net results.
When you start developing a system, you look for an edge of indicator like MACD, RSI etc. but you should be often asking
- What is historical win rate of my signal
- In points, how much I lose wrt win
- How many signals I might get to tweak my quantity to take all trades...
...and if I hit my worst case scenario, will I be able to follow my trades over a bigger period of time, say 100 trades?

This is where holy grail of any trading strategy lies.

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More from @rohit_katwal

Aug 8
How can you effectively do the "Covered Calls" ?

Here is a quick guide to help you. Don't worry if you dont have the 100% capital for covered call. I will show that covered call can be done with 60-70% capital also.

Here are my inputs.
What is a Covered Call ?

Selling OTM Call when you have the underlying in your stock holding.

If stock remains sideways, you earn rental income.

If stock appreciates above strike price, profit is capped.

Its the safest strategy for investors.
Why and What's the catch?

- Underlying / Stock is sideways for 70% of the time. It creates income generation or gains during such period.
- Stock price appreciation, bonus, dividends, premium are yours to keep.

Catch:
- If price goes above strike, you have to part with stock.
Read 14 tweets
Jul 22
My Learnings from #OptionTrading this week....

1. Have a clear trading plan before you start your day
-- Support and Resistance
-- Trap Zones
-- Indicators on Multi TF analysis
-- Clear Bear/Bull Zone
-- Path of Least Resistance

Then decide where/which options to sell.

...1/n
2. Traditional technical analysis may fail. Consolidation > Breakout > Consolidation may not work always. New trend is V-up, /\-down trends, fake breakouts and fake selloffs. Be prepared for all these when creating a position. Any Option Position can be challenged...2/n Image
3. As an Option Trader you can not predict where the market will go. You can only predict where market might not go.

4. Positions from carry forward point of view of smart money are highly masked. Any trending move is preceded by a lot of fake breakouts....3/n
Read 5 tweets
Jul 13
Thread on understanding OI Sparkline and how it can be used for Intraday Trading.

Market is all about trend. Trend is identifiable or visible on Open Interest also if one can track it. This trend is present in Change of OI with respect to OI on previous day.

1/n
Consider this Option Chain on Intraday time frame for example.
Strike 16000 CE, 13 Apr 2022
Total OI is - 62029
Change in OI is - 22439

What this tells us is: 22,439 contracts were added today. This is Intraday Buildup. 66,684 added to 16000 PE, Intraday. 2/n
Similarly when Change in OI goes negative for example in the attached option chain of #BANKNIFTY, 13 Jul 2022, 1:15 PM writers at 35500 PE at 35400 PE are covering their position as it is now In the Money.

This is positional unwinding. Traders who carried are now exiting. 3/n
Read 9 tweets
Jul 10
A thread on Options based on my understanding...

1. Chose the Options your sell wisely. OTM's witness theta decay very fast and will be forgiving in slight adverse move. ITM/ATM are for momentum play and best to trade with proper SL and position sizing.
If you intend to trade options like stock with technical analysis with SL, probabilities and position sizing, its best to trade in ITM/ATM options.

If your intention is to benefit from massive theta decay fast with slight safety from spikes then OTM options with hedge are best.
2. Never Leave Positions Unattended.

As a rule of thumb, always have an eye on your positions in case you need to cut them. Specifically for people with a day job. Many times I have seen people taking position with hedge (OTM) going back to job with a thinking...
Read 14 tweets
Mar 19
The most underrated part of trading is Probabilities, Risk Management and Position Sizing. New traders are looking for Holy Grail Strategy.

When a new trader enters the market, First, he is always underfunded with no understanding of System.

A Detailed V. Important Thread 1/n Image
...Second, his expectations of returns from the market are unrealistic. I cannot remember how many instances I have had of chatting with traders wanting to double there money in a month or expecting a 100% return in an year or expecting a 20% return over a trade....2/n
During Covid, many were ready to leave the jobs with trading capital of 2-3 lakhs. A senior citizen lady with dire need of finances wanted to trade with Rs. 50,000 in option buying. Most often than not, these new traders blow their accounts off.
This is what needs to be done 3/n
Read 22 tweets
Mar 12
Best way to use #RSI for Trading

What is RSI indicator?
RSI is used on price to identify oversold and overbought market conditions. In relative terms, when RSI line touches the 30 line, price is said to be oversold. When RSI touches the 70 line, price is said to be overbought.
Problem of using RSI traditionally is that in heavily trending market #RSI can remain oversold and overbought for a considerably long duration. Consider example of #TATACHEM for example. If you keep selling because of RSI Oversold, you can continue to make losses.
So the proper way is to use RSI + Divergence. 

What is RSI Divergence? When price is moving in opposite direction of the RSI. 

1. Near 70, Price is making Higher Highs & RSI is making Lower Highs; or
2. Near 30, Price is making Lower Lows & RSI is making Higher Lows.

For Ex.
Read 14 tweets

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