How the Taliban Changed our Markets

Hello friends. This is Vijay Bhambwani and I come back with you in this video to talk about what I am most passionate about - markets and intraday trading.

I thank you all for the wonderful feedback that I received in the comments section and on my social media accounts about yesterday's video, wherein I showed you how to use a simple, higher secondary geometry tool, the protractor, to earn above normal profits from your intraday trades.

I think we as professional traders, look for trading signals everywhere in life around us. So we basically learn a lot from a day to day experiences in life and try to adapt that towards our trading regimens.

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Now here's something that I noticed about what changed in the market in the last three trading sessions that I have been through. As a record this video on a Thursday afternoon, which will be edited and post production changes made and uploaded on Equitymaster's of YouTube channel on Friday, I've had the benefit of trading through Monday, Tuesday, and Wednesday.

You see, a pilot flies the aircraft that he is commandeering from his cockpit. He has over 300 controls to grapple with and monitor, and he does a manoeuvre, the aircraft sitting in his cockpit. I have talked to you about the snap quote window in many of my earlier videos, the last one being the basics of short selling. Now the snap quote window is traders cockpit.

There are top five buyers and top five sellers being shown on the snap quote window. You can bring it up on your desktop trading terminal any time by highlighting any security with your mouse and then most of the trading terminals would have the same syntax or the command F5. F for father and five.

So when you press F5, this rectangular window opens up. Most people use it to look at where the top five buyers and the top five sellers are. But believe me, when I tell you this, there are more than a dozen and a half hidden signals in this snap quote window which professional traders monitor and keep a hawk eye on after they have initiated a trade.

The first thing that I realised Monday onwards was that the snap quote window's rates had changed. If you stick with me for the next few minutes, I'll show you how.

You see on the snap quote window on your screen, what you are seeing are the top five buyers and the top five sellers. Buyers are in blue. Sellers are in red. These are called bids and offers. Bids are buyers. Offers are sellers.

Now notice what is the price difference between the top buyer and the top seller. Way too wide. Ideally speaking, the narrower is this difference, the better it is because the cost paid by a trader to get in and get out of a trade is very small, which means you, as a trader, pocket most of the profits.

Now, this bid and offer difference is called the spread. And since it is between two parties on the same row, it is horizontal in nature. So this is the horizontal spread. Now, this data you will not find on Google, all right? I'm sharing my personal secret hack with you.

Then there are other spreads, like the vertical spread. Note how the price differs from the top buyer to buyer number five. Let's call it B1, B2, B3, B4, and B5. Buyer numbers 1, 2, 3, 4, 5. Ideally speaking, the difference between buyer number one and buyer number five should also be as little as possible. If it is ideal, it would be one tick. What is one tick? 5 paise. Ideally, what should be the horizontal spread? The bid and offer spread? One or maybe two ticks. But Monday to Wednesday I was noticing 4, 5, 6, and even 8 tick differences.

Now the vertical difference, ideally, should be one tick each, but it is not and the difference is that if you are seeing a big difference between B1, which is buyer number one and B5, if you were a seller who wanted to exit in a hurry, you would say I am going to sell without any limits and you would get prices ranging from B1 to B5 and your average price would be somewhere lower.

And if you were to buy, on the other hand, you would have to pay everything that O1 that is offer number 1, to O5, offer number five, are offering you shares at. The smaller is this difference, the better it is. The market is more efficient and the trader gets a higher net profit. The spreads, if they are wide, eat into your profits.

When I was trading since 1986, in those days, there was no online trading, and there was something called the public outcry system where people used to gesticulate. This was for sell. This was for buy, in the Bombay Stock Exchange trading ring.

Now, it was a quote driven market. By quote driven market, I mean they used to be a floor specialist, a jobber, or stockist who owned a lot of shares. If you wanted to buy and sell, you had to had to go to this guy and he would give you a two way quote.

For example, if you wanted to buy and sell Reliance, he would tell you 265 and 270. If you wanted to sell, he would buy at 265. If you wanted to buy, he would sell it to you at 270. Obviously the narrower the spread, the better it was for you, so that you could get in and get out at very small differences.

So the markets have changed now. We don't have the public outcry system. We are not a quote driven market. We are now an order driven market. Each one of us has the power and the freedom to enter a trade at whatever bid or offer price we choose to.

But if past experience with any judge, and it is, whenever, whenever, there have been moments in time when the markets have been extremely nervous for example, earthquakes 9/11, the Gulf War one, Gulf War two, and even the Harshad Mehta scam, you could even have the global financial crisis, the jobbers, the floor specialists of the stockists, they knew that, you know, trading in shares would become a hazard.

If they were buying, they could be saddled with stock, which could plummet all the way down. If they were short selling, they would possibly be forced to cover at a huge markup or higher prices.

Now, to cover their risk they widened the spread. So instead of 265 and 270, they would tell you 250 and 270. So they would buy from you at 250. They would sell to you at 270. Which means that the spreads were widened, which means the market specialist was nervous.

On Monday to Wednesday, what I have seen is that the bid and offer spreads on my snap quote windows getting 4, 5, 6, or even 8 ticks wide. In an order driven market this is amazing. This is what the Taliban takeover of Afghanistan has done to the market. Markets are nervous, which is why I keep telling you that you must always watch the snap quote window.

What can you do? Number one, the first and foremost thing is what I keep advising my viewers on Equitymaster's Telegram Channel, which goes by the handle Equitymaster Official, one word, no hyphen, no underscore, nothing. One simple world Equitymaster Official, what I keep telling you every day, and I don't get tired of repeating it is, trade small.

The reason being that even if you were to go wrong, if you were to get an entry, but you're not able to exit because the spreads are very wide, even if you are forced to sell at wide spreads, you will lose less money.

Doesn't it mean that you would ask, doesn't it also mean that I would make less money? I think yes, You're right. You will make a little less money. But you will live to fight another day and trade another day.

We don't know what will be happening in the markets on Friday because I'm recording this video as I told you on a Thursday, the SGX is pretty nervous, but I don't bet the bank or bet my farm on the SGX Nifty signals. They can be inaccurate at times. But what is very apparent is that the bid and offer spreads are telling me that the markets are nervous.

So when would I come back to my usual trading style, where I commit my usual number of lots per trade? When the spreads narrow. When the spreads narrow. What kind of spreads am I talking about? Remember, the horizontal spread is a difference between the bid on the offer. The vertical spread is the difference, the impact cost from B1 to B5. If you look at it, it looks like a plus sign, like a quadrant, four sides.

Now on the horizontal plane, the left hand side would tell you that the bid an offer spreads are low and the absolute right on the quadrant will tell you, the bid an offer spreads are high. On the vertical arm of the quadrant, the impact cost being low, would be down and impact cost high would be up.

So, ideally speaking, the price points on my spread quadrant should be low left. Low means vertical spreads are low and left means horizontal spreads are also low.

Where are we right now? We are up, right. So the impact cost of the vertical spreads are high and bid and offer spreads are also very high. So when things return back to normal on my quadrant, I will then start to scale up my trades all over again. I will sleep better, taking a bigger exposure in the market at that point in time.

Till then, my friends I would keep remaining on my toes as if I'm walking on eggshells. Do remember that intraday trading is like walking through a land mine. You don't know where you're going to step next. So at that point in time, it always helps to travel light.

On this cautious note, I bid goodbye to you, but not before reminding you that I am going to be on Equitymaster's YouTube channel every Saturday, 11 a.m. to 12 noon, where I am going to take your queries on trading, trading systems, trading techniques, trading hacks, and make you better traders so that you can earn more money in the market.

I hope you've blocked the date. You remind yourself on 11 a.m. on Saturday mornings every Saturday, to join me on Equitymaster, live on YouTube for Q&A sessions.

Friends, I bid goodbye to you. I request you to click like on this video if you agree with what you saw if it added value to your knowledge. Subscribe to my YouTube channel if you haven't already done so. Click on the bell icon to receive instant alerts about fresh videos being put up out here. Good, bad or ugly, I welcome all your feedback in the comments section and help me reach out to fellow like-minded investors by referring my video to your family and friends.

I wish you have a very profitable day ahead my friends. Thank you for watching. Thank you for your patience. Till we meet again in my next video, this is Vijay Bhambwani signing off for now. Take care. Bye.