»Fast Profits Daily by Equitymaster

On This Day - 14 FEBRUARY 2020
This Chart Could Have Helped You Make Rs 59,000 in a Few Days

Apurva Sheth, Editor,Profit Hunter Pro

Hi, it's Apurva Sheth, back again in the Fast Profits Daily.

A couple of weeks ago, I showed you how to use ratio charts to make fast profits. For a refresher, you can watch it here.

Today, I'm going to show you this chart in action.

This is a real trade with real profits!

Let's dive right in...

Hi, I'm Apurva Sheth and I welcome you to this latest edition of Fast Profits Daily.

Now, a couple of weeks ago, I spoke about ratio charts. Ratio charts are used to measure the relationship between two securities. You divide the high-priced security by the low-priced security to identify which security is outperforming the other one.

Now professionals use ratio charts. I spoke about my experience with the fund manager who used technical analysis. Now after this meeting, I happened to come across many other fund managers and professional investors who use technical analysis, and some of them, the smarter ones, even used ratio charts.

Now they use ratio charts to identify which stock to buy. So, for example, when it comes to making a choice from buying TCS or Infosys, or buying Bajaj Auto or buying Hero MotoCorp. So when they have to make these kind of choices, they use ratio charts.

Not only professional investors but professional traders also use ratio charts but they use it in a very different way. They use ratio charts for pair trading.

Now, what exactly is pair trading?

In pair trading, these traders buy a security which is underperforming and sell a security which is outperforming. So basically, they expect that these securities will, or the relationship between these two securities, will eventually revert to their mean. So whenever the ratio has moved to an extreme, they expect that this ratio would move up again.

So what is the benefit of pair trading?

Now pair trading is market neutral strategy. So you do not need markets to move up or down to make money. You can make money irrespective of the market direction.

Second, you're always hedged. Since you're, long one position and you're short one position, your risk is controlled.

Third, it is a relatively safer way to make money. Now last time, I showed you the ratio chart of HDFC Ltd and HDFC Bank. Now here is this chart once again in front of you.

Today, I will show how one could use this ratio chart to identify massive profit-making opportunities. In fact, my readers had this opportunity last year.

Now, as you can see on this chart out here, the ratio chart was trading in a range. I told you last time that the ratio charts or ratios are far more cyclical and they keep on trading within ranges.

So this time around, the ratio was trading near its lows back in March 2019. So I wrote to my readers and told them that there is an opportunity in HDFC Ltd and HDFC Bank. Traders could go long on HDFC Ltd and go short on HDFC Bank. This is an example of how one could actually implement this strategy.

So now you can see on your screen, the table out here. So the table out here shows what a trader should actually do. I wrote this opportunity on the 26th of March 2019. So we are taking the closing prices of that day.

So the action that one should have taken is that go long on HDFC 25th April 2019 futures. The closing price on that day was Rs 1,962.85. The lot size of HDFC Ltd was 500 and the number of contracts to be bought was one. So the total contract value was approximately Rs 980,000.

On that same day, the trader should have also gone short on HDFC Bank at a price of Rs 2,330. Now the lot size for HDFC Bank is 250 and the trader should have gone short on two lots. So we go short on two lots because the lot size of HDFC Bank is smaller and you have to maintain a contract value which is slightly equal to each other. So that's why we go short on two lots of HDFC Bank.

Now a few days later, on fifth of April, the ratio moved exactly in favour. So as per expectation, HDFC Ltd moved up, whereas HDFC Bank more or less stayed flat.

So what was the result out there?

So on the fifth of April, HDFC Ltd ended at a level of Rs 2,089, which was approximately Rs 120 higher than the entry price. The profit on this particular contract of HDFC Ltd was Rs 63,075.

On the other hand, the short position in HDFC Bank resulted into a nominal loss of Rs 3,825 but since this is a pair trade, we are looking at the strategy in combination with each other. So one should look at the total profit or loss in the pair. In this case, there is a profit of Rs 59,250 on a margin of approximately Rs 4 lakh.

So this is how one could make massive profits using pair trades and ratio charts within a very short span of time.

Now I would like to remind all the viewers that using pair trades or when you are trading in derivatives market, it's absolutely essential to maintain a very tight risk management policy. So one should maintain a stop loss, and since the capital allocation is also very high, it is suitable only for traders with a high risk appetite, and with a good net worth.

After considering all this, the pair trading strategy is still very profitable. So one should look forward to such opportunities.

Now, if you want to learn more about such things about trading then Fast Profits Daily, is the place to be.

You can subscribe to our YouTube channel and you would get more and more such stuff about trading. So don't miss out on subscribing to our channel.

Now, in case if you like this video, then please share this video with your friends and family members. I am sure that they will love it too.

Thanks a lot and have a nice day.

I hope you found this video useful. Watch out for more profit-making videos from me!

I'll be back again next Friday, 21 February, in the Fast Profits Daily.

Vijay will be back with another video on Monday morning.

Have a profitable trading day and a great weekend ahead.

Warm regards,

Apurva Sheth
Apurva Sheth
Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407