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The Money Flow Index (MFI) is a momentum indicator that calculates the flow of money into and out of a stock ranging over a specified period of time. It is similar and related to the Relative Strength Index (RSI) but integrates volume with it, whereas the RSI only assumes the price. The MFI is calculated by accumulating positive and negative Money Flow values and then formulating a Money Ratio. The Money Ratio is normalized into the MFI oscillator form

The Relative Strength Index which is commonly abbreviated as RSI is a momentum oscillator that measures the speed and the change of price movements. RSI is a very popular momentum oscillator that was introduced in 1978 and was developed by J. Welles Wilder. The RSI oscillates in a range between 0 and 100. Usually, the RSI gives us an overbought signal when its value is above 70 and an oversold signal when below 30. Signals can be identified by searching for divergences and failure on swing highs and lows. RSI can be used to identify the general trend.

The RSI is a technical tool that gives traders signals for bullish and bearish price momentum, and it is often plotted beneath the graph of an asset’s price. A stock is usually considered overbought when the RSI is above 70, so it is a selling or a short trade opportunity. Similarly, stock is usually considered oversold when it is below 30, hence it is a buying or a long trade opportunity.

Everyone believes there are two categories of market players: one is a trader, and the other is an investor. 

I always say 

“There is nobody called an investor. Everybody is a trader.”

Trading is a business of managing risk. Is there nothing called investment here? No. 

There is a term called investment and is relevant in banks and bonds. 

So, what exactly is the investment? 

When you put your money to receive guaranteed profit, only then it is called as an investment. For example, if you put your money in fix deposits at a guaranteed 9% rate of interest and you get a that in writing on a piece of paper, then this type of transaction is called investment. When you put your money in a money-back scheme of an insurance company, the moment you have given your premium cheque, the money-back is guaranteed to you. That is an investment. 

If you are in the stock market and buy any stock such as Reliance, Tata Motors, or TCS, do you receive anything in writing for a profit? is the profit guaranteed to you? No. Only when you sell it will it be known whether you sold it in a profit or a loss. 

Profit or loss is the mechanism of every business in the world. The ideal approach for any business is buying at a wholesale price and selling at the retail price. Every trader does the same. He tries to buy at a wholesale price and tries to sell at a retail price. 

Is there something called 90% or 95% success in trading? Forget about it. You will meet people you see. They will come to you and say “Sir, take our tips. Our tips are 95% accurate. And you ask him back- “Hey if your tips are 95% accurate, why don’t you borrow some money, trade your tips and become very very rich with it? One thing I have known in trading, those who know how to make money, do not ask other’s money, and those who ask for your money don’t know how to make money. 

In the last 11 years since I have been associated with this market, one thing I know is that you cannot predict the market. All efforts in trying to predict the market are futile. You can only flow with the market. It is the trend that is important. The trend is your friend till it bends at the end. 

Trading, like any other business, needs to be learned. You have to train yourself. You have to become skilled in your business. And various kinds of assets are available now. You can trade stocks, options, futures, commodities, and forex. And there is one thing many people are not aware of is that there is a lot of money to be made when the price is going down beside when it is going up. So do you know how to make money in both directions? 

If you train yourself, you have a strong chance of making money in the markets. So do not be dependent on others. Train yourself, and then only you have a chance of making a consistent amount of money from the market. Remember, consistency is the key. Making money once in a while is not good enough. You have to make that money month after month after month if you want to have it as a second source or first source of income. 

Successful and consistent trading is a result of hard work and persistence. A trader spends a great deal of time in identifying potentially profitable trades and executing them to precision. Identifying a potentially good stock is not enough. Entering at an appropriate time is equally important. This requires a certain level of skill and expertise.

After entering into a trade the next most important aspect is the stop loss. An appropriate stop loss is crucial to the success of a trade. A tight stop loss can stop one out of the trade too quickly and one too far away can result in big losses should the trade backfire. Timely trailing of the stop loss at regular intervals is also very important to lock in profits.

The market moves up and down with infinite variables at play and no amount of calculations can help one determine or identify the perfect trade. It always boils down to the probabilities-the probability of being either right or wrong. Either the trade moves in the desired direction or it does not.

Despite all efforts, many novice traders tend to accumulate losses as their winners are smaller in size as compared to their losers. This brings in a degree of frustration in the mind of the trader and he begins looking at the market differently.

At the onset of his trading journey, the trader is optimistic about the market and is almost always slightly reckless. He is positive about winning and keeps on trading with the hope of riding winners.

Once the losses begin to accumulate, his outlook takes a hundred and eighty-degree turn and the trader becomes astute in his view of the market. He looks at every trade with skepticism. Where earlier his objective was to earn money, his objective now is more focused on covering his losses.

This diversion in objective leads the trader to approach the market with a revengeful attitude where his prime concern is to recover his capital from the market. This vindictive approach leads the trader into a whirlpool of negativity where he makes more mistakes and loses more money. Coupled with a deep sense of frustration and defeat, the trader is blinded to the many opportunities the market has to offer and loses out on many winning situations. He overtrades and also trades beyond his position sizing capacity.

Cumulatively it all results in greater losses till ultimately he is rendered financially paralyzed. His capital is wiped out and he cannot trade any further.

Chasing a loss is like trying to catch one’s shadow and is never a successful venture. Rather, a trader should absorb his loss, identify his mistake and rectify it to prevent another loss.

Profit and loss are a part of every business. But this statement is magnified ten folds when applied to the markets. Losses are small and opportunities are many. And every opportunity is an opportunity of probability with a chance to win and a chance to lose.

Trading is a game of managing risk. Easier said than done, this involves a huge amount of discipline and emotional control. It requires one to quantify the risk involved in a given trade setup and then manage the same with diligence. Once achieved, this then becomes the stepping stone to trading the markets without fear.

The other emotion that rules the market is greed. Fear is far easier to overcome than greed. This is simply because fear can be controlled but greed cannot. The moment a trader puts his stop loss in place his risk is controlled and so is his fear of losing the trade.

But when the trade starts moving in his direction and the profit counters are flashing green repeatedly, the trader loses all control of himself. His desire for more keeps him hoping that the trade will continue in his direction forever. But naturally, it doesn’t. The move stalls and the price starts reversing. Blinded by greed, the trader refuses to accept that the move is over and hopes for a turnaround once again in his direction. The price doesn’t turn and soon the green counter turns red only to grow a few shades darker.

Booking profits and exiting a trade is as important as taking a timely entry with a proper stop loss. Little do traders understand this and give up all the gains which otherwise would have made them richer.

What is the reason one enters a position?

A trade is executed only to realize gains. And when the trader sees those gains he refuses to book his profit in the hope of more.

Greed is good but foolishness is not.

A professional trader not only executes a winning trade but also realizes the gains and books of his profit. Many traders book their profits outright whilst some prefer to book partial profits and continue in the trade. Yet others trail their stop loss and move along making sure to lock their profits. Whatever method a trader may adopt, the common aspect to their trading method is that they do not give back what they have gained and make sure to exit without a loss.

A penny booked is a penny earned. A dollar locked is a dollar locked. A rupee in the kitty only adds up to one’s wealth. Nobody ever became poor by booking profits!

Trading is a game of profits and losses; wins and defeats. It is a game of odds where high probability is the key to successful trading. A professional trader identifies a high-probability trade opportunity and trades it using prudent risk management. If the trade moves in his favor, he stands to gain a big amount; and if it goes against him, he tends to lose a very small amount.

The novice trader, sadly though, understands the importance of risk management after going through many big losses and depleting his trading account considerably. Before he realizes the mistake, he would have lost more than 50% of his trading account. Most though, lose everything and give up trading.

With every wrong trade, the trader depletes his account size by a certain amount and then fervently tries to recover it. This back-and-forth movement normally follows a pattern. He goes back two notches and moves ahead one notch and thus is never able to recover his losses. He entraps himself in this whirlpool and like a deadly quicksand and pulls himself to the death of his account.

Let us say that a trader has a trading capital of Rs. 1 lakh. He suffers from a loss of Rs. 50, 000/- or 50%. Most would say that he just needs a recovery of 50% to be at par, but this is not the case. He will need to recover by 100% actually to come to par again. Why?

Let us understand this using the example.

 He has lost 50% (Rs. 50,000/- out of Rs. 100,000/- trading capital)

He has to gain 100% (Rs. 50,000/- out of the remaining Rs. 50,000/- trading capital)

Thus, simply put, if a trader has a drawdown of 50%, he will have to make a recovery of 100% to be at par.

Drawdown and recovery are very important aspects of risk management and should always be given deep thought. Planning for losses in advance can help to recover from these swiftly or avoid these completely altogether.

Successful trading is more about prudent risk management rather than the accuracy of the trade itself