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Peak Margin Circular from Sebi


What is the Peak margin circular about
SEBI has been grappling with some issues in recent years amongst which were of course broker corruption, network effects of one failure on others, and then there was the severe discomfort with the extremely high percentage of derivatives turnover versus cash.

Because of the way derivatives are- a synthetic instrument, it has attracted not only strategy based players but also heavy speculation by retail investors. To control this, SEBI has been increasingly raising margins and the size of the contracts but this effort was neutralized as brokers gave ever increasing multipliers to counter it. In effect , raising risk to their balance sheets in an era of decreasing brokerage and sources of funding.

By its peak margining circular, SEBI has effectively capped the exposure that’s possible in derivatives – to 4x of margin in Phase 1 (Goes down to 1x of margin by Sep 1, 2021) – and that’s where the effects will be felt as that’s where more than 90% of the turnover is.

On the other hand, while the same 4x principle applies to cash as well, its possible that volumes from derivatives –for stocks and especially better quality stocks like Reliance where margins in cash are lower than in derivatives –  will move to the cash segment and provide some kind of balance to overall turnover. Which is probably what SEBI wants.

No surprise then that it rolled back some of the increased margins on non FNO stocks so that leverage returns to the cash market – beyond FNO stocks- and in turn there is increased activity in a larger spectrum than just the derivatives markets. Of course, by nature index derivatives will offer high multipliers (Even at full margin applied you get to buy almost 6x value of an index so why ask for more?) so that’s where derivative trading may continue. Random speculation on options may come down as multipliers reduce but then, that’s by design. Also what may happen is that option writers start looking at farther contracts or more out of money contracts to earn/save on margins thus possibly bringing liquidity into these sections of the market. Which is good.

SEBI’s mind is clear – by nature, the margin system provides leverage. For Rs 25, you can buy Rs 100 worth of a stock in derivatives and carry it for many days.  This means you are leveraged anyways. So why have additional leverage on top of that. Example, a 10x leverage on margin means you could buy Rs 100 worth of Reliance for just Rs 2.5 (10% of Rs 25)-  a big risk in derivatives as the contract could go either way till expiry!

Overall, it seems like a well considered move and the semi final before the one final hassle / difference between cash and derivatives is removed – T+1 settlement. That , combined with further decrease in cash margins may be what SEBI is targeting next.

So how will the peak margin system work?
In concept its very simple.  So far the exchanges never knew (remember that they work with members on upfront and peak margins anyway- it’s the extension to the client that was the issue) what the broker allowed clients to do intraday as measurement of obligation versus client margins was on an end of day basis. This meant that brokers could, to wean away volumes , offer higher and higher multipliers intraday and create risk for the entire system if something went wrong– across the chain of the clearing member, the exchange and in certain situations, other clients as well. To cut this effect, and ensure that the member allows clients to trade only with their own money, they had to know what was the maximum margin intraday utilized for any specific client versus the actual margin.

The peak margin attempts to do that – it tries to estimate the maximum intraday margin used by a client and compares to his actual margin available – to identify if the broker gave additional limits. And if the broker did, then he has to prove it was his money and not someone else’s.  because someone elses money means risk of one default can still spread to other innocent parties.

But then that means brokers would take risk and put more capital behind speculation – so the next step? Reduce intraday to clients own capital! This is what will happen by next September.

The Calculations
The calculations are fairly simple – lets say you had Rs 100 in your account today – beginning of day – and you used lets say Rs 500 as margin (In cash it would mean VAR+ELM and in derivatives, Initial Margin) to buy Rs 2000 worth of a derivative – some of which you did intraday and some you took delivery. Lets say you retained Rs 90 with the broker at end of day and your end of the day margin obligation for this derivative is Rs 80.

From December 2020, for such a trade, the formula would run something like this : The exchange would consider the higher of the two calculations below as your shortfall:

  • 25% of your peak margin of Rs 500= Rs 125 was required but you had only Rs 100 during the day. So shortfall of Rs 25
  • EOD margin of Rs 80 was required but you had Rs 90 at the end of the day DESPITE the cash withdrawal. So there is no shortfall as per the EOD formula. This is how it has worked so far.
  • Higher of the two? Rs 25! So even if you had no obligation at end of day and you had fully paid for the position and the broker graciously returned Rs 10 to you at end of day because he was covered, there would be a shortfall! And a penalty!

So how would the broker cover this risk? He would not allow you in the above example to have more than Rs 400 (4x of 100) of margin leverage in Phase 1 – because then there cant be a shortfall as per 1 above.  It was the extra Rs 100 that created the Rs 25 shortfall!  And by September 2021, the client would be required to have Rs 400 if he wishes to utilize Rs 400 of peak margin. Remember that even then, the leverage stays at 4x-5x as margins are 20%. So no big damage!

The second problem – how would the exchange communicate to the broker various peak margins of various clients – no such technology linkages exist today between the CPs and brokers. So the exchanges would do a random pick of snapshots – 4 times a day- and pick out the maximum of the 4 for each client!  Remember its random so you cant fool the system J

There are further complications around this – meaning the peak margin sticks to the client till T+2 days in the cash segment – and till the trade is settled, the peak margin will continue to reduce leverage for T+1 and T+2 days as well!

- Copied from Internet

How to choose stocks for Next Day

I have received numerous queries on how to choose stocks for next day

 As you all know that I use super trend for trading intraday  and it is based on small swings or pullbacks.

 So first step to narrow down stocks for the next day is to check its beta in 3 minutes chart with index.  Now beta is the movement of a stock with respect to index . I not only check its movement with respect to index but I also check how its wings with respect to the index.  Our system is based on swings so for me, the beta is, how the stocks swings with respect to index. In this way I narrow down 20 stocks out of 125 stocks in my list. I never trade stocks less than rupees 80 and higher than rupees 15000.

 Second step is to shortlist 6 stocks out of these 20 stocks. For this I start scrolling big Facebook groups and telegram groups. From 3:30 p.m. To 7:30 p.m.,I run a program  that scans, the stocks about which, traders are talking a lot. Reason can be anything, direction can be anyway but  I simply scan the stocks in which other traders or retailers are interested in.  In my backtesting I have seen that such stocks definitely show some movement next day.  So finally I make a list in which the most talked stock is at top and the least at bottom .  Hence we get 6 stocks for next day, intraday trading using supertrend.

(I have written this post using speech to text software so there may be some grammatical errors)

-Ajeet Singh 

A perfect setup for Entry


Upper Indicator SuperTrend

Lower Indicator, Vol + Trend

 Hello friends

 I received number of requests,  on how to draw the setup

First of all I am mentioning two links for the indicators the first link is for super trend indicator and the second link is for volatility and trend indicator

 I have attached herewith a sample image for a perfect setup

 so here are the few points that you have to consider before entering into a trade. Timeframe of chart, will be always 3 mins

1.  First of all I will look for signal in supertrend, for a buy there must be up signal and for sell it must be a down signal in supertrend.

2.  Then we will look for pullback.  Signal which is after a pull back is more reliable than others

3.  Now we will search a basic pattern of price action that is double top for sell and double bottom for a buy.  The more, price tested a level, the more it's better. Like instead of double bottom double top if you find triple bottom for triple top it is much better

4. Then we will move to a lower indicator and look for a volatility. Lesser the volatility, better is the signal. It is denoted by Black bars on the top line of the table so while taking the trade, if there is a black bar in the lower indicator, on that candle, the signal is more reliable

5.  The rest of the two lines denotes that Trend.  Lower line denotes the trend in 15 minutes and Middle line denotes the trend in five minutes. So while taking a bullish trade at least 1 line must be blue among these two lines and for a bearish trade one line must be Orange among these two

6.  We have to take a entry only after completion of the running candle. Like whenever a signal is generated in supertrend, we will wait for the candle to close and as soon as the candle closes we will enter a limit price for the close price of the signal candle. I personally never entered on market price

7.  Target will be always 1% from the entry level. If we buy at 500 then the target will be 505 and if we sell at 500 target will be 495

8.  At any point of the trade we can never control the result but quantity is always in our control suppose you trade with 1 lakh rupees, then quantity for a 500 rupees share will be 200. I term it as 100 percent quantity. But suppose one condition is missing or you are bullish on index and got a bullish signal but volatility black box is missing then we will enter with reduced quantity like 70% or 80%
 or if a pullback is missing  we can go with 80% quantity so lesser the conditions are met lesson the quantity will be

9.  Now to make the quantity higher I will check the support and resistance lines as well. Suppose after all the conditions met, a pullback is formed exactly on the support then  we can slightly higher the quantity of trade or a doji is formed at pull back then also we can increase the quantity.

10. so you start with a simple setup and then keep on adding different parameters as you feel confident.  Normally I try to post charts based on my personal trades, you keep tracking them this will help to clear your doubts.

11.  Whenever I do a change in any of the integrator, I changed its version and will be updated at tradingview website. so whenever you find a change of version in my screenshots then remove the indicator from your favorites and add it again. Links for the indicators will remain same

(I have written this post by speech to text software so there may be some grammatical errors)

-Ajeet Singh

SuperTrend with VWAP


VWAP , a widely used indicator
In the free account, there is a limit to add max. of 3 indicators
and with my 2 indicators added, the very scope is left to add further studies
I received many requests to add this indi in my setup, although I personally don't use the same
So here's the new version of ST with vwap

Click HERE to add indicator to your chart

A Better CCI

This is an oscillator, better than CCI
and to be used with Supertrend
It is meant of scalping in running trend
suppose the price is below superT and oscillator touches 100 and returns
then we can initiate a short for few bucks and vice versa for buy
Point to note is.... Oscillator must not be above 100 or below -100
for more than 1 candle, it must just touch and returned.
I tested it on 3 mins timeframe and gave good returns.
Indicator is 100% Non-Repainting but for candle to close...
and gives best results on 3 mins timeframe

Click HERE to add an indicator to your chart