Top 5 Benefits of Ratio Trading: Know the De Risk Theory of Stock Market Trade

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Ratio Trading is a scientific concept that is the “surest way to make money in the stock market” irrespective of market swing and fluctuations. In other words ratio trading guarantees consistent and stable income from the stock market which is large viewed as a risky, unstable and volatile sector by even inside players.

The negative reputation of the stock market is largely due to the practices of individual players who participate in speculation. Ratio trading on the other hand is not speculative in nature. Rather it has the potential to change the perspective of the stock market as a risky sector. To those who understand the tools and strategies of ratio trading and can yield them to earn profits in options market, know that the stock market can indeed be a de-risked niche.

Let us take a close peak at some of the benefits of ratio trading:

Ratio trading is less risky because it is an intraday strategy where trade originates and concludes on the same day. Thus, the risk of a negative impact due to overnight swing in global as well as domestic markets is negated. Even the effect of intraday market movement on ratio trading strategy is minimal. If we look at the trends in the last decade we will find that, markets have not fallen or risen by 200 points intraday for more than 10 times within this time period. Therefore if we remain 200-300 points out of the money from the current market, we are almost assured of not getting affected by the market movement and are assured of getting profits from our trade 9 out of 10 times. It is the safest and surest way to make money off the financial markets.

Ratio trading strategy is based upon trade in options contracts, the lowest cost product in the Indian stock market. The initial investment therefore is quite low. Since it involves intraday trading at the end of the day no trades are carried over and therefore no margins are required.

Time value decay or rise in ratio is a continuous process there are no specific exit and entrance points in ratio trading. Anyone can enter and exit trade at any point of time depending upon opportunity calculated through comparison and judgment between different ratios. In other words ratio trading strategy is designed to be one that facilitates trade at will of the players involved. One may stop trading when there is uncertainty or confusion in the market and resume trade when the crisis is over.

The graph of ratios (Out of the Money) in Ratio Trading is always up irrespective of the market direction. Thus, profit is guaranteed in this strategy which consists of trading in small lots generating small profits which eventually build decent volumes and profits at the end of the day.

The trade remains unaffected by increase in number of participants or increase in volume. Rather competition only serves to open door to more opportunities as more competition means more volume, more volatility, more mis-pricing, more imperfection in ratios – all of which culminates into more opportunities and more profits.

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Source by Ajay Kr Jain