Sourabh Sisodiya’s Trading Journey by Money Control
Here’s the moneycontrol article link :
It’s normally difficult to find a self-driven person who is born with a silver spoon. Sourabh Sisodiya, born in a jewellers’ family, completed his engineering from one of the most reputed colleges in Mumbai and worked his way to become a successful quant trader.
He has very strong views on the use of data for trading. Without data, you are just a person with an opinion, he says in a free-wheeling interview with Moneycontrol. On weekends he trains traders from some of the biggest proprietary trading desks or delivers lectures on data science and markets in the most prestigious institutes in the country.
Talking about his trading journey, strategy and lessons from market stalwarts and his effort of giving back to the trading community, Sourabh Sisodiya (http://twitter.com/sourabhsiso19) is a trader with his heart in the right place.
Q: A brief background and how did you come to the stock market?
A: My family owns and runs a jewellery business. I pursued Bachelors of Engineering in Information Technology from Sardar Patel Institute of Technology, University of Mumbai. I have cleared all levels of CFA. I am an NSE Certified Market Professional (NCCMP) and also registered as an Authorised Person with SEBI.
But the stock market was considered to be a taboo in my family and most of my family members thought of it as nothing less than gambling.
In fact, when my relatives ask me :
“Aap kaam kya karte ho” (What’s your occupation?).
I reply saying “Stock market mein trade karta hu”. (I trade in the stock market).
They reply back “Who toh theek hai, magar Kaam kya karte ho” (That’s fine, but what work do you do) 😄
My first step towards the market was taken in early 2010. I was sitting in my dad’s office and overheard a conversation between a family friend and my father. That family friend was a derivatives trader who was telling my father that he pocketed an 8 figure bonus that year and had made a 9 figure profit for his company trading at the company’s options desk.
At that time, I couldn’t make much sense of what he was saying but it got me totally intrigued that how can someone make so much money just by pressing a few keys on a computer keyboard. This incident was the actual trigger that made me deep-dive into the markets.
Q: What was your next step?
A: To learn more about markets, I started with a basic Google search and came across Warren Buffett and how he made his fortune in stocks. I started off by reading The Intelligent Investor by Benjamin Graham to get a hang of things. I started looking for internships and after a lot of searches, fortunately, landed one.
As an intern, I was working on company valuations and fundamental analysis. It didn’t take me long to realize that fundamentals were not my cup of tea. I realized that I needed exposure to the real world of trading. I morphed myself into an incessant, cold e-mailer and dropped emails to all possible heads of trading desks. Out of the hundreds of emails that I had dropped, I received a reply from Mr Dave, Head of Trading, Barclays, Singapore.
He directed me to connect with a few top traders in Mumbai. I had the privilege of meeting some of them in person and based on my interactions with them, I realised that these traders make millions of dollars without using fundamental analysis and only trade the price.
This introduced me to the world of Technical Analysis and Price Action Trading. I realized that there was much more to markets than fundamentals.
After learning a bit of technical analysis, I thought I could predict what was going to be the market’s next move (just like every beginner). At this point, I was a complete discretionary trader i.e. I traded as per my whims and fancies! Trading for me was completely random and so were the outcomes. Consistent profits looked like a mirage back then!
Q: What were your initial trading experience and the lessons from it?
A: There were two trades that were life-altering for me. I remember vividly as if it happened yesterday. It was August 2016, I had been tracking Just Dial and researching it for a while. The stock seemed to be very bearish. The stock’s Alexa rank was dropping. SEC 13 F filing showed US-based ETF exiting Just Dial. Google trends and web crawling data indicated a declining interest in JustDial. Data coupled with technical weakness made for a perfect shorting candidate.
I was heavily short on this counter. Just Dial dropped by 40 percent in a couple of months and I made a whopping 300 percent, thanks to leverage, on my capital in just 2 months. The profit amassed was a cool Rs. 7.2 million. I was ecstatic and on cloud nine. I knew that this was my calling and this is what I wanted to do for a living and started with full-time trading. They say that success breeds complacency and complacency breeds failure.
I thought that it is really easy to make money in the stock market and started taking wild risks. All of this profit eventually faded away.
My second life-changing trade was a pair trade in HPCL & BPCL. I was short on HPCL & long on BPCL. My logic for the trade was that they both had diverged and should revert back to the mean. I essentially was direction neutral and thought I won’t lose much money. So I took a really big position size.
But to my surprise, HPCL declared their quarterly results and announced a bonus. HPCL opened with a 7 percent gap up and BPCL was down by 1 percent.
I was sitting on a huge loss but I didn’t close my position. In fact, I added more to it with the logic that they have deviated even more and hence should converge.
My huge position size was making me restless. After the market would close, I looked for any bad news on online trading forums that could make the price of HPCL go down. This continued for an entire month and my losses kept widening and I finally closed the trade with a huge loss. I gave back almost all of the profits that I had made earlier.
This trade made me understand two important things, which completely changed me as a trader:
-Never average a losing trade.
-Always have proper position size and risk management in place, no matter how good a setup it is.
By now I had realized that my initial trading profits were more of beginner’s luck and less of skill. I was in deep mental agony and emotional pain. Life had hit rock bottom. I couldn’t muster the courage to even punch a single trade.
Q: How did you get back in the market?
A: I decided to take a break from trading. I realised that if I had to be in this full time and make a living out of it, I had to find a method to this madness. I made up my mind to move away from being a discretionary trader. At this point, I was reading a few books. The ones that had the most impact on me were: Market Wizards, Hedge Fund Market Wizards by Jack Schwager and Trading in the Zone by Mark Douglas.
To learn more, I did a small stint with a Quantitative trading firm — HL Investrade (renamed as Arque Tech) that made me realize the importance of systems & data-driven trading. This laid the foundation for my career in quantitative trading.
HL Investrade is a quantitative asset management firm using data science and machine learning techniques for long term investing. My job there was the development of financial indicators that have an influence on stock price returns. I was looking for industry specific factors influencing company performance, refining indicators to improve their predictive power and Portfolio optimization techniques.
Incidentally, my office was in the BSE building and had heard from others that the renowned investor Ramesh Damani’s office was in the same building.
I sneaked into Mr Damani’s office to get an appointment with him. To my pleasant surprise, he asked me to sit down and had a word with me at that very moment. I was completely unprepared for this.
He narrated an incident of his son’s 10th birthday and how everyone had bought gifts for his son. Several people gifted many valuable things but one fine gentleman gifted shares of HDFC Bank worth Rs. 5,000.
He said that most of the gifts have no value now but the current value of those shares was about Rs. 50 lakhs. The point that he was driving home was that big money is made in riding large trends. He mentioned that while pursuing his Masters in the USA, he realized that a major Tech boom was about to happen and was going to be the next big theme.
He invested in the Infosys IPO and rode the entire trend, making over 100 times returns. Out of all the nuggets of wisdom shared by Mr Damani, two have stuck with me forever:
“ Buy truckloads when there is an opportunity.”
and
“ There are no losses, only lessons learnt.”
I had also heard from a few people that Mr Rakesh Jhunjhunwala would visit Geoffrey’s at Marine Drive on Friday evenings. During my internship, I would visit Geoffrey’s with a friend every Friday evening to spot Mr Jhunjhunwala and have a word with him. But it was an unsuccessful adventure. I was determined to meet the Big Bull and landed at his office to seek an appointment. But, he wasn’t present. Mr Utpal Sheth, CEO, Rare Enterprises was present in the office and was kind enough to give me a patient hearing. I was overwhelmed by the humility and simplicity of this man. The key lesson learnt was that to be successful in the markets, one ought to be very humble.
All this while, I didn’t stop observing the markets. While I wasn’t trading at all, I would observe the daily price action on the index and take screenshots of it. Until this point in life, I have never missed a single day to observe the markets and have collected about 5 years of daily screenshots of the market’s price action.
In due course of time, I learnt more about derivatives, more specifically about options and using options to dynamically manage my risk. The more I read about options, the more I fell in love with them. The beauty of trading options is that one can take a directional view on the market or a direction neutral view and yet make money. The market need not move even by a single point and yet options can make you money.
My stint at the Quantitative Trading firm helped me clear my mind as to what exactly I wanted to do. I began leveraging my tech skills and analyzing market data. I decided to give another shot at trading. This time, the focus was Quantitative trading with rigorous backtesting, proper risk management and position sizing.
Q: Currently how do you trade — a brief description of the strategies
A: I co-founded Quantify Capital (www.quantifycapital.in), a quantitative research and trading firm with my partner Abhishek Gaikwad. We started trading with our own capital using quantitative and volatility-based strategies. I am primarily an option seller and mainly trade the indices, Nifty and Bank Nifty.
90 percent of my trades are non-directional intraday strangles (selling out of the money call and put options) using weekly options.
At Quantify Capital, we have built a quantitative model called Snorlax. It’s my proprietary intraday theta (time decay of an option) eating strategy. For the uninitiated, Snorlax is a Pokemon that just sleeps and eats all day. This name was recommended by my 8-year-old cousin.
This model indicates the intraday trend for the index based on historical data, the opening and a few intraday price patterns. I manually create skewed delta positions (asymmetrical strike price) as per the system and place my stops. The signals generated are automated, only the execution is manual.
For example, if the previous day’s high and low were 18300 and 17500 respectively, and today’s open is 18000, which is within the previous day’s range, then the market has an 85 percent probability of going sideways. We’ve arrived at the probability figure by backtesting over 10 years of price data. Such days are ideal for deploying delta-neutral strangles. In this case, a short strangle using 17000 puts and 19000 calls in the weekly options is likely to give good returns.
The theta decay in weekly options is quite steep and our aim is to exploit that to our advantage on such days. Option selling involves high risk and requires very strict risk management. If the combined premium collected rises by 10 percent, I exit my position.
As for my position sizing, I enter with only one-third of the targeted position size for the day. I add another one-third when the initial position has gone in my favour. And finally, I add the remaining one-third if the trade is working in my favour. This is known as pyramiding.
So, I have my maximum position outstanding when the trade is going in my favour. But if I am wrong, my position size is the smallest. This has helped me to keep my losses small and profits large. The pyramiding technique provides a favourable risk to reward mechanism.
I also trade momentum in individual stocks using signals generated by our system. The major parameters of the system are the underlying stock trend, OI data, futures data and candlestick patterns. Stocks which open with a gap or break the previous day’s range within the first 5 minutes of market opening are likely to be the trending stocks for the day.
They are often on our radar and make for good trading opportunities. We have also incorporated multiple time frame analysis within our system. The best setups develop when all time frames are pointing in the same direction. For example, a stock which is bullish on weekly, daily, hourly and a five-minute chart is likely to give an explosive move.
At Quantify Capital, we are constantly working on improvising our trading strategies. I head the quant team, which analyses raw market data, looks for tradeable patterns and devises profitable trading strategies. We have built our very own backtesting engine in-house which helps us power the extensive data research that we do.
The most exciting project that we are working on is to deploy Machine Learning algorithms to see if we can find non-linear patterns and optimize our outcomes by doing a statistical analysis between various variables such as moving average, VWAP, RSI and ADX to identify stocks that are likely to provide good momentum trading opportunities.
Q: Can you tell us about your trading statistics.
A: In option selling, a win-loss ratio is an insignificant number. Most option sellers have a very good win ratio. What is actually important is the size of the winners vis-a-vis the losers. I am mainly an option seller and my win ratio is around 70 percent. What has helped me to succeed is effective risk management. My average losing day is smaller than my average winning day. At no point do I allow my losses to spiral out of control.
My Profit/ Loss ratio is around 1.3. This implies that I make 1.3 for every 1 Rupee risk I take. My target is to make 3 percent on my trading capital net of charges every month.
Q: Can you tell us about your association with various broking houses and trading firms.
A: Yes, on weekends we train some of the largest proprietary trading desks of the country on quantitative trading and how to leverage the power of algorithms and data science in trading.
While we teach them on building trading systems, we get to learn from their market experience. Some of the traders at these desks have spent more years in the markets than I have spent on this planet. It’s quite an opportunity to learn from each one of them.
What I have learnt from them are perseverance, resilience and mental fortitude. They often discuss their shortcomings as a trader and tell us about their setbacks. One thing that is common with them all is that after each failure or setback, they bounce back even harder.
I’ve also heard and learnt from them that ‘bhaav bhagwan che’ (price is god) and a good stock is good only when it is going up. The only price that matters is the one you see on your screen. You never argue with the market.
Q: What are your future plans?
A: I have been overwhelmed by the support that I received from the trading community when I had virtually no knowledge about this domain. My constant endeavour is to give back to this community, more specifically to aspiring traders as much as I can. We have begun a few initiatives and we hope to build on it.
We have started an initiative called “Finsense,” to spread Financial Literacy across the country. We are constantly advancing with new technologies and methodologies to make financial knowledge convenient and accessible to everyone. We firmly believe that “without data, you are just a person with an opinion.”
Our mission is to help people to be their own advisor and make independent investment decisions backed by data.
We have also started ‘The Trade Room,’ a shared co-working facility for stock market participants with a mission to create a community of traders and help traders be more disciplined and system driven.
We also recently launched our Quantitative Trading Program to make algorithmic trading accessible to retail traders.
Q: What would you like to tell a retail trader?
A: My advice to a retail trader would be to start small and stick to a selected list of stocks and strategies. Develop your own edge. Stop looking for a holy grail, there isn’t any. Do not get influenced by fat mark-to-market screenshots that are shared these days on social media.
Don’t make the mistake of letting your losses run (like I did in HPCL- BPCL). Such incidents will only cause emotional as well as equity drawdown. Let your winners run and cut your losses short.
Do not run after many different strategies and trading styles. Find out what works best for you and set your goals accordingly.
I would encourage every aspiring trader to read ‘The Market Wizards’ and see which trader can they most relate to or they like. You are most likely to be naturally inclined to that style of trading.
Successful trading requires a laser-sharp focus. Set your goals and go after them in a planned manner. Those who fail to plan, plan to fail.
Most importantly reward yourself, each time you accomplish a goal. I had decided to reward myself with a trip to Wall Street, New York to touch the Bull if I were to accomplish my trading goals for 2018.
Q: What do you do with your free time, hobbies?
A: In my free time, you’ll find me with a book on finance or financial markets. My other hobby is playing poker. I play poker online on an app called ‘Pppoker’ with my friends. (I go by the name ‘Siso’ in case you want to find me!)
‘The Market Wizards’ helped me to draw parallels between poker and trading. Like trading, in poker too, you play only the good hands and drop out of the poor hands. When more cards are on the table and you have a very strong hand — in other words, when you feel the percentages are skewed in your favour — you raise and play that hand to the hilt.
If you apply the same principles of poker to trading, it increases your odds of winning significantly. I have always tried to keep the concept of patience in mind by waiting for the right trade, just like you wait for the right hand in poker.
