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Sunday, July 6, 2008

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No Overnight Positions Unless the Trend is Strong

After taking huge losses in the last trade even when I followed my principles properly except for not putting stoplosses strictly at 8% point, I got my senses back. Now I take only conservative approach and no more aggressive buying from here on.

The problem was I felt the urge to do short term as I couldn’t track stocks in intraday to make big gains in intraday itself. The problem is risk increases as I look for higher returns with lesser tracking in a short term trading scenario. That is the pitfall of short term trading in bear markets. No need to ask about long term trading in a bear market. That is already dead and there doesn’t seem to be any indication of its rebirth in the near future.

Finally I made a resolution to seriously accept the overnight risk coming from overseas madness. The big loss (15% on venture capital, still at the back of good sentiments) was mainly due to overnight risk coming from US markets. Dow Jones fell by mad 3% on that night and there was no stopping to it till the close of that day. To add to my misfortune the madcap stocks and even the front liners closed the day by 6-10% decline. The only way to resolve this overnight risk is to not have any open position that too when the stocks have already declined on the day of purchase by a significant amount. This is a good principle. We can see its effectiveness in application. A stoploss trigger at 2-3% from purchase price and a limit gap of 0.5-1% depending no. of shares is the best way to go in these kind of markets. I cannot continue otherwise. I can sustain one injury at one place. But even after that happened, if I do not protect it from unforeseen injuries whether they happen or not, is a fatal mistake. That is the simplest principle a common man survive upon.

We should also note that overnight risk is not a rare thing in the coming months. The money in US is simply disappearing. Fed has done all it could to save the rich by giving more cash to them and thus inflating the dollar. Latest news tells that some stores in US have already started cropping up windows saying “We accept Euros”. Dollar just isn’t going to stop falling and along with it the economies of all emerging markets. The credit crisis has started unfolding and in the coming weeks we are going to see the massive writedowns from many US banks and FIs, that we have never seen before. That means Dow Jones will have more down days of 2-3% and that creates overnight risk here.

Unless we find a strongly trending stock we should not take an overnight position. The people who have lost from the January heights and without taking any defensive approach must have already lost by nearly 75% of portfolio. For them any new venture is less riskier. But for me who protected all of the gains made at the January by defensive management, I am more vulnerable to any decline from here on. Any small dip from here is a big loss for me as the already losers do not have any worry to keep selling and booking losses. Any slide from here has less effect for them. Those who protected their capital should take even more stringent measures from here because when the journey is half done, the other half journey will be convincingly done at a faster rate.

That means I need to look at the next peak the market is going to make and then a dip not lesser than recent low. After this if the market rebounds without going down further, I take a call as intermediate bull market and enter into any stock trending up strongly.

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