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How to do SIP (Systematic Investment) in Stocks?

“History is written by the winners” -Napoleon Bonaparte I won’t be writing about the SIP which is already covered in the public doma...

Sunday, October 18, 2009

A Simple Strategy for Consistent Intra Day Trading

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There are a lot of ways to do intra-day trading of stocks. The beauty of intra-day trading is that it makes you feel like you are doing a full time job out of trading shares. Even with a single strategy you can keep trading all through the day. There is a simple strategy that I want to share today. This is really the simplest one as it does not take much effort on our part to find stocks and execute the trades. But it does have considerable risk and accordingly higher chances and potentially higher rate of returns.

Intra-Day Trading Needs Persistence

When day trading shares, most important thing to consider is to note the boundaries of the time that is fixed within that day. This is what makes the intra-day trading to be difficult, if not encouraging, for most traders. Even if you learn to accustom to this time boundaries still to persist all through the day is challenging. What if I tell that by sticking to one simple strategy you can persist all through the day?

That is what I am going to share now. When trading shares intraday consistently trade after trade, we need to make the task easier. Each trade consists of several activities within the same day. You need to find stocks, you need to look at their charts, order books, second order and if possible third order quotes as well, before deciding to make an entry. After making an entry, you should place it on auto-pilot with a trailing stop order and move on to other trades.

Trading Only Stocks at Their Highest or Lowest Levels

Now to make these tasks easier we can choose to trade those stocks that are closer to their intra-day highs or lows. Plan to go long on stocks that are trading near their intra-day highs and go short on stocks that are trading near their intra-day lows. As long and short trading share similar principles but in the opposite direction, it suffices to explain one direction.

Let us take the case of stocks to go long. It does not matter what time it is during the day. You can always find some stocks that are just closer to their highest value of the day. To find such stocks you should not just look at the list of top gainers, losers etc, though these also give the stocks list with least effort on our part. If these lists are exhausted meaning you took advantage of them already and they are still gainers of the day but not at their highest points of the day, then you need to go deeper in search.

Finding Stocks

Fortunately it is pretty easier to find such stocks by going to nseindia.com and keeping a list of stocks that show open, high, low and close prices at any point of time during the day. If your brokerage account’s terminal can show the same list as a table in one window that will be even better because they show real time quotes as close as less than a second. NSE India site shows with a delay of 15 seconds. It can be considerable time lag when trading volatile stocks with this technique.

Once you find a stock that is moving near its high of the day, place an order to buy just a little above high price. Now you need to place a buy stop order and not an ordinary limit order as beginning traders do. Because the trade gets executed immediately after placing an order to buy above the current market price.

This is not the way to trade with this strategy. We need to get in only if the stock were to breakout once again and make a new high higher than the present high price. This ensures that we will be in the trade only if the stock were to continue the uptrend that it started. If not our stop order will make sure that we never enter that stock. Don’t try to reverse the order thinking the stock might fall. Sometimes stocks just don’t move anywhere all through the day.

Placing Orders for Entry

In your entry order, you should place stop price just a little above the high price of the stock at that time. How much is the ‘little above’ depends on the volatility of the stock? I prefer to consider +0.15% for the stop price for highly volatile stocks. For non-volatile stocks this strategy is not very useful but if tried it is good to try with a +0.1%. Don’t increase this further as the brokerages in Indian markets charge 0.3% as typical rate.

The Limit price in your order should be again 0.1%-0.15% above the stop price. All in all you are betting on the stock making a move higher than a total of 0.6% from current high price to make sure the trade is atleast even. But note that often if the stocks breakout you could be in a ride as long as 10% of the stock.

The reason why we trade stocks at the highest point when common sense tells that we are paying higher price is because the probability of the stock going higher is high when it is trading at its highest point of the day. Otherwise tell me how can stocks move higher? One is by opening with gaps. But we are talking about trading through the day and not overnight. Expecting a gap up at tomorrow opening and buying shares at today’s close is a completely different strategy and is more riskier than the one I am talking about now.

If you want to take advantage of a sudden and surefire movement of the stock then go long on the stocks at intra-day highs and vice versa for going short. You can take any intra-day chart. If you generalize different charts of the same stock on different days or different stocks and different days, the chances of a stock making a sudden up move are higher than the chances of trend reversal when the stocks are at their intra-day highs.

Placing Orders for Exit

Putting the fear to rest, one important thing to mention is the exit strategy. As these stocks make rapid moves once they break out of the high price, they are likely to retrace of their move in the same pace. If you want to move onto another stock that you just found it is good to guess an exit point say 1% or 1.5% above the high price and place a limit order.

If you are a multi-tasker who can switch between observing charts, order books of multiple stocks that you have entered, then instead of placing limit orders try trailing stop orders. As the stock price moves upwards it will keep on making pull backs of small magnitude. Whenever a pull back appear to be larger than a pull back on both sides, take the lowest point in that pull back as the stop price for your trailing stop order.

If the stock were to continue the trend, the trailing stop price too should keep going up. When you change it continuously the profit will be locked when the stock makes a bigger pullback for the day or the hour.

Word of Caution

This strategy entails risk. So it is not a one time thing you should do. If it turned out that the first attempt of the day went bad, then it is natural feeling to not try again. To avoid great risks, use stop loss order compulsorily at just below the high price of the day after making entry into the stock. When a stock makes a high, breaks it and couldn’t find a support at this high, it is likely that it will break down further. Don’t worry too much about closing with a loss including brokerage costs for the potential profit can be much better with this strategy.

All of the time you should note that in intra-day trading all percentages, price differences would be very small. Don’t try this if you cannot digest these small numbers as big for the time during the trade.

Easy to Persist

It is easier to persist with this method in intra-day trading because the sudden move in the stock immediately after entry will get you excited. As much as the excitement if you also close the trade even with little profits and maintain stop loss order just after entry very close to the entry price, you are likely to persist with this strategy.

Another important thing to note is that finding the stocks not very hard. For any given day you can prepare the list of stocks the day before that by finding all stocks that made a white candlestick. In other words on the previous day the stock should have made a close higher than the open. The chances of a bigger move are high if there are atleast two white candlesticks after few black candlesticks till previous day.

You can also sort out stocks that just made 1%-5% gain within the half-an-hour. You can place alerts in your brokerage terminal (if they allow) or write a script to do that on your computer which suddenly pops up a window to tell that a stock just reached close its intra-day high. The ideas to find the candidate stocks are only limited by your imagination.

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Sunday, October 11, 2009

The Three Parameters of Stock Trading: Entry Time, Exit Time and Stock Selection

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If we were to speak strictly, all the things about stock trading boil down to only these three parameters: Entry time into the stock, Exit time out of the stock, and Selection of the stock. If a share trader knows how to find out these three parameters for any given trade, then there is nothing else to do for him/her. It is sufficient to continue doing the same trade after trade.

When stocks were traded two centuries before there were only these three things to care about for a stock trader. Since 20th century stock trading has become a common thing for many people in the United States and there came some experts that generalized principles for successful stock trading. Later some experts or institutional investors or fund managers took these even further and invented many tools like the simple moving average to the complex indicators (directional movement index).

Even when studying so-called fundamental analysis of stocks, there are too many parameters introduced from simple annual returns to complex balance sheets. The more complex tools are created the more bewildered are the stock traders.

Simplicity is the Key to Success

Like in any discipline, simplicity is the best way to succeed in stock trading. Having too many tools and analyzing them for every stock before selecting one or studying a particular stock from all its parameters only bogs you down. It is not the tools that should do the thinking it is you as a stock trader that should do all the data processing.

The simplest data to process is just the price chart of a stock. From this we need to determine the entry point and exit points. By looking at the charts of several stocks we should determine which one is the best to trade for higher chances of success.

Additionally I prefer candle stick charts for delivery based trades and line charts for intra-day trades. A simple moving average of 20 trading days is more than sufficient as an indicator. Volume is considered to be an important technical tool. But I didn’t find it a consistent tool. Sometimes it is counter indicating against the price movement or moving averages.

The simple moving average is found to be the simplest and best of all tools to use in determining the three parameters of stock trading. It is not true only one parameter is sufficient to make a profitable trade. A trade becomes successful only when all the three are right. Even Warren Buffet who is considered to be a hard core follower of fundamental analysis, always made these three parameters right. Most importantly he captured the three longest bull markets of the 20th Century in his life time with the best entry and exit times. Now you understand what it means to capture three long bull markets – it means to be the Richest Person in the world!

Entry Time

Entry time is the most important of all these three parameters. That is why I placed it first. Without a right entry time, the entire journey with the stock will be like a hell.

A good entry time makes the trade comfortable and gives you sufficient margin to place stop loss without really taking a loss in case. It also takes away the mental stress that comes when stocks do not just move as we want them to move.

You need not always make an entry at the lowest point the stock has traded. There perhaps might have been enough volume. The important thing is to make the entry so that the trade becomes profitable whether your timeframe is short term or long term.

Exit Time

Exit time is also important but as it happens only after the entry time, choosing the right entry time relieves a lot of burden in choosing the right exit time.

A good exit time is actually easier to find than a good entry time. This could be because we don’t care what happens to the stock after we quit it. A right exit time also helps cut losses short.

You need not always worry about making an exit at the highest point of the stock movement. A closer price or even a little later after that is good. We need to confirm that the trend has reversed and until then we should sit tight to make big gains.

Selection of Stock

This is the least important parameter. You can trade any stocks with few exceptions and still make good trades provided the entry and exit times are right. But a selection of stock can make all the difference between the amount of gain/loss you make in a given time frame. There are stocks that gain by about 5 times in a single year yet in the same there are others that gain about 20 times. Even during the same time there can be stocks that fall to 1/10th of their value.

Knowing how to find these three parameters can help make best trades consistently. Consistently is what makes a good share trader. If you can trade consistently right even a single bull market can make you a millionaire if not a billionaire (Warren Buffet in three bull markets).

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Thursday, October 8, 2009

What is the Easiest Way to Make Money?

It is one of the simplest topics that can attract huge amount of audience – “What is the easiest way to make money?” Believe, like anything in life, there are easier ways to make money. There are easier ways to making profitable trades, to earn from a business, to earn from a profession etc. The easiest ways to make money from anything share one fundamental aspect.

It need not always be the harder way. Why people choose such paths is entirely upto them for various reasons. Sometimes even those who choose to earn money easiest way do so out of some excitement that drives them. Once the excitement dies down they cannot continue doing it more. It can be because some may not persist without variety.

Cheating is Obvious, but that is Not

The first thing that can come to anyone’s mind is cheating. Of course, that is apparently easiest way to make money. Note that it is only apparently. There are some consequences to it that affect the repeatability of the action.

Then What is it?

All of the easiest ways to make money share one fundamental aspect. It is to find loop holes in a system. Don’t confuse it with cheating. On the outset taking advantage of loop holes in a system might look just like cheating. But it is not. Loop holes are there because of imperfect design or incomplete testing in real time.

This also means that the loop holes may not stay all of the time. They will get closed once discovered. But you can always think of a way to avoid being detected, or find a new loop hole or find a new thing where loop holes aren’t yet discovered. As it is clear by now, we need to be persistent in finding loop holes one after another in a given system and move on to another if one is exhausted.

You may start worrying about competition. Yes there can be competition. But it is your choice to discover loop holes that benefit you most even when you share them with others, instead of getting you a competition. Alternatively finding loop holes itself can be a hard task to many. They may not be interested. If you are in for the money, and like to take challenges, may be you are the right one to feel that it is easier to take this route.

And mind that when I say loop holes I mean the loop holes that allow you do certain things legally till the rules are changed. Some people who work harder won’t like that and hence change the rules.

Some of the stock trading scams (as we see them now) by 20th century trader Jesse Livermore are based on Loop Holes. He used to take advantage of his reputation though he very well can trade stocks the right way. Actually he used to do both, based on what is possible at that time. Once his tactics are discovered in Great Depression 1.0 around 1930, all those activities are banned and considered as illegal. Till then he was the king of the worst bear market of all time in history because he took advantage of loop holes.

Loops Holes Involve Repetition

Though taking advantage of loop holes is easiest way to make money, doing this can be a boring task. Finding loop holes in a system can be challenging but to take advantage of them we need to do some actions repetitively. If you can do that easily then there is nothing stopping till the loop holes are closed.

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Sunday, October 4, 2009

Trading Stocks is All About Taking Chances

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There is a myth about stock trading in those who do not trade and also that bewilders even those who trade stocks. People just think about to make money from stocks we should predict the future price of the stock. Let me say that is a foolish belief. A novice thinks like that because that is what is apparently revealed by the stock market. To learn the fundamental truth about stock trading one should go deep into it.

Predicting the Future to Win is Worse than Gambling

Stock trading is often thought to be about predicting the future price of the stocks and then making bets on them. That is not true. Even professional gamblers do not do that though on the outset gambling looks like it is about betting by predicting.

Whether gambling or trading stocks you do not win by predicting what will be the scene in the future but by taking chances. You study the chances of a certain outcome and bet on that outcome that is most likely to happen. It can happen that your first bet goes wrong. But that is not the end of the world. Atleast that should not be the end of the stock trading. Depending on the chances of an outcome, your second or even third bet might win.

If you are betting on stocks by predicting then you are doing worse than gamblers. Gambling does not share some features that only stocks have. That is the reason why it is foolish to bet on stocks by predicting. It is more like blinding yourself after you make entry in a stock through prediction even when the stock is on the move whether in your anticipated direction or against it.

The Simple Difference Between Gambling and Trading Stocks

The simplest difference between gambling and trading stocks is the time dimension attached to the stock price movements unlike the outcome of a bet in gambling where there is no continuous path from present scene to the outcome in the future. The stock prices generally move continuously from one price to the next and this is what makes trading stocks more exciting than gambling.

To see the present, to know there is a path but not a sudden shift and still make the bet on a certain outcome while on the move is something more exciting than any activity I think of, and more riskier than any risky sport in the world. Hercules should have known it!

You should note that there is also another difference I had explained earlier. That’s not the point we should worry about when talking about this fundamentally incorrect belief about stock trading.

Astrology, Forecasting, Extra-Sensory Perceptions… are all Not Needed

I too though of a stock trading as predicting game back when I started. There were so many things that I thought of to help make an accurate prediction. I studied about astrology, financial forecasting, even extra-sensory perception. Sometimes I used to wonder about time-travel or to attain some mystic yoga Siddhi. All the time I used to come back to one conclusion: If I can have any one of the extra sensory or even physical abilities than an ordinary person, I need not really trade stocks. I need not even earn money for I can find a way to get what I want and do what I want to do.

So I gave up on all these things and concluded that the real thrill is in winning the game with only the abilities of an ordinary man. My confidence to success in stock trading did not come until I succeeded in doubling my capital in RNRL shares.

Even before that I realized that stock trading is not about predicting but it is about taking advantage of whatever the stock market has to offer. During bull markets, stocks just move up at a rate of 4-10% consistently every month. It was simple to think of participating in that ride and gain along with the crowds. But the reality is that we can end up participating in a downside ride as well. To succeed or fail like this was more of a gambling than professional stock trading.

Betting on Stocks with Highest Odds

To trade stocks successfully one should change the fundamental paradigm of prediction to win, to taking chances to win. We should start finding the chances of a certain outcome or a certain price move action on a stock and bet on it. This is possible by studying the stock price movements’ history.

You shouldn’t be worried about history repeating itself but about the hidden patterns that consistently repeat most of the time. In stock trading, unlike some other disciplines, there are no hard and fast rules.

Whether the outcome is going to be profit or loss, a stock trader only takes his/her chances at the trade. If you are not willing to take a chance then it good to avoid wasting time. If you do not yet know, it costs a fortune to waste time on the stock market.

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Saturday, October 3, 2009

Stocks vs. Gains: How Much can You Expect to Gain from the Stock Market?

stocks vs. gains in 2007 on NSE : Gaussian Plot
This is going to blow your mind out. Even if you are well versed in news about stock market related activities or a stock trader, still it will amaze you. It will give a glimpse of what stock market trading can hold for an individual investor. The above picture should speak better than words.

It is a Gaussian statistical curve, isn’t it? You might have known about this curve already. But did you ever stop to think that this curve, which can be found in so many things in nature, can also be found in the stock market? Now I am showing just that.

I thought that if I were to plot a curve showing the number of stocks on one axis and the number of times those stocks appreciated in a given time duration on the other it is likely to be a Gaussian. I had set out to get this data and plot, thanks to nseindia.com which has generously and easily made it available.

I myself was astounded to not only find this to be true but that the picture can show more things that are otherwise hidden. It took me considerable effort for 1.5 hours to clean out lot of mess in the data (some stocks changed names during the year).

The above chart shown is for the year 2007. It plots the no. of stocks for a given appreciation of the share price, all within the same year. We should note that this data is for stocks on NSE (about a 1000 stocks) but it can still hold good for BSE as well (which has 2500 stocks) and even for NYSE and so on.

We can make interesting conclusions from this picture. But let me show a glimpse of the actual data that even mentions the name of the stocks on the National Stock Exchange.

stocks vs. gains in 2007 on NSE : List of stocks
The highest gain a stock made in 2007 on NSE was 17 times gain in other words 1600% in 12 months time by JINDALSWHL. The next stocks made gains in descending order as 14, 12, 11, 9, 8, 7, 6, 5, 4, 3, 2, 1, and down into losses. The most number of stocks made a gain of around 2 times that is 100%, in sync with the general market index called SENSEX and NIFTY.

The colored stock RNRL is the one I had found and betted during the last quarter of the year. Though it gained by 700% from 22 to 180, I could capture its move from 93 to 237 during a quarter of year’s time. Nevertheless that was good as I had bet as much as I could with my courage.

All these stocks at the extreme right can be found using one market statistic. The first one is simply known by JSW holdings and did not go out of my notice. I had always seen it in the list of stocks making 52-week highs. I started tracking this market statistic since April 2007. I couldn’t enter into this stock because I couldn’t believe its trend, as the price was too high. (Now the price is adjusted after splits).

You can look at this chart again and again and take print out to get motivated for trading stocks. Do whatever you want to do with it. I leave all the conclusions on the table. And I don’t fear any sort of loss in revealing the truth. But let me tell you one important thing: "this is only a glimpse of the peak of the powerful bull market" that Indian markets have ever seen since inception. This shows what the stock market can hold even for individual traders that can trade with right principles consistently and persistently.

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Wednesday, July 8, 2009

Couldn’t Post Anything Today!

I will not be able to post anything today and may be on Friday as well. I will start again from Sunday. I did not utilize this week’s time well. I am thinking about either continuing in the same line of topics or start with a new series.

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Monday, July 6, 2009

Why You Should Consider Share Trading As A Profession?

Do you consider stock trading as a profession?Image Source

Much like the many professions in our society, the stock trading is in itself a profession of modern civilization. Unless you are a day trader, the money you earn from trading or investing in stocks is a passive income stream. Whether you trade daily or over a time period, it can still be a profession if done in a professional manner. Many traders just don’t put the time required because they do not consider it as a profession.

Why is Stock Trading a Profession?

Stock trading involves the same kind of effort like any other activity. But why do people ignore this aspect of stock trading? This is because the potential for returns from the stock market is very high. Even by chance you may end up making great gains from stocks without spending any time for it. All you would have to do is to buy and sell the stocks.

With the potential for high return stock trading also involves high risk factor. Risk does not mean certainty of loss. It means that if ended up in loss it will be a big loss than any other loss in your life. Similarly potential for returns means not certainty of gain but big gains for less activity when things go in your favor.

When a trader spends some time to study, analyze and plan for future trades, learn from past trades, he/she can be considered a professional stock trader. The time and effort you spend may not be much depending on your strategies and trading principles. But what is important is that you give it its due consideration. Then it becomes a profession though not full time. Otherwise it will be like gambling in a casino.

Stock Trading is a Sophisticated Profession!

Unlike any other profession you must have known, the stock trading is the most sophisticated profession I have ever known. It involves the same kind of effort and analysis. It requires intelligence and alertness. But it has special characteristics that make it far better than any other profession. There are risks too for this profession.

You get to trade only on days when markets are open for trading. Your time for studying and preparing for next day will also be limited to the time market is open. The stock markets actually trade for much less time than any other office works. As I explained earlier about the time to trade in your life, it is just half the time that you get to trade stocks compared to any other job.

That gives a great deal of time for studying the markets, learning lessons, strategies, principles and also working on any other part time profession as well. Even if you do not trade stocks for full time, you may still trade stocks for a little time in your day and have a full time job. Stock trading allows that. And the returns too are not greatly different in either way. The difference comes from the trading style and strategies.

The kind of returns that stock trading can give and the time it needs from our day make it a really sophisticated profession. It is harder than any other profession. But it also entails great risk if taken full time. That is why one needs enough courage and a brave heart to make an entry into this profession.

Stock Trading can Also be a Hobby

Depending on what suits you, you can consider trading as a full time profession or only as a hobby. I too considered stock trading as a hobby much like other the hobbies. Many people have different hobbies in their life. The time spent for each of them is different. And different people spend different amounts of time for their hobbies.

Some people spend time for browsing orkut and other social networking sites. Some people spend time on browing blogs and internet. Some people spend time watching cricket and browsing internet for cricket score and other related information. Some people play computer games. And some spend time chatting in gmail or gtalk (may be all the day!). Some just spend time on research or study related to their current profession. Some people spend time for improving personal and professional life.

Similarly some people spend time studying stock markets and trading stocks. Because they spend only part of their daily life it is much like a hobby. Many traders trade stocks for the pleasure it gives and not considering it as another profession or income generator.

Why Consider Stock Trading as a Profession?

It does not matter whether stock trading is a hobby for you as long as you have a full time job. But if you want to make great strides in stock trading even by spending a little time from your day, you should certainly consider it as a profession. That is when you can commit to learn and apply powerful trading principles consistently. It is only consistent trading that gives a long term success in stock trading. Otherwise you will also join the group of losers who quit after three consecutive losses!

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Saturday, July 4, 2009

Is There a Hidden Treasure in the Stock Market?

Is there a hidden treasure in the stock marketImage Source

For a long time I used to wonder about this question – if there is a hidden treasure in the stock market? I believe many stock traders would have thought about it. In fact those who turn towards stock trading from their normal professions actually develop this thinking that there may be some treasure in the stock market. For all those out there who are wondering if there is one, I am here to tell you “yes there is truly a treasure in the stock market”.

Before I started stock trading, it was completely new to me. In fact I heard about shares when I was in the final year of my graduation college. There were few Tamil friends who used to discuss it and one in particular was very much enthusiastic about it. I vaguely remember that one day that person was saying that some stocks just went up very fast as days were passing by.

Stock Market is Fascinating from the Beginning

Those times were in 2005 and you can obviously see why stocks were rising regularly. That was part of the prolonged bull market. But I did not know anything about shares or stocks at that time. In the newspaper, the section where share market information is given was completely alien to me. Now I wonder if only I tried to understand what it was at that time!

Once I joined by job, unexpectedly one day I attended a seminar by Anand Agarwal (from Hyderabad) who spoke about stock market investing, personal wealth and risk management. That was a very informative and inspiring session. After looking at the way the presenter analyzed the returns that can be made through investing in stocks, mutual funds and specifically in right stocks like Infosys, Reliance, etc., I was quick to realize that there is really something wonderful about the stock market. And moreover all this is passive income.

There Was a Hidden Treasure in the Stock Market

I too started analyzing and calculating how earnings would be by studying the history of Sensex, mutual fund NAVs, and some popular stocks of the time. I had also proactively started making a list of certain stocks and tracking them regularly. I did soon realize that buying and selling these stocks is going to give a nice passive income. As I did more calculations I realized that there is really a Hidden Treasure in the stock market.

As I am living in India, and having a day job, I used to think that I don’t have the time to trade because I thought at that time I had to spend full time to look at the market. It was also easy to get information about the stocks in the US markets on the internet. Brokerage sites were easily searchable and accessible. Slowly Indian online brokerages and stock related websites are just opening up right at that time.

My conviction about the hidden treasure in the stock market was lost when I made my first big loss in just after two months of starting. I had thought of giving up. But for the kind of success achiever I was, I did not give up but started looking for reasons for failure and how to correct them. Very soon I realized that there should be a plan for trading stocks much like we do in other types of activities.

This is when I changed my principles and strategies. I started looking for better ways to trade. For many months I didn’t make much improvement though I was making some gains and keeping pace with the general market movements. Initially I was actually lagging in pace with the market and sometimes made losses when markets gained.

No More Treasure :(

Though I had learned to keep pace with the market, I could not re-convince myself that there is a treasure in the market. As time passed, I realized that there is no guarantee that I would perpetually make profits from the market. I was quick to understand that as an average trader, I would lose more than the average indices when markets fall while I would gain less than the average indices when markets rise. This reality had forced me to reconsider my situation.

I had decided to give up like many other traders who just get lazy enough to continue when it is not better than other things. But just before that I wanted to give one last try. There was one consistent pattern I had noticed in the movement of certain stocks. So I felt if I could capture something based on consistent behavior I should be able to beat the market.

Finding the Treasure Again

Those stocks were actually beating the market but unfortunately they were not so popular. As they are not popular nobody gave any advice on them. So I could not judge if I can make an entry. The uncertainty was what stopped me for many days. But after observing their consistent movements, I wanted to give them a try.

That was the time when I made my entry into RNRL and that too with a powerful principle of no diversification. I weighed half of my portfolio into this single stock. I believed whether profit or loss that is going to change my portfolio forever.

As RNRL moved everyday, I held my breath from selling too quickly for stop loss or for small profit. Very soon after 45 days, the expected move had come and the stock just doubled in only a matter of one week's time. I had seen my portfolio gain by a whopping 18000 rupees on one single day of that week! You can note that my entry price was 47000 rupees into that stock. There was no end to my happiness over that weekend!

There is Truly a Treasure in the Stock Market

This result had absolutely convinced me that there is truly a treasure in the stock market. I could see that my newly applied strategy had done wonders in a short period of time. If I apply that consistently it is only a matter of time before I make myself very rich. That was the first time I ever felt very happy about stock trading. And it happened just about the time I finally decided to give up.

I felt glad that I gave a last try. It would have been completely different otherwise. After that I started telling my fellow traders to reconsider their situation if they are not keeping pace with the average market returns.

The Treasure is Not Hidden But the Path to It is!

And what more, it is not a hidden treasure. It is a clearly visible treasure. You can just study the stocks and their movements within a certain period of time and calculate for yourself how you would gain by trading them. You do not need to worry about some way of trading but look at the statistics and conclude that huge money is present in the stock market movements.

When my trading went onto the right path after a long time since I started trading, I had realized that the way to make money from trading is very important than anything else in the stock market. That is what told that the treasure in the market is not hidden but the way to get that treasure. You cannot clearly see how to make your way to that treasure because it is highly complicated on the outset. Only trained eyes can see a common stock chart from uncommon perspective. They can see the hidden truth in it.

It not only requires intelligence to gain from stock trading, but also skill and effort. There is no way you can succeed without putting the required effort into planning your trades and learning lessons from them. Without that you can be better to stop trading immediately.

If your trading is not going right and you are not keeping pace with the market instead of beating it, then it is time that you should reconsider your trading. Either make a commitment to learn to find the path to the treasure or stop your quest for the treasure. Don’t just keep looking at the treasure without going for it, you will then become a gambler in the stock market!

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Thursday, July 2, 2009

What is Your Stock - A Laggard, a Leader or a Mover?

Leaders and laggards in your stocksImage Source

Do you trade stocks just without knowing what type it its? Are they moving along with the market, ahead of the market or behind the market? There is a simple categorization of stocks into laggards, leaders and movers. Knowing this can make a big difference in your trading success in the long run.

Classification of Traded Stocks

There are actually only two categories – laggards or leaders. But the stocks can be categorized into three in reality. But the third term is not right though I used it for the sake of understanding. Mover actually, in popular sense, means that the stock that is heavily traded on a given day. Even this classification can help make better bets in the next trades.

The stocks in a market can move independently on their own or get influenced by the movement of other stocks. The reasons can be different but apparently we can see that some stocks are getting influenced by other stocks movement. This apparent distinction in time between different stocks results in a whole new opportunity to trade well.

Who are Leaders?

Some stocks tend to move ahead of the market. These are called as leaders. These are the stocks that make their name in the top section of the list of gainers and losers for a given day or time period. They are moving ahead of the market not just in terms of gains but there are also cases, where certain stocks make their moves before other stocks can make their own.

Who are Laggards?

Some stocks tend to move behind the market. Generally these are thought to be as the stocks that do not make as much gains as top gainers and as much losses as top losers. But my classification here is not about that. It is about the time when they make their move. Whether it be small or big compared to the leaders but they move only after leaders made their move. These stocks are called laggards.

It is All in the Time Difference of Movements

Even though the term leader is referred to in the right sense, the difference I am going to bring up here is about the time difference between laggards and leaders when they make their best moves in price. I found that these terms are also used to refer to exactly this difference by some traders.

In between these two types of stocks there are other stocks generally which form the rest of the market that move just along with the market in synchronization in time with the indices. As these are more in number they make the part of portfolio of almost every trader. Only those traders, who stick to a particular strategy, do consider different stocks and get some flexibility in their trading.

Making a Trading Strategy Out of Leaders and Laggards

Knowing this classification of stocks, we can make some interesting conclusions. I observed that stocks that become leaders continue to be so in their next moves as well. You will get to know this as you track market statistics on a regular basis. Similarly stocks that become laggards, tend to continue like that for some more moves. It is this behavior of stocks that results in a whole new opportunity to trade. We can make a simple trading strategy out of this.

The strategy is to trade the stocks that move as laggards once you notice that leaders have just made a move. Before you can apply this, you should have already built a list of stocks that fit into these two categories. You can apply this strategy for both short term trading and long term trading as well. You can also do this for long buying and short selling as well.

So It is Fortunately a Consistent Strategy

I am amazed at how consistent this pattern of behavior is found in stocks from time to time. And in fact I don’t know when it was different. Some stocks that I found as leaders continued like that in the last bull market into the trend reversal and later bear market as well. The trick would be to take advantage of the stocks that have not yet made their move when leaders have made it.

It is not hard thing to understand or to execute this strategy. It is pretty simple. There is also no uncertainty in this as to when to exit or when to enter or which stock to choose. Just keep one thing in mind. As you are able to find stocks with certainty of move, go for any stock that satisfies these criteria and hasn’t moved yet. Don’t worry about which stock might give bigger return. After all you have removed so much of uncertainty in your trading. Can’t you cope with this one uncertainty about the amount of return of the trade?

There is also another way to benefit from this classification of stocks. It is when sitting tight as I explained earlier. When sitting tight, it will become easier to anticipate when the stock may move and you may plan exit, after determining what type of stock you are holding. If it was leader, you may consider exiting and jumping immediately into a laggard. If it was a laggard, then you know that the expected move is just about to begin. That can help you hold your patience with the stock. This is important in the long run.

First Build the List and Then Trade

If you haven’t yet done something like this, then you should start building the list of stocks. Track them regularly before classifying into appropriate categories Also note that there can be certain stocks that change their behavior from one move to next. But there are also consistent stocks. You need to pick only such stocks. To make it better apply diversification strategy here.

You too can add it into your strategy of trading and enjoy the simplicity it gives!

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Tuesday, June 30, 2009

Why You Should Sit Tight to Make Big Money from Your Bets?

sitting tight on your trades to make big profitsImage Source

Many successful traders or investors in history have done this. Many traders still continue to sit tight and make big money from their bets. Sitting tight is the single most important thing that can make or break a stock trader’s portfolio in the long run. But it is more dependent on the type of strategies a trader uses than on any trader in general.

What Does Sitting Tight Mean?

Sitting tight is a term most popularly used in stock trading by successful traders. Because you can be certain to become successful if you employ sitting tight principle in your own trading! It refers to holding the stock patiently no matter how violent the stock may be moving till it makes the anticipated move in the desired direction.

It is much like its literal meaning. Let us say you are sitting in a vehicle and the vehicle is moving on a rough terrain. Then whether you sit tight or not determines how your experience of the journey will be. Those who sit tight will stay there till they reach their destination without leaving the vehicle or getting hurt. Same is true in stock trading. Just sit tight when your stocks are making you feel uncomfortable.

Any Trader can Sit Tight

Sitting tight can be applied for any time frame. It applies to short term traders, intra day traders and long term traders as well. It does not matter what amount of time you should sit tight, there is always a situation when the stock behaves unexpectedly but you are expected to sit tight.

Importance of Sitting Tight on Your Trades

Sitting tight can make a big difference on the long run. This is because often the biggest gains in stocks can be made by sitting tight on your bets. Immediately after you buy a stock it may either, just fall below your buy price prompting you to sell with stop loss or sell because it is just waiting above the stop loss and wasting time, or it might have moved up sharply and down violently though it shows good profit from buy price. In all these situations, there is an opportunity in sitting tight.

It may not necessarily be true all of the time. But often the stocks tend to move in trends, that is, they continue with the same trend and repeat the moves that they did earlier. For this reason sitting tight makes the big difference between a successful trader and a trader who just makes it above the break-even barrier.

Sometimes institutional investors or some smart high networth investors try to play games with the retail investors. It is easy to for them to play for a while because they have huge money to play with. They can risk a little for game play while testing your trading attitude. Recently Sebi announced plans to allow Indian Brokerage firms to use their software based trading. This was despised by these institutional investors as they can't know now whether it is a retail trader or a software that they are competing with on the other side.

Successful stock traders like Jesse Livermore have explained the importance of sitting tight in trading stocks. Even after knowing its importance we tend to forget it or violate it for some reason. But focusing on its long term importance one can make a habit of sitting tight on the right bets and make the best out of a trade.

Don’t Be Mislead into Holding Stock as Sitting Tight!

There is a difference between sitting tight and holding the stock. Sitting tight does not just refer to the act of holding a stock without selling it. Sitting applies to only situations where you should hold your breath and do not sell immediately till the stock makes anticipated move. So there is a plan in your trade and an expected result when sitting tight. You will hold the stock till it does what you expect it to do.

In holding a stock there may not be a plan. You may be just holding it for no reason other than hope. Most of the times the average stock trader decides to hold a stock only when it falls below their buy price. He/she does not get the courage to book the loss, when it is small, and expects it to turn around and close it without loss. It may or may not happen. Most of the times the stocks move in the same trend. Hence as the stock falls further and further, these traders hold it for eternity making the loss bigger and bigger!

But sitting tight in no way comes close to this act of drowning in a falling stock. In fact holding the stock in a falling market is opposite of sitting tight. Relatively we can view it like this: not waiting till the stock makes its bottom is sitting tight on you cash in a bear market trend. We should clearly distinguish before trading stocks as well as even while trading stocks. Most importantly you should be able to clearly assess the type of situation you are in and if you are already in loss cut short with stop loss, close the trade, or plan for second stop loss there is still an opportunity for the stock to make a move. Never take a third chance.

As the stocks continue in a trend, you will also need to sit tight for long term trading beyond one cycle. Long term stocks move ahead in jumps. It gives a big return if more than one jump is captured in a single trade. This is where you need to sit tight. It enables you to get an extra margin over trading expenses and also increases the profitability per trade. This ensures long term success of stock trader as only few such trades are needed which compound that return into massive gains over a period of time.

Depends on Your Trading Strategy

Sitting tight is not just for any stock trader. It has to be applied to certain types of strategies. Knowing them well makes a big difference too. For certain types of strategies there may not be a need to sit tight.

Some traders’ strategy is to trade that part of the stocks’ movement that is certain when applied a particular rule of entry or exit. This can be for short selling or buying stocks. They exit quickly after the stock makes that certain move upon entering. In fact here if you keep watching the stock, the stock will hit the high and wipe out the gains quickly. There the stock will sit tight before making another move up or down. As the margins of profit per trade are low for these traders, they do not waste time sitting tight.

Hence the profit potential per trade must be considered strictly when deciding to sit tight on a bet. The trade should generally be of a long swing type be it short term or long term. The expected price range potential should be very high. Even in day trading, stocks can make moves successively again and again on certain days. These days are not very rare for particular stocks. But on average they are rare. Hence a stock, that makes such moves on some day, may make only part of such move on normal days. Here it becomes difficult to separate it. So you will have to check the pattern, assess it and decide to sit tight within the day or over a few days.

Generally Good on Long Term Trades

Sometimes in day trading, immediately after you make an entry the stock might just become range bound into a tiny range. The volume may dry down. But you should weigh the trade-off between the value of your trading time and the odds of the stock moving right. Then only sitting tight here can make a difference. Of course profit potential over expenses must make it worth sitting tight. Unless otherwise you should restrict this habit to the long term trading only.

Sitting Tight can Change Your Portfolio Forever

Note the strategy you are trading with, the situation at hand when you are in a stock, and decide whether it is right to sit tight. When done properly sitting tight can grab all the opportunity that you have ever wanted to capture in a stock. It results in a long lasting satisfaction and experiences to share as you sat tight when the stock moved violently!

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Sunday, June 28, 2009

Should You Trade in Liquid Stocks or Illiquid Stocks?

Should you trade in liquid or illiquid stocks?Image Source

Liquidity is an important property of a stock. It is in fact not just for stocks but for any asset that can be traded with money. Many people trade stocks without ever knowing about this property of their stocks. For a professional stock trader, who trades with strong trading principles, liquidity becomes one of the major properties to consider in his/her trading. Continue reading to learn more about its importance as well as what is liquidity if you did not know.

What is Liquidity?

Liquidity is a popular term in finance but I did not know it until last year. Even though I heard about it and its importance in the first ever seminar I heard when Anand Agarwal (from Hyderabad) presented about investing and risk, I did not quite understand it at that time. As I started trading on my own, and learning new lessons at one point of time I could quite understand the right meaning of this in relation to my own trading.

Liquidity of an asset is defined as the ability to sell or buy it quickly in the market without affecting its price. You must have heard that a stock will rise when it is bought and will rise when it is sold. In reality if you think again you will note that there is a seller for every buyer and a buyer for every seller. Then how come you can say that the stock is only bought or sold?

The fact is not whether the stock is just bought or sold that determines its movement. It is the change in value of the stock in the mind of buyer or seller willing to transact the stock at any time. At any point of time there will be orders for sell above current market price and orders for buy below it. If buyers want to buy the stock at any rate immediately, what should they do? They should just rise their order price, then immediately it will match against the sellers’ prices and gets executed.

How Does Liquidity Play Role in the Stock Market Movements?

When too many buyers behave in the same way then the stock starts showing a definite movement in the upward direction. This is the reason why the stock moves with buy or sell actions not just by their simple meaning but due to as described above.

That means stock moves when you make a transaction aggressively by changing your order to get executed quickly. This is only when you do not find enough number of stocks with the matching opposite orders. But what if you find? Then the stock price does not move in the up direction if you buying. In other words the stock appears stable.

Now to make sure that the stock makes some move at all times, we need to have liquidity. That is there should be buyers and sellers constantly trying to match their orders. No matter who trades them and how many trade these stocks, the point is to have very little impact of your trade on the price of the stock. Even if you sell your stocks in huge volume, it should regain its earlier price in a very short time (in seconds).

So Liquid Stocks Regain Their Shape

That is how liquidity works. You must have noted the relative stability of the big companies and especially the large caps mentioned in the stock exchange indices like Sensex for BSE or Nifty for NSE. This is because of their high liquidity. Liquidity, if you take literally ,also tells that the asset is more like a liquid in which you can quickly put your hand, pull something out and it still retains its shape after a little time. If it is like a solid, then whatever small piece you add or take from it creates a mark or change in its shape that remains like that for the rest of the time. Illiquid stocks behave like that. If you traded them, you can see the impact of your trade for a long time to be noticed by the Securities Exchange Commission.

Hence liquidity is referred to as the ability to trade an asset without altering its price. In reality different stocks have different amounts of liquidity. For that reason their daily movement ranges and the volume of transactions too differ.

Those stocks are highly liquid which are traded heavily with huge number of transactions per second compared to any other stock. With these stocks you can get in quickly for the price that you see as the CMP (current market price) at that time. You can also get out of the stock quickly for the price you see as CMP. In less liquid stocks it is not possible to do so easily. In other words liquidity determines how many shares you can transact at any given time in a given stock.

Liquidity Gives a Safety Edge for a Trader

Liquidity thus gives you flexibility to play the game easily. So it is safer to invest or trade those stocks that are highly liquid or traded heavily than otherwise because you can get in and out of them pretty fast. Examples of these stocks are many in Nasdaq as 100s of millions of shares get traded on them. For ex, Apple, Nasdaq Index QQQQQQ, QualComm, Texas Instruments, Cisco, Microsoft, etc. On the National Stock Exchange in India, the stocks in Nifty like ICICI Bank, HDFC Bank, Reliance, RNRL, etc are highly liquid. In general, NSE is more liquid than BSE.

Now you must have already understood how liquidity can be used. If you are a stock trader (or share trader), then you should go for highly liquid stocks. Especially if you are going for short term trading or intra day trading. When you do short term trading, you should be able to get in at the price you want to get in and also trade with the same number of shares that you would have done with long term trading. The reason is that regardless of short term or long term trading, a stock can give the same amount of return. You got to do long term compulsorily when liquidity is less.

Hence short term traders bet relatively large money in a short period of time. To absorb their impact and not to affect the stock price movements we need to select those stocks whose daily traded volume is very high. At the end of the day somebody has to absorb your moves right :). For example, for day traders or short term traders, many stocks on Nasdaq and RNRL, Reliance, JPAssociates, DLF, Adlabsfilm, etc. on NSE are right type of stocks.

But it does not necessarily be vise versa for the long term traders. I had explained the difference between long term trading and short term trading and when to use them in an earlier article. The long term traders often target stocks that may not necessarily have good liquidity. For example in the year 2007, the top 20 stocks that gave highest returns as much as 2000% in a year are the stocks that have low liquidity. It happens like all of the time.

Illiquid Stocks Too Are Important, But Play Carefully

This does not mean that you can not trade them. Many people get turned off for low volume and ignore them thinking there may be some scam involved. That is wrong. There is a professional way of trading these stocks. And institutional investors always employ such tactics to get in and get out of any stocks easily and quickly without draining out the stock or skyrocketing it. In fact institutional investors trade with a big deal of money that they mostly settle with highly liquid stocks like Infosys and Reliance. Just check the fund allocation into stocks of any mutual fund and you will find this.

With low liquid stocks, you should never consider short term trading. You should only do long term but with a proper strategy in deciding the number of shares to trade. You can also buy the stock not in one trade, but in several at different times in different order for the same or closely similar prices. It takes time for these trades to get executed as there may not be much activity on that stock.

Similarly while getting out as well, it can become extremely dangerous with illiquid stocks. You may want to get out at certain price but as you start reducing the exposure you will see that the next lowest buy order is at a huge gap. Either you need to have enough patience to wait till it gets executed (it often does) or lose money in the process. As the margins of profit for short term trades are less than that for long term trades in illiquid trades, it is never a good idea to trade illiquid stocks for the short term.

In many cases the right time to decide to sell is when the trend of the stock reverses and by then the illiquid stock too becomes very liquid due to the hype and attention it had accumulated over time. And if you do not get out then, it will become illiquid again as the stock falls. Then you can never get out with a reasonable profit from it.

Liquidity Changes with Market Trends

Note that not all stocks can be just separated as liquid and illiquid stocks. Each stock has a certain level of liquidity. Hence you should understand this level of liquidity of a stock from its daily volume of transactions. Often this becomes highest during bull markets or at the peak price of a stock.

Once you know about liquidity, now you should consider it while creating the list of stocks to trade for short term and long term separately. Sometimes you should add some stocks or remove some from the list as the liquidity of stocks can vary depending on the type of investors that trade it from time to time.

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Friday, June 26, 2009

The Importance of Plan for Your Trading

It is important to have plan for your tradingImage Source

What is the simple thing that separates professional stock traders from novice traders? Are you a trader who trades stocks by the instinct? Or do you trade with a plan? You need to have a plan for your trades from the entry into a position till its exit. Having a plan does the same help for trading stocks as it does for any other profession.

Many traders start trading stocks because it looks like as if it holds some luck for them. Some traders understand that it is not a gambling casino but still continue trading by the instinct. Even the traders who are active and have some experience of past trades still end up doing a lot of trades without any proper plan.

Novice Traders Don’t Have a Plan

Trading stocks without prior study or preparations is what makes it an instinct based trading. For novice traders it is very natural to just jump into a stock that has just made some gain compared to other stocks. They do not even think of the stock making a reversal in the next moment.

Only after several failed trades do many stock traders understand the importance of a plan before executing a trade. Many learn it the hard way. Some traders actually do not bring in a full change in their trading habits. Sometimes they trade well as with their plans. But in between they keep doing trades without prior plans.

With Practice I Learned to Plan

When I started trading since two and a half years back, I too used to trade just like that. In fact I was not a very novice, unorganized trader. But I had studied a little about stock markets and stock price movements before opening my trading account. I had created a list of stocks which I can trade and used to track them well before I started trading. Even after all this I couldn’t control the urge to enter a stock just after logging into my trading account.

It is not when starting trading first time or logging into my trading account. Whenever I close a trade by selling existing stock, for whatever tiny profit that came from my luck, I immediately wanted to put the money to use in some stock. I never used to give rest for it. I think this is the same case for you as well at one point in your trading life. We just don’t get over this thinking of keeping money always at work.

Some trades resulted in profits whether small or big. But some ended down in loss. But I never booked loss initially until my first big loss. It was just part of a powerful bull market that we had for the past years and hence it did not matter. The stocks always bounced back and I used to quickly close the stock after it crossed a little above my buying price. Then again I used to put in some other stock without any plan.

After several trades and few months of time has passed, I started analyzing the progress. I was surprised to see the way my portfolio is growing relative to the market indices. Sensex was making 5% gain every month. But my portfolio was making only 2% and that too with multiple trades, diversified and so on. So I thought there is something wrong. I need to change my trading habits.

No Plan - No Progress

Later as I started looking for best ways to trade and make full out of opportunities, I found several experts’ articles on the internet. Sometimes I searched for books and read them. Though I couldn’t find a perfect book or the books did not match my then wavelength, I noticed that almost all books and experts emphasized the importance of a plan in your trading. They used to say, “It does not matter what you trade and how you trade and so on. If you have some plan for your trading that is all that is needed. You will certainly be on the right path soon.”

Trading without any plan is like a kite flying without being controlled by a rope. It is a complete waste of time and money. The worst still is that many people do not get over this urge to trade without plan. Though they do some trades with plan, they still do some trades by the instinct. It is almost like a habit that we need to unlearn. We can overcome this through practice.

It is only after learning my lessons from losses, not small but big big ones, that I had consciously added planning into my trading. I almost made it a habit. Because of this now I can control no matter what kind of stock you show me today. I can very easily imagine the consequences of entering a trade right now without a prior plan.

All You Need is a Plan, Rest will be Taken Care

If you are reading this article it means that you are consciously trying to improve your trading. Just take a step ahead and start thinking seriously about your past trades and future trades. Answer these questions to yourself before every trade:
What went wrong and what went right?
What can I do better this time?
What stocks should I trade?
What kind of stocks should I track and when should I enter any of them?
Why I should not jump into the next trade?
Can I give my money some rest?
Do I know that I can make a lot better profits even with money engaged in less amount of time?

As you answer these questions you will get out of old habit and start planning your next entry to make it at the best time. You will soon inculcate a habit of trading with a plan. What it takes is an initial effort to change your trading constantly. After few trades, you will automatically change both because of a new habit and also because of the results from these trades.

Next time make trades only with a plan. It does not matter who you are and what you know. It does not matter what kind of plan it is. As long as you have some plan, I can assure you that you are going to become a better trader!

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Wednesday, June 24, 2009

How to Cope with an Unexpected Massive Loss And Emerge Again as Professional Stock Trader?

how to cope with massive unexpected loss in your stock tradingImage Source

Every stock trader must have faced an unexpected massive loss at one time or another in his/her trading. When that happens to you, your heart will break down. A massive sudden loss pierces a deep hole in your heart. Especially for the effect the loss has in terms of money, it creates a unique feeling that can only be experienced than described. Often this results in a trader either packing back to their original profession or going beyond to explore their opportunity to emerge again as professional stock traders.

Every Trader Gets Their Chance to Lose Big

I had such an experience very early in my trading. Though that first time big loss is not really big compared to my present standards, it was a big deal at that time. It had a huge impact on the state of my mind at that time. Though I felt I did a bad thing by booking that loss at that time, later I had realized that in fact had helped me learn to cope with such unexpected losses which came to me from time to time.

The case of a sudden unexpected loss is not something new in the stock trading. It happens for any trader. It can happen at any time, in any cycle, in any year. Many traders have gone broke in the history just because of such sudden turn-arounds. Sometimes these events, in fact, triggered the longest bear markets like the one we are facing now and the one during great depression of the 1930s.

Why Massive Loss is a Problem?

What we should realize from such times is that it is not the end of the game. It in fact is a part of the multifarious scenarios that stock market presents to its participants from time to time. Much like a massive loss, the stock market also gives, sometimes, a massive run away profit. But we tend to forget such things and remember only massive loss situations.

The other reason why people get caught up with this sudden loss and completely lose their mind for it, is that they miss the opportunity of run away of profit when the market gives. Stock market plays a fair game with its participants though it does not behave in certain patterns that are obvious to the ordinary. But it is the participants’ failure to not fully capture the profit side but end up drowning on the losing side.

The reason for not taking complete advantage of the profit side is because of the temptation to take profits early. People fail to call the top at the right time. You need to capture top at exactly the peak point. You can catch when the next top is lower than the all time top. That definitely signals a reversal atleast in the medium term time frame. Meanwhile you could go for next good bet.

It is Not Always Unexpected

It is not only missing the profit advantage that burns the portfolio of the stock trader, but also not taking precautions to cut losses with stop loss limits. Remember every big loss starts with a small loss that you can easily cut. You may say that nothing can be done if it is a sudden loss.. But even in the last year’s violent movements of Sensex on Jan 22 and 23, the markets did not really make unexpected sudden jerks. They were steadily and everyday consecutively falling since reaching the topmost point of 21.4k and next top most point after that at 20.7k.

The consecutive falls and the second lower top formation were enough to convince any trader to reduce his/her exposure as much as possible. And that is what I had precisely done. Nevertheless for a new trader who had never experienced a massive loss like I did early in my own trading, it would be definitely hard to take this action. It is easy to see why they would end up in a massive loss.

For this reason, and also for a reason that even after learning all the trading principle there comes a time when you end up making a massive loss for whatever cause, it is important to learn to cope with such a scenario.

Your Trading Does Not End with This

A massive loss is not the end of the world. Most of the times it is perceived to be so. That is why we need to first prepare ourselves not to think like that. Remember nothing happens in your stock trading without giving you an opportunity to learn a lesson. Here too there is a strong and important lesson to learn.

Though the massive loss may come unexpectedly, from my experience I have always seen that it immediately presents an amazing and easy opportunity to make a massive gain in the next few days. Sometimes the sudden unexpected downside of a stock does not continue on the next day when I had placed stop loss order to close the position if it were to continue.

Better Sides of a Massive Loss

Whether it is last year January on Dalal Street or the year 1929 on Wall Street, there were immediate magnificent rallies that created history in the next few days. And most importantly these were easy to capture because the whole market was sympathetic of losers. The buyers are coming in just to show their sympathy without a second thought. That presented an opportunity of a life time for a trader who can trade at the edge. This is when you should actually leverage because the rally appears too certain.

It is also a time when you get to know who are the people that really give support to you during bad times. You will find your true friends who try to understand and feel your pain. You will also get to know people who start talking low about you because you made a “loss”. There will also be people who gossip behind you and possibly you can get to know them as well.

Once you go through such bad times, you will see that you will build good virtues like humility and shatter egoism. You will also have the choice to become strong enough to prepare for such a catastrophe if it were to repeat again. This time you will plan alternate support systems so that you will not go broke overnight. You will realize the importance of helping friends, relatives etc. so that they come to help during these times.

The turn of the century trader Jesse Livermore had gone broke several times and gained riches again and again because there were people who trusted his ability to make gains from the market. Can you think of such a luxury in your life too?

Faith can Save You From a Massive Loss

One last thing that you should note when coping with massive loss is faith. Faith is a basic fact of our life. We cannot live even for a moment without it. Catastrophes, natural calamities or disasters can happen at any time and there is no way we can predict them. No matter how much our science advances, we still feel like a baby in front of the destructive power of nature.

The room you live in may collapse. There can be earthquake in the next moment. If we think of these things everyday, then how can we continue our daily lives? But despite knowing all these things we still continue our life without fear. This is all because of faith. A faith that these do not happen now. They may happen sometime but we don’t know when. And there is no guarantee that they happen or do not happen. But we maintain our faith that these are things that rarely happen and nothing to worry now.

Same faith should be applied in your situation too. When you encounter a sudden massive loss, do not lose hope. Have faith that you can start again. May be this will not happen again to you which means that the path from here is golden.

Expand Your Horizon to See a New Future

Many people, who end up with such massive loss in their first few trades only, really lose faith in the markets. I have practically seen many such people in my life. They go back to their life never to come back again. Partly I feel that it is their unfortunate situation to enter at the wrong time. But partly I also feel that it is their mistake not to try to explore if this is everyday scene or if there is a future beyond this.

Losing big in the beginning when you bet small is much better than losing big later on in the game, when your betting size has increased. Come out of the fear of a big loss and realize that there can be many like you. Treat this as an opportunity to know yourself better and your relationships. Prepare with alternative ways to tackle such a situation in the future. When you do this, you will definitely emerge again as a professional stock trader!

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