Tuesday, March 31, 2009

Does A Share Trader Undergo Hibernation?

If you are into share trading like me you will understand that there will be times when we have to sit idle without trading any shares for a long period time. For many stock traders and even investors and gamblers out there, one time or another just stop trading. But there is a difference between prolonged gap and a casual break from trading.

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The First Ventures

When you start your ventures into the stock market, you will be very excited. Stock market appears to hold all the hidden treasures and the easy path to your financial goals. This is how many traders start and the phenomenon continues like that everyday as the percentage of traders who involve with stock market is very less part of the population. It is said that there was only 2% of Indian population that had owned shares on the exchange a decade back. But now after the bull market of a life time this percent has gone up to 4. In US the penetration is actually 50%. But then again, the traders in the US are the most persistent traders.

For many traders, the first few trades get completed within no time. As most start carefully, their conservativeness initially helps them. They take the profits that come along their way. Of course there are some unfortunate starters who end up with a big loss in the first trade itself. For them it is hard to reconsider another trade. But for others the little profits that look not so little propel them forward to start multiple trades at the same time.

In the stock market there is nothing like first impression is best impression or first trade is that defines the future. It is like a circle of trades from which we randomly get a trade no matter who starts or when they start. Every trader has to go through the same lessons before they come to the next stage of trading. That is the beauty of the stock market. The first loss is not very far and it often comes turns out to be more than all the first few profits they make.

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This is where the stock trader considers a short break. What many traders typically do is to let the stocks recover on their own instead of closing trade with losses. This is a fundamental mistake almost every trader does atleast once. It is the “Venna tho pettina Vidya” (butter-lessons) for many. Even after more than two years of share trading experience I myself find doing this sometimes.

Going Back Home Never to Return

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When I started my trading two years back, I took a month long break just after few days of trading. I resumed trading again after realizing how stocks were moving up on average (10%) in a month. For many people who started at the tip of the Everest of the last bull market in January or March 2008, I bet that the first trade was their last trade. For them they never consider quitting the first trade. It is very difficult position to be in. But very few realize that it is a kind of lesson that our life also teaches us on the way. These people do not have the hope of returning to stock trading. They go back to become workaholics again.

But when you pass through these occasional breaks, conservatively trading shares still there comes a time to stop and look back. Even the reputed traders in history have taken long breaks from trading or stopped to look back at where they are really going. For the turn of the century trader Jesse Livermose, his trading career was of a cyclical type. He made money, maintained a costly life style, lost money, went into debt and again made money trading He continued like this for few times before ending his life.

When a stock trader undergoes hibernation it is to say that he is taking a longer break from trading than normal. He is always conscious of trading in the future. He always knows what works best in the market, whether there are any treasures in the market and how to get them. But still he considers a break after a long sequence of trades that taught him various types of lessons.

In a typical break, the trader takes break after booking a loss or a profit, so as to reconsider the situation before coming back. But the hibernation is due to something that stops the trader from doing what he does before. He encounters a reality where it is no longer the same perceptions that he had traded with earlier. The obstacle stopping him appears larger than and considers various options to pass that obstacle before resuming trading. Having learned so many lessons, there appears to be something that has to be not learnt but conquered with inaction. Most the time spent by a successful trader is actually doing nothing.

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Hibernation of A Share Trader

Of all the novice traders that start at the stock market, very few survive through their first few losses to become regular traders. Many will go back with no intention to ever trade again. These people of course keep the blood flowing in the market with some fresh money added regularly. But the blood suckers are the regular traders. Sometimes they do not stop, take profits and go away, but pause for considerably longer time. That can be due to recession effects, other work creating timing conflict, some paradigm shift created from within oneself. These people know that they will come back some day to trade again.

For my particular case, having learnt to trade from short term trades to quick intraday trades, now I find it hard to identify the goals of a trade that is initiated. Is it for a day trade to be closed in any time, or is it for short term trading? Either types should give good results when traded with discipline. But what is holding me back is my vacillation between day trading and short term trading. Once into a trade one should adhere to the primary plan assigned to that trade. Another thing is the extra difficulties of a recession added with a day job, make it hard to keep focus on trading whether it is short term or medium term. So I considered hibernation since November 2008, that was the month when the world first time woke up to the reality of a Great Depression-2.0.

If you are also one of such trader going hibernation, I would like to know what made you take a pause in the trading journey.

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Sunday, March 8, 2009

Domestic Institutional Investors Just Can’t Stop Buying

If you ask any businessman about who has the money in these difficult times, he will say that the customer has the money. But if you ask me the same question to me I will say that it is the Domestic Institutional Investors (DIIs) in India that have the money. And they demonstrate it everyday by buying stocks on the Indian bourses.

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If you are wondering who these DIIs are, they are just opposite of FIIs. FIIs are foreign Institutional Investors meaning the institutional investors trading/investing stocks from other countries. Where as DIIs are the institutions within our own country. Examples are LIC, UTI bank and several public sector banks/insurance companies.

In fact these institutions get an official request from the government of India to do those transactions mainly on the buy side to support markets during the turbulent times. Turbulent times are when the markets only go down due to excessive supply from all market participants. Do not take its literal meaning the share market context.

One must have known a slang word in Telugu used to best describe these type of investors. I am just reversing it to spell it as – puluba. These investors have lot of puluba in terms of money that they keep showing it on the bourses when every individual investors on the Dalal Street has no clue as to why they behave so.

What caused this from 2004?

The story dates long back to 2004 when UPA has won elections on the back of support from the CPI or left front. UPA was formed from coalition between Congress party and left front parties. Just as the new government came into action, left front already started making comments about their plans and control over the government making reforms in the economy. This concerned investors and more on the FIIs. They started selling stocks in frenzy. That was what caused popular stock market crashes in those days on Bombay Stock Exchange.

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By that time already there was a good bull market and many investors who were bullish are affected as usual. Some committed suicide and some must have staged rallies as well. Anyway that has made this government (which is still under the same administration from those times) to consider the importance supporting the market through any means. The government based institutional investors like LIC, UTI bank are the companies that are obligated to support the markets as much as they can under all technological limits.

As I get the market statistics on my mobile phone from Indiabulls (my brokerage service), I get to know the daily net transactions of DIIs and FIIs. FIIs not having any choice ended up being net sellers all of the time, while the DIIs are net buyers most of the time. This shows a definite trend which is down trend. The counter trend starts when FIIs become net buyers for more at least two consecutive days. DIIs can remain buyers or may become buyers, but that does not matter for the market direction.

Let us check our next good bet(s)

This time I changed the charts to also add the Bollinger Bands along with usual volume and moving average indicators. The chart for the Cambridge solutions shows its usual consolidation pattern in the midst of a general market meltdown. Its trend is strong as shown by the white candlesticks made every day. That may also mean that it can surge suddenly upwards on a good day or two.

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Then the chart for nifty shows that it has clearly broken the trend line and set the tone for the new down trend in the long term trend. If one wants to short the term, it is better to do it on every rise. Ha ha.. does it sound similar but opposite to traditional saying “buy on every dip”?

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This time I am also featuring my most tracked exchange traded fund these days. That is the gold benchmark exchange traded scheme. Its scrip id is goldbees on NSE. It can be traded on the national stock exchange just like a stock. The chart for this shows that it just touched the support at the moving average in between the Bolliger bands. I feel that it crosses that and touches the lower Bolliger band before resuming uptrend. We cannot tell when it will do so. But we can see that 1400-1450 may be the good price to catch it to ride the next wave if there is going to be any. Many financial experts give a green signal for Gold. Then why should we ignore the opportunity when it is still one.

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Good luck trading!

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