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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...

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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