It has been about four years since I had first started investing in stocks in the Indian stock market. I can clearly remember the losing trades of the first financial year and the only one high profit trade I ever had along with moving from long term investing to short term trading before making a wipe-out trade for the bitterest experience I ever had.
When I started investing money in stocks it was a humble beginning. Nobody gave any encouragement. I have noticed many people starting trading stocks directly, after so many years of getting into a job with the same capital that I started with early on. Folks just follow the famous rule: invest money you can afford to lose. And you will certainly lose if you can :)
I would say the time that I spent investing into stocks for almost first two years was the most exciting in the last four years! Ever since I stopped buying or selling (it was like bringing a fast car to a grinding halt), I had really lost the excitement in life. I remained passive for the two year period (2009-2010) during which, one medium term but a fantastic bull market had run in the markets, which was like a short preview of the longest bull market (2003-2007) and a window of opportunity.
Looking back I didn’t have an easy way. I was gradually moving from long term investing to short term trading. I certainly felt over-confident when I was betting on junk stocks in bear markets using techniques that should be applied on momentum stocks in bull market times. These are what I had experienced one after another making it difficult to comprehend what was going wrong:
• A near complete wipe-out trade (~90% loss wiping out 50% of total profits of two years in three months time frame)
• Buy & hold in bear markets (to get over short term mindset simple trades failed)
• Trapping at false highs (everytime I buy at high and stocks retreat till I sell at low, losing rest of total profits)
• Grinding halt trade (four stocks all going wrong just because I was a little late for a pullback trade and too early for the bull market, digging losses into original capital)
I wasn’t very much worried about the last one except that it turned my +ve position onto the –ve side. Even while I was holding bleeding shares of selmcl I wasn’t really serious about losses. I remember during that time as I told a friend (Vinay) that I was holding it to see how the pain feels. I realized that it was not only a bitter experience but it made me realize that the pain of losses is always same. This one stock still looks like a black mark in my experience and made me realize one every important lesson: “no matter how much profits we make, a single 90%-99% loss can ruin everything”.
Certainly loss isn’t something anyone would want to hold onto unless he is novice and holds out of hope. I wasn’t having any hope though. As Michael Douglas says in Wall Street “Nothing ruins my day more than losses”. That is always true for any stock investor.
At the end of all this, I wasn’t sure of what is happening and I wanted to correct myself before I get back again. I tried to find answers to these failures. Unfortunately there wasn’t a simple answer. They got interlinked.
All these losses (including the worst bear market) just started with those “trap at false high” trades. One buys at price above yesterday’s high to make sure to buy only if the stock were to rise and not get trapped in otherwise case. It actually works well on charts. When I discovered this trick of making significant profits in just a week’s time in strongly trending stocks, I almost thought I had found the Holy Grail of stock trading. Suddenly everything became crystal clear. All stock charts, all time periods seemed to follow one consistent pattern. But what I failed to notice was its practicability in real world.
We can’t trade on thin margins. Little or no loss also means loss due to great brokerage charges. I certainly didn’t have time or confidence to place stop orders for entry/exit as often as this strategy demands. The worst thing is that it isn’t Holy Grail after all in bear markets but it is in bull markets. This made it practically dangerous in bear markets or near the onset of bear markets. I have so many such trades that I am scared to buy stocks at high prices just because the price gap to the stop loss point is high.
This resulted in next set of losses. Before that, I was able to do atleast one good trade in the list of bad ones, in Moserbear, making 10% gain, buying closer to the low and selling after a quick pull-up. Later it rose as much as 30%. That made me even more confused at that time. So in the last one (grinding halt trade), when the market had turned around sharply I was already late for the party but trying to buy on pullbacks and not above highs. This had perfectly trapped me for the big losses as the market gave up all the gains of sharp turn around and resulted in huge stop loss. The mistake was not to buy closer to low, not to buy above high, but intermediate point (with huge stop loss margin) when it wasn’t really clear what is going to happen. The market really dived down to its lowest level after this but that was the lowest ever since. I was actually right about the turn around of the markets but was a little early for the long term trade, a little late for the short term.
A simple lesson from all these failures is that what worked easily for the long side (not the short selling side) in bull markets, will not work, but works against, in the bear markets. In bull markets you can even buy a stock at its highest and hold very comfortably on as it bleeds for short time and then see it go to even highest levels within no time. In bear markets it works so only for the downsides. A stock that retreats from lows, will eventually fall back down to lowest lows. Looking at how things reverse from bull market to bear market is a bit confusing for a single hand trader (that cannot do short selling).
But more importantly the Holy Grail that I thought I found wasn’t correct. There is no Holy Grail to stock market investing. I just had to read last few para’s of a book I stopped out of excitement at that time. There it says, this buy above high strategy works less than 50% of the time which means losses have to be cut short at any rate. If stop losses have to be larger than comfortable level, then better to avoid. There the truth comes from an experienced trader (the author of the book).
Now the truth is known, I think my confusion is cleared. We can’t make consistent profits with strict rule based trades. Rules are for money management that is deciding capital allocation and reducing losses by cutting them short. For closing or entering trades we have to rely on “gut feeling”.
Recently I started playing on chartgame.com. This is an amazing website that helps practice virtual stock investing without actually trading. It is better than trading and virtually as best as real trading practice.
I played it a year back too but with the Holy Grail idea :). I was able to practically see its failure. But it got shaded with the fact that this game at the time didn’t incorporate the short selling feature. Though initially I was able to beat the market over large number of stocks, I was losing. It went worse. Also around that time any random sampling of a stock price history more often resulting in a bear market period. This too made it difficult to see where I was going wrong.
In the last week or two, I played again. This time I was able to beat the market more often. I learned it was easy to make losses. There are almost infinite ways to lose. But there are only few ways to make profits. All the 250 ticks while playing the game in one stock, I had to be carefully to cut losses short and take profits when they are there and follow the stock movement all the time to finally notice that I did better than buy & hold. When I get into relaxed mode and just ignore few ticks, it’s a gone case. But it can be corrected after some loss (or loss of opportunity).
I can summarize all of this experience in three points on how to make profits consistently investing in stocks:
1. Always cut losses short. A loss never tastes sweet. It is always painful (small or large) and feels bitter.
2. Take profits when they are there. How to decide? When happiness seems to come at a faster rate with time, then it is time to take profit.
3. Follow or feel the rhythm of the stock price movement. Keep monitoring shares of interest periodically (daily or weekly) and avoid monitoring all stocks, all markets or broader market. Stocks can move independently and most of the profits are made by following its unique and independent rhythm.
One thing I had not mentioned here but learned long time back and followed even in worse bear markets is this:
• Don’t make random entries or on the urge buying (unless it is bull market)
Although I didn’t summarize these to be final list till now, I still had almost got it when I made two small profit (but no loss) trades one in 2009 and another in 2010.
In 2009, when RNRL was retreating after down trend, I bought it through the rise and followed it constantly and felt its rhythm before closing it in two orders, one for profit and another for zero. In this I had felt its rhythm and accordingly made moves. I had cut losses (short even before losses started as stock fell down to lowest levels since selling off). I had followed money management by reducing exposure in two chances when things are not very clear about its further upward trend.
In 2010, (from the return of the stock trader PIPAVAVYD), again I followed its rhythm and though I didn’t take available profit, closed it in small or no profit. This stock too plummeted (and the current bear market set in) just after this sell-off.
Interestingly in both of the above cases, the stocks were giving only one last chance before turning around into oblivion. It is important to note this because this is where all the investors get trapped into long term large losses and stop trading for long time. I won’t boast that I am good at this. It is a result of following the four points mentioned above. Four years of trading experience isn’t gone waste and it will prove its worth more with next good bets.
Now I can’t wait to get started this time. I know I had lost touch with the market. So I will start small (very small). But the fear is that it is way into bear market right now to consider long positions. May be I will wait but keep following the market till the next turn around.
RBI’s Gambling on Dollar-Rupee Exchange Rate
Sensex Crossed 20K Again! Nifty Crossed 6K
The Second Wave of Great (Deep) Recession is Around the Corner
The Three Parameters of Stock Trading: Entry Time, Exit Time & Seletion of Stock
Stocks vs. Gains: How Much can You Expect to Gain from the Stock Market?
Is There a Hidden Treasure in the Stock Market?
Does History Repeat? This is About Average Stock Market Returns
Why You Should Sit Tight to Make Big Money from Your Bets?
When I started investing money in stocks it was a humble beginning. Nobody gave any encouragement. I have noticed many people starting trading stocks directly, after so many years of getting into a job with the same capital that I started with early on. Folks just follow the famous rule: invest money you can afford to lose. And you will certainly lose if you can :)
I would say the time that I spent investing into stocks for almost first two years was the most exciting in the last four years! Ever since I stopped buying or selling (it was like bringing a fast car to a grinding halt), I had really lost the excitement in life. I remained passive for the two year period (2009-2010) during which, one medium term but a fantastic bull market had run in the markets, which was like a short preview of the longest bull market (2003-2007) and a window of opportunity.
Looking back I didn’t have an easy way. I was gradually moving from long term investing to short term trading. I certainly felt over-confident when I was betting on junk stocks in bear markets using techniques that should be applied on momentum stocks in bull market times. These are what I had experienced one after another making it difficult to comprehend what was going wrong:
• A near complete wipe-out trade (~90% loss wiping out 50% of total profits of two years in three months time frame)
• Buy & hold in bear markets (to get over short term mindset simple trades failed)
• Trapping at false highs (everytime I buy at high and stocks retreat till I sell at low, losing rest of total profits)
• Grinding halt trade (four stocks all going wrong just because I was a little late for a pullback trade and too early for the bull market, digging losses into original capital)
I wasn’t very much worried about the last one except that it turned my +ve position onto the –ve side. Even while I was holding bleeding shares of selmcl I wasn’t really serious about losses. I remember during that time as I told a friend (Vinay) that I was holding it to see how the pain feels. I realized that it was not only a bitter experience but it made me realize that the pain of losses is always same. This one stock still looks like a black mark in my experience and made me realize one every important lesson: “no matter how much profits we make, a single 90%-99% loss can ruin everything”.
Certainly loss isn’t something anyone would want to hold onto unless he is novice and holds out of hope. I wasn’t having any hope though. As Michael Douglas says in Wall Street “Nothing ruins my day more than losses”. That is always true for any stock investor.
At the end of all this, I wasn’t sure of what is happening and I wanted to correct myself before I get back again. I tried to find answers to these failures. Unfortunately there wasn’t a simple answer. They got interlinked.
All these losses (including the worst bear market) just started with those “trap at false high” trades. One buys at price above yesterday’s high to make sure to buy only if the stock were to rise and not get trapped in otherwise case. It actually works well on charts. When I discovered this trick of making significant profits in just a week’s time in strongly trending stocks, I almost thought I had found the Holy Grail of stock trading. Suddenly everything became crystal clear. All stock charts, all time periods seemed to follow one consistent pattern. But what I failed to notice was its practicability in real world.
We can’t trade on thin margins. Little or no loss also means loss due to great brokerage charges. I certainly didn’t have time or confidence to place stop orders for entry/exit as often as this strategy demands. The worst thing is that it isn’t Holy Grail after all in bear markets but it is in bull markets. This made it practically dangerous in bear markets or near the onset of bear markets. I have so many such trades that I am scared to buy stocks at high prices just because the price gap to the stop loss point is high.
This resulted in next set of losses. Before that, I was able to do atleast one good trade in the list of bad ones, in Moserbear, making 10% gain, buying closer to the low and selling after a quick pull-up. Later it rose as much as 30%. That made me even more confused at that time. So in the last one (grinding halt trade), when the market had turned around sharply I was already late for the party but trying to buy on pullbacks and not above highs. This had perfectly trapped me for the big losses as the market gave up all the gains of sharp turn around and resulted in huge stop loss. The mistake was not to buy closer to low, not to buy above high, but intermediate point (with huge stop loss margin) when it wasn’t really clear what is going to happen. The market really dived down to its lowest level after this but that was the lowest ever since. I was actually right about the turn around of the markets but was a little early for the long term trade, a little late for the short term.
A simple lesson from all these failures is that what worked easily for the long side (not the short selling side) in bull markets, will not work, but works against, in the bear markets. In bull markets you can even buy a stock at its highest and hold very comfortably on as it bleeds for short time and then see it go to even highest levels within no time. In bear markets it works so only for the downsides. A stock that retreats from lows, will eventually fall back down to lowest lows. Looking at how things reverse from bull market to bear market is a bit confusing for a single hand trader (that cannot do short selling).
But more importantly the Holy Grail that I thought I found wasn’t correct. There is no Holy Grail to stock market investing. I just had to read last few para’s of a book I stopped out of excitement at that time. There it says, this buy above high strategy works less than 50% of the time which means losses have to be cut short at any rate. If stop losses have to be larger than comfortable level, then better to avoid. There the truth comes from an experienced trader (the author of the book).
Now the truth is known, I think my confusion is cleared. We can’t make consistent profits with strict rule based trades. Rules are for money management that is deciding capital allocation and reducing losses by cutting them short. For closing or entering trades we have to rely on “gut feeling”.
Recently I started playing on chartgame.com. This is an amazing website that helps practice virtual stock investing without actually trading. It is better than trading and virtually as best as real trading practice.
I played it a year back too but with the Holy Grail idea :). I was able to practically see its failure. But it got shaded with the fact that this game at the time didn’t incorporate the short selling feature. Though initially I was able to beat the market over large number of stocks, I was losing. It went worse. Also around that time any random sampling of a stock price history more often resulting in a bear market period. This too made it difficult to see where I was going wrong.
In the last week or two, I played again. This time I was able to beat the market more often. I learned it was easy to make losses. There are almost infinite ways to lose. But there are only few ways to make profits. All the 250 ticks while playing the game in one stock, I had to be carefully to cut losses short and take profits when they are there and follow the stock movement all the time to finally notice that I did better than buy & hold. When I get into relaxed mode and just ignore few ticks, it’s a gone case. But it can be corrected after some loss (or loss of opportunity).
I can summarize all of this experience in three points on how to make profits consistently investing in stocks:
1. Always cut losses short. A loss never tastes sweet. It is always painful (small or large) and feels bitter.
2. Take profits when they are there. How to decide? When happiness seems to come at a faster rate with time, then it is time to take profit.
3. Follow or feel the rhythm of the stock price movement. Keep monitoring shares of interest periodically (daily or weekly) and avoid monitoring all stocks, all markets or broader market. Stocks can move independently and most of the profits are made by following its unique and independent rhythm.
One thing I had not mentioned here but learned long time back and followed even in worse bear markets is this:
• Don’t make random entries or on the urge buying (unless it is bull market)
Although I didn’t summarize these to be final list till now, I still had almost got it when I made two small profit (but no loss) trades one in 2009 and another in 2010.
In 2009, when RNRL was retreating after down trend, I bought it through the rise and followed it constantly and felt its rhythm before closing it in two orders, one for profit and another for zero. In this I had felt its rhythm and accordingly made moves. I had cut losses (short even before losses started as stock fell down to lowest levels since selling off). I had followed money management by reducing exposure in two chances when things are not very clear about its further upward trend.
In 2010, (from the return of the stock trader PIPAVAVYD), again I followed its rhythm and though I didn’t take available profit, closed it in small or no profit. This stock too plummeted (and the current bear market set in) just after this sell-off.
Interestingly in both of the above cases, the stocks were giving only one last chance before turning around into oblivion. It is important to note this because this is where all the investors get trapped into long term large losses and stop trading for long time. I won’t boast that I am good at this. It is a result of following the four points mentioned above. Four years of trading experience isn’t gone waste and it will prove its worth more with next good bets.
Now I can’t wait to get started this time. I know I had lost touch with the market. So I will start small (very small). But the fear is that it is way into bear market right now to consider long positions. May be I will wait but keep following the market till the next turn around.
RBI’s Gambling on Dollar-Rupee Exchange Rate
Sensex Crossed 20K Again! Nifty Crossed 6K
The Second Wave of Great (Deep) Recession is Around the Corner
The Three Parameters of Stock Trading: Entry Time, Exit Time & Seletion of Stock
Stocks vs. Gains: How Much can You Expect to Gain from the Stock Market?
Is There a Hidden Treasure in the Stock Market?
Does History Repeat? This is About Average Stock Market Returns
Why You Should Sit Tight to Make Big Money from Your Bets?
2 comments:
Great post, I can feel that you've experienced a lot over the past couple years and learned a lot! I feel you're learned more the hard way unfortunately, but even those lessons can still be applied to a prosperous future. Don't get down and I did have one disagreement with your hard earned wisdom, I think in investing the 'gut feeling' may be everyone's worst enemy. Keep your head up and keep learning, there's a pattern in there somewhere and when you see it it'll all be worth it.
@Nate K,
Thanks for the comment. I really appreciate it.
Yes there is a pattern and once we lock ourselves onto it, the journey would be most exciting.
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