Upside and Downside: the Story of a Dimwit

 Here is a nice story of a dimwit who plays the wrong way with upside and downside.

Watch these episodes of Alif Laila from 2.13 to 3.9. In those good old days the tv shows were popular based on the quality of the language, character portrayal rather than masala grinding done nowadays. In this series and in Shaktiman I found how nicely the characters speak their language, Hindi/Urdu.

Alif Laila Vol 2.13

Alif Laila Vol 3.9


Once upon a time there was a fisherman who is poor and goes to fishing everyday. His wife and kids are suffering from hunger and poverty as he is not able to get enough fish from his fishing endeavors. The reason for this? This dimwit made a rule that he will use his net to fish only 4 times in a day and settle with whatever he gets from that.

Alas, what a real dimwit he is. Let us say sometimes he catches enough fish to survive the day. Then no problems. Say sometimes he catches just little more than enough to survive (after all how much more will he catch with his small net with the max. limit of 4 trials per day?). And rest of the times he catches less or no fish at all. So what happens is he progressively keeps getting poorer by the day.

On good days nothing to complain. On bad days he may incur debt or keep his wife and children hungry. He doesn't save some amount from good days either as there is only so much he can fish with a limit of 4 trials. What a real dumbwit he is.

But this kind of dimwit nature exists in stock traders as well. This is where it might hurt their ego. There are traders who sell their stocks for little profit without regard to potential upside it might have. In case the stock falls, they wait it out till it recovers and just sell at break-even or little gain again and watch later to see it go higher and higher.

Now this is not going to look like a big problem at all, apparently. Once they hit on bad luck, that is a bunch of losing stocks filling the portfolio and capital stuck in them for a long time without hope of recovery then they realize.

The problem is they limit the upside while not limiting downside. Rather one should limit downside and not limit the upside. Not limiting upside is not an easy thing to do. But this is where a trader differentiates himself from the herd. It is those unlimited gains that can help compensate and overcome the losses from unexpected string of bad luck trades.

Do not limit your upsides without giving much thought. Often it pains most when the stock goes up immediately after you took a hasty decision to get out. If it was a well thought out sale, you would've prepared for alternative scenarios.

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IN RETROSPECT: Past Four Years into Trading Stocks!

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.

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

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

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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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