Short Selling is a strategy in which a trader sells a commodity or security that he or she does not own in order to profit from a falling market invest money.? In this trader will borrow the commodity or security from his broker stock market, who usually in turn has borrowed the shares from some other investor who is holding his shares then immediately sell on to the buyer invest money. At a later date stock market, the trader must buy back the commodity or security from the market to close the position invest money.? If the value of the commodity or security has fallen during this period the short selling trader?s profit will be the difference between his original sale price and the buyback price invest money. Short selling is strategy to express bearish view point of trader towards a commodity or security invest money. Essentially this is another face of coin in any freely traded commodity where trader feel that current value of commodity is inflated and does not represent actual value invest money. This is exact opposite to more known buy and hold bullish strategy where investor buy the commodity or security feeling it be undervalued and will increase in price invest money. Short sellers need to be aware of three important aspects which can affect profitability of their short positions invest money. 1 invest money. Interest on Borrowed Security ? As the commodity or security is borrowed from broker or third part account so interest is required to be paid on that invest money. This is generally not applicable if you are settling your account on same day but can erode profits if kept on rollover for long duration invest money. Depend on brokerage firm it percentage can change but generally it?s around overnight interbank lending rate invest money. 2 invest money. Dividend Distribution ? If the security which is been shorted by trader gives out dividend then short seller need to short the dividend i invest money.e invest money. the dividend amount will be taken out from his brokerage account invest money. So it is very important to keep track of dividend date of security trader want to short invest money. 3 invest money. Short Squeeze - A short squeeze results when the price of the stock rises and investors who short-sold the stock rush to buy it to cover their short position invest money. As the price of the stock increases stock market, more short sellers feel driven to cover their positions and this result in further escalation of price in short duration of time invest money. Markets in all developed economies provide easy short selling procedures where individual shares can be shorted and rolled over for multiple days but currently in Indian Stock Market short selling of shares is only possible on intraday bases invest money. If traders who want to take bearish view of certain scripts for longer duration they can do it through futures market invest money. It is to be noted that availability of scripts in futures markets are very limited as compare to overall number of traded scripts invest money. When the underlying market is in downtrend stock market, short selling is the best strategy if implemented correctly in hands of Commodity stock market, Equity and Forex traders invest money. To be a successful trader one need to learn both long and short strategies as market itself goes through bullish and bearish cycles periodically giving plethora of opportunities to generate wealth invest money.
Regards
Tuesday, June 24, 2008
What is Short Selling
Monday, June 23, 2008
Nifty View - 23 Jun 08
The inflation numbers or the WPI numbers on Fridays took the best of the Bear/Bull by surprise.The Nifty tanked immediately after the unexpected numbers and the markets took a 500+ points beating.The markets are expected to react to Bsp support withdrawal and the Left-UPA Nuke tussle stated for 25th of june starting tomorrow.Moreover the Repo or the reverse repo rate hike by Rbi should also be a matter of days now seeing the unacceptable levels of Inflation.The FOMC meet will have a strong view on Inflationary trends and the fall in dow can be related with the occurrence of the same event.The primary reason for the inflation as of now is Crude hike must have been the headlines of any newspaper.The truth remains in the fact that the present government did not take any measures to hike prices of fuel and to curb inflationary trend that was seen in last 8 months.I believe that traders should remember that markets react at a later stage to any economic event.What the ministers did was curbed the rise in prices of cement and metals without noticing the fact that there was a demand driven price rise.Once there is an external force that limits the functioning of a free market.The market breakdown is bound to happen.
With the hoarding of food grains and expectations of even higher inflation.Occurrence of higher inflation can not be unexpected as of now.Moreover the instability of the government in the centre will be the last nail in the coffin for tired bulls as of now.Tsr Research team expects elections to be held in next 6 months.We expect that the government will try and call early elections when the inflation will be manageable.Any snap polls before this outcome will lead to clean sweep by erstwhile NDA.Moreover even after support of S.P one cannot expect that the government will have a clear majority as it will fall short of 2 vital members (UPA-LEFT+S.P)
If there are announcement of any snap polls in next two months then it will be blessing in disguise for stock markets.We can expect a very sharp recovery as Poll pundits will predict a clear majority for NDA.Moreover the stock markets want reforms at the end of the day and the present government has been a Reform sans government.Stock markets wants divestments,Ipo and less interference of state in free market mechanism.If only the present government would had increased the prices as per the rise in international markets till last year.Inflation figures would had a higher base and the markets would had heaved a sigh of relief.The government is paying its own price by being associated with forces who are more committed to China being the only super power in Asia then India being one.
Coming back to Nifty the charts have become so ugly that its better to talk about the political scenario then talking about Nifty.The closing witnessed in nifty on Friday coupled with the weakness seen in the Dow .One can assume a weaker opening for Nifty.The million dollar question now is that whats next.For me i will try and give trade s on pivots coupled with the news flow to make the most of the Nifty moves this week.Going ahead support zonbe for Nifty will be 4231-4254 if 4194 holds on the downside one can expect an upmove in Nifty.We will face good amount of selling pressure and all leveraged trades should be limited to Intraday.One can go for value buying below 4200 levels.We had given 3 stocks(take solns,oswal chem and diamond cables) and booked 2 of them approx 10 days back with 12-15% capital appreciation in four days.One stock diamond cables is up 12% from recommended levels but is still a Hold as better rates are possible.
Weekly Nifty supports :- 4185-4205
Nifty resistances -4451-4538
Monday, June 9, 2008
A Positive Out of the Many Negatives
For anyone who plans to make money from investing in stocks and equity mutual funds, things look bad indeed. Since about 2003, whenever the stock markets have dropped, there have always been only one or two factors that have driven it down. This was also true when the first precursor to the current troubles appeared back in August last year.However, all that has changed now and everything appears to be going wrong simultaneously. The international credit crisis that looked like a local US problem hasn't really gone away. Oil prices and inflation have become a huge cr
isis. Corporate profits are under tremendous pressure. The once-invincible tech services industry is reeling from a weak dollar. Geo-political problems look worse than ever. And the Government of India has gone into full damage-enhancement mode wherein almost everything it is doing seems carefully planned to worsen the country's problems.In short, it's a great time to invest in equities and equity-backed mutual funds. That should be obvious, no? Here's an old Wall Street joke that would have been a PJ if it didn't ring so true. A newbie asks an old-timer, "How do you make money in the market." The wise man answers, "Nothing could be simpler: buy low, sell high." The beginner asks, "How can I learn to do that?" Comes the response, "Ahhhh…that takes a lifetime."But such a simple and obvious truth probably comes as a surprise to most of us. The reason is that the public discourse and media coverage about stock investing has become completely poisoned with the most extreme kind of short-termism. Every day, the business newspaper and TV channels come out and tell you that things were bad on the stock markets because prices fell. And that's the attitude that we absorb without thinking about it.So pervasive is this attitude that lots of investors I talk to are changing their investment plans, getting out of stocks and dropping all plans to invest in stocks. Surely, this makes sense only for traders who bought yesterday and are selling today or are buying today to sell tomorrow. For an investor who is investing for his and his children's future, plunging markets and all-round gloom and doom are good news. Since the way to make money is to buy low and sell high, low prices should make buyers happy, shouldn't they? To this, the traders' answer is that the markets could keep plunging. But that's even more good news. This is the time to start investing in a conservative mutual fund and going on doing so gradually for a long time. Of course this works only for long-term investors who are putting in money for five years or more.If stocks turn up from here onwards, then you will be fine because you would have invested at least some of you money at low levels. If they drop a lot from here on, then too you are fine if you continue investing at lower and lower levels. The only way you could actually be in trouble is if stocks keep dropping for years and years and don't recover for a decade or so even to today's levels. I'm not saying that that couldn't happen, but if it does, then it will be because we are in deeper trouble than we can even imagine today.Meanwhile, all of us who want to grow our money would do well to stop thinking of the current crises as being bad for the future of our investments.
Short term Calls
Short term Buy at cmp for 1-2 months view
1. oswal chem cmp 32
2 take solutions cmp 625
3 diamond cables cmp 288
The Going Gets Tough
Have you ever seen a road accident happen? You must have, since we generally drive like idiots and have a high accident rate. Whenever I see a road accident and later think about how it happened, I can't help feeling that while most of us drive like idiots, most of the time accidents happen when two idiots do something idiotic at the same time and at the same place. One guy is happily speeding, while trying to read an SMS and just then another one in front of him decides to turn right without revealing his intentions beforehand. Either one would have got away but the two in
combination becomes an event.
The stock markets are just like that. While one company or one industry may be driven by some particular factor, a prolonged bull market or a bear market only happens when many different factors come together. Sometimes, some of these factors may be related but at other times, they may be unrelated. It could just be a coincidence that they are happening at the same time.
Nothing is more confusing than trying to understand such a situation by taking only one factor into consideration. The weak stock markets that we are seeing now are happening because of a combination of factors.
Interest rates are rising, and corporates just aren't going to become more profitable while they are rising. There could be individual exceptions, but for all practical purposes, this is an inviolable rule. Most of the blame for high interest rates goes to high inflation.
If one reads the government's pronouncements and insinuations, then at various stages the blame for high inflation has been laid at the door of oil prices, steel companies, cement companies, foreign inflows, and others on a list of now-usual suspects.
As far as the stock markets go, all this coincidentally came at just the same time as the international credit crisis. By the way, there are some straws in the wind that indicate that we may soon be in for act two (or would that be act three) of the credit crisis. Apparently, over the last two weeks the cost of insuring oneself against a credit default by big Wall Street firms like Goldman Sachs, Lehman Brothers and JP Morgan has shot up. No one seems sure of what this means but this is unnervingly similar to the way things started to worsen the last time around.
There's a third part of this combination that I feel is the least recognised: after a few years of headlong growth, many Indian businesses are facing a natural pause as the easy part of their markets have saturated. Whether it's about selling phones or cars or clothes or fancy flats in the middle of nowhere, the low-hanging fruits have been picked. Their markets may be larger, but from here on, they'll be tougher to crack.
However, going forward, the kicker here is oil prices. In this entire combination of problems, oil prices are a test match scale crisis while the rest are mere Twenty20s. Permanently high oil prices could invalidate the business models and working methods of large swathes of the world's economy.
Make no mistake, we are in a tough situation. A momentary relief on any one of these negative factors may make good headlines, but they won't mean that the good times are back.
But being an optimist I can’t help recall the inspiring quote ‘When the going gets tough, the tough gets going’.
RCOM, MTN reportedly close to share swap deal
RCOM, MTN reportedly close to share swap deal
Reliance Communications (RCOM) and South African telecom major MTN Group arereportedly close to finalising a reverse merger deal under which RCOM will become asubsidiary of the MTN Group and its chairman Anil Ambani will initially hold 28-30% inthe merged entity, which would make him the largest shareholder. The deal wouldcreate a telecom colossus with 115mn subscribers in 25 countries. Ambani, whoholds 66% in RCOM, may then buy another 4-6%, either through market operationsor from shareholders to reach a 34% shareholding in MTN through an all-cash deal.MTN's promoters will hold the remaining 65% stake in the merged entity. The dealalso requires MTN to make an open offer to RCOM shareholders to make it asubsidiary. Under Indian laws any company acquiring more than 15% has to make anopen offer. The specifics of the shareholding structure will depend on the share-swapratio, which is yet to be decided. Ambani is likely to be nominated the chairman of thecompany and current MTN CEO Phuthuma Nhelko will continue as the executivehead of the merged entity.In related news, in one of the largest-ever direct-to-home (DTH) set-top box contractsin the country, RCOM has placed an order for 5mn boxes with vendors from Korea,China and Taiwan to be delivered between July and December next year. Thevendors include Hyundai, UEC, Thomson, Hunmax, Homecast, Koship and KaonMedia. The current landed cost of an MPEG4-enabled set top box in the globalmarkets ranges between US $50-60 based on the size. RCOM is looking atinnovative ways to reduce the overall cost of set top boxes by up to 25%, therebyprocuring MPEG4 set top boxes at prices lower than the prevailing MPEG2 boxes.The company, which plans to launch its DTH services under the Big TV brand, hasalready placed orders for the launch, scheduled in a few weeks. RCOM has alreadyreceived stocks of close to 2.5lakh set-top boxes in its warehouse and anothershipment of 2.5lakh set-top boxes is scheduled to arrive in a week’s time. Potentialfor the DTH business is significant going ahead and this business is seen as a majorrevenue earner for RCOM in the future. Nonetheless, the company will face toughcompetition from Dish TV with around 3.2mn subscribers and Tata Sky with around2mn subscribers.
We maintain a Buy on the stock with a Target Price of Rs763.
Mutual Funds - Biggest Loser Kaun?
Biggest Loser Kaun?
The 4th of June was yet another black day for the Indian stock markets. In what has been a series of misfortunes in the past few months, the markets have seen bad days followed by worse ones. 4th June figures right up there in this list. On that day, the Sensex fell by 478 points (2.81 per cent) and the Nifty by 130 points (2.76 per cent). The reasons behind this fall are the rising inflation, talks of a slowdown and the oil price hike.
Since its peak in early January, the Sensex has been down by 29 per cent. However, it is the mutual funds that have suffered mu
ch more. 42 equity funds hit their all time low on 4th June.
Some of these funds have slipped by 50 per cent from their peak values of January, earlier this year. The biggest losers have been: Principal Personal Tax Saver losing 61 per cent from its peak NAV of Rs 221.26 it hit on December 31, 2007, Birla Sun Life Tax Relief 96 which lost 50 per cent of its NAV of Rs 167.72 on January 7, JM HI FI which lost 47 per cent of its NAV of Rs 19.10 on January 2, ABN AMRO Tax Advantage Plan which lost 44 per cent of its NAV of Rs 22.70 on January 4, and Banking BeES, the ETF which lost 43 per cent of its NAV at Rs 1070.88 on January 14.
The slip in NAVs of most equity funds launched in the past one year can depress new fund investors. Today, 65 funds have slipped below their face value with the lowest being Kotak Indo World Infrastructure at Rs 6.9 and JM Agri & Infra fund at Rs 6.8. Both these funds were launched in December 2007. The new funds launched this year have had a tough time as well with 22 of the 25 funds slipping below their face value.
On a slightly brighter side, at least 28 equity funds lost less than 10 per cent through the market carnage. The list of these funds is includes Birla Sun Life Pure Value, Franklin Pharma, HSBC Small Cap, ICICI Prudential Focused Equity Inst I, ICICI Prudential Fusion S-III Retail, IDFC Small & Midcap Equity, JM Healthcare Sector, LICMF Systematic Asset Allocation, Lotus India Mid N Small Cap, Reliance ELSS Series I, Reliance Natural Resources, SBI Tax Advantage Series I, Tata SIP Fund II and UTI Pharma & Healthcare.
Well, it’s hard to predict what will happen in the future but it certainly doesn’t look too bright. But as always, what we investors can do is wait and be hopeful. It’s a repeated advise, we know, but it’s all we can give for now.
Story of Crude Oil
By now it is becoming too obvious that theUnited States is playing the oil game all overagain. And this is the desperate gamble of acountry whose economy is neck deep introuble.Given this scenario, managing prices of oil iscentral to the US economic architecture.Expectedly, this gamble has been played in agreat alliance between the US government,US financial sector and the media.I have earlier written about: The impending collapse of the US dollar onaccount of the inherent weakness in the USeconomy caused by its structural weakness as reflected in the subprimecrisis; The repeated softening of the interest rates in the US that has thepotency to kill the US dollar; and How the fall in the US dollar suits the US corporate sector, especiallyits omnipotent financial sector.Naturally, since the past few years, the US financial sector has begun to turnits attention from currency and stock markets to commodity markets.According to The Economist, about $260 billion has been invested into thecommodity market -- up nearly 20 times from what it was in 2003.Coinciding with a weak dollar and this speculative interest of the US financialsector, prices of commodities have soared globally.And most of these investments are bets placed by hedge and pension funds,always on the lookout for risky but high-yielding investments. What is indeedinteresting to note here is that unlike margin requirements for stocks whichare as high as 50 per cent in many markets, the margin requirements forcommodities is a mere 5-7 per cent.This implies that with an outlay of a mere $260 billion these speculatorswould be able to take positions of approximately $5 trillion -- yes, $5 trillion! -- in the futures markets. It is estimated that half of these are bets placed on oil.
Oil price hike: Govt can't save you: PM
Readers may note that oil is internationally traded in New York and Londonand denominated in US dollar only. Naturally, it has been opined by expertsthat since the advent of oil futures, oil prices are no longer controlled byOPEC (Organization of Petroleum Exporting Countries). Rather, it is nowdone by Wall Street.This tectonic shift in the determination of international oil prices from thehands of producers to the hands of speculators is crucial to understandingthe oil price rise.Today's oil prices are believed to be determined by the four Anglo-Americanfinancial companies-turned-oil traders, viz., Goldman Sachs, Citigroup, J PMorgan Chase, and Morgan Stanley. It is only they who have any idea aboutwho is entering into oil futures or derivative contracts. It is also they who areplacing bets on oil prices and in the process ensuring that the prices of oilfutures go up by the day.But how does the increase in the price of this oil in the futures marketdetermine the prices of oil in the spot markets? Crucially, does speculation inoil influence and determine the prices of oil in the spot markets?Answering these questions as to whether speculation has supercharged thedemand for oil The Economist, in its recent issue, states: 'But that is plainwrong. Such speculators do not own real oil. Every barrel they buy in thefutures markets they sell back again before the contract ends. That mayraise the price of 'paper barrels,' but not of the black stuff refiners turn intopetrol. It is true that high futures prices could lead someone to hoard oiltoday in the hope of a higher price tomorrow. But inventories are notespecially full just now and there are few signs of hoarding.'On both counts -- that speculation in oil is not pushing up oil prices, as wellas on the issue of the build-up of inventories -- the venerable Economist iswrong.The finding of US Senate Committee in 2006In June 2006, when the oil price in the futures markets was about $60 a barrel, a Senate Committee in the US probed the role of marketspeculation in oil and gas prices. The report points out that large purchase of crude oil futures contracts by speculators has, in effect, createdadditional demand for oil and in the process driven up the future prices of oil.The report further stated that it was 'difficult to quantify the effect of speculation on prices,' but concluded that 'there is substantial evidence thatthe large amount of speculation in the current market has significantly increased prices.'The report further estimated that speculative purchases of oil futures had added as much as $20-25 per barrel to the then prevailing price of$60 per barrel. In today's prices of approximately $130 per barrel, this means that approximately $100 per barrel could be attributed tospeculation!But the report found a serious loophole in the US regulation of oil derivatives trading, which according to experts could allow even a 'herd ofelephants to walk to through it.' The report pointed out that US energy futures were traded on regulated exchanges within the US andsubjected to extensive oversight by the Commodities Future Trading Commission (CFTC) -- the US regulator for commodity futures market.In recent years, the report however pointed out to the tremendous growth in the trading of contracts which were traded on unregulated OTC(over-the-counter) electronic markets. Interestingly, the report pointed out that the trading of energy commodities by large firms on OTCelectronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron into the Commodity FuturesModernization Act in 2000.The report concludes that consequential impact on account of lack of market oversight has been 'substantial.'NYMEX (New York Mercantile Exchange) traders are required to keep records of all trades and report large trades to the CFTC enabling it togauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. In contrast, however, traders onunregulated OTC electronic exchanges are not required to keep records or file any information with the CFTC as these trades are exempt fromits oversight.Consequently, as there is no monitoring of such trading by the oversight body, the committee believes that it allows speculators to indulge inprice manipulation.Finally, the report concludes that to a certain extent, whether or not any level of speculation is 'excessive' lies entirely in the eye of thebeholder. In the absence of data, however, it is impossible to begin the analysis or engage in an informed debate over whether our energymarkets are functioning properly or are in the midst of a speculative bubble.
That was two years back. And much water has flown in the Mississippi since then.The link to the spot marketsNow to answer the second leg of the question: how speculators are able to translate the future prices into spot prices.The answer to this question is fairly simple. After all, oil price is highly inelastic -- i.e. even a substantial increase in price does not alter theconsumption pattern. No wonder, a mere 3-4 per cent annual global growth has translated into more than a 40 per cent annual increase inprices for the past three or four years.But there is more to it. One may note that the world supply and demand is evenly matched at about 85 million barrels every day. Only ifsupplies exceed demand by a substantial margin can any downward pressure on oil prices be created. In contrast, if someone with deeppockets picks up even a small quantity of oil, it dramatically alters the delicate global demand-supply gap, creating enormous upward pressureon prices.What is interesting to note is that the US strategic oil reserves were at approximately 350 million barrels for a decade till 2006. However, forthe past year and a half these reserves have doubled to more than 700 million barrels. Naturally, this build-up of strategic oil reserves by theUS (of 350 million barrels) is adding enormous pressure on the oil demand and consequently its prices.Do the oil speculators know of this reserves build-up by the US and are indulging in rampant speculation? Are they acting in tandem with theUS government? Worse still, are they bordering on recklessness knowing fully well that if the oil prices fall the US government will be forced toa 'Bears Stearns' on them and bail them out? One is not sure.But who foots bill at such high prices? At an average price of even $100 per barrel, the entire cost for the purchase of this additional 350million barrels by the US works out to a mere $35 billion. Needless to emphasise, this can be funded by the US by allowing it currency printingpresses to work overtime. After all, it has a currency that is acceptable globally and people worldwide are willing to exchange it for precious oil.No wonder Goldman Sachs predicts that oil will touch $200 to a barrel shortly, knowing fully well that the US government will back itsprediction.And, in the past three years alone the world has paid an estimated additional $3 trillion for its oil purchases. Oil speculators (and not oilproducers) are the biggest beneficiaries of this price increase.In the process, the US has been able to keep the value of the US dollar afloat -- perhaps at an extra cost of a mere $35 billion to its exchequer!The global crude oil price rise is complex, sinister and beyond innocent economic theories of demand and supply. It is speculation, geopolitics and much more. Obviously, there is a symbiotic link between the US, the US dollar and the oil prices. And unless this truth is understood andthe link broken, oil prices cannot be controlled.
Mkt View - 09 Jun 08
Hi Friends,
The free fall observed in dow on Friday will have a cascading effect on the Indian stock Markets on Monday.To be very fair expect Nifty to have a fall range between 2.5% to 5.8%.4450 is an important support level from where markets should bounce.The bounce can be of 80-120 points.The better strategy will be to short the second break of 4450 with a sl of 30 points.In a synopsis i expect a vertical fall if 4450 is broken for the second time tomorrow or Nifty opens and remains below those levels.The million dollar question now will be that what should be the way to trade in the stocks going ahead.Should we short tomorrow or use the dips to make fresh purchases.I will personally not advise leveraging at any costs.Markets on a whole is under leveraged and this fall will be more because of oil and global cues then because of any Indian factors.In fundamental analysis there is systematic risk in everyones portfolio due to the movement of the stock markets and we will see the effect of the same tomorrow.If your portfolio is down between 3-5% don't be a bit surprised.My personal analysis says that Buying the next 25% of your free unleveraged (0% margin funding) funds should be the next step going ahead in the markets if Nifty does not break 4450.Stocks to Buy.Avoid real estate stocks for some more time.Use the stocks that give a 4.5-7% dividend yield on an average and have 15-20% growth prospect.The dividend yield will protect any further capital erosion for the same.
nifty supports 4450 and just 4450
Nifty Resistance : If holds 4450 then think of the same.
Wednesday, June 4, 2008
Calls - 04 Jun 08
Buy SEL MCL (532886) intraday target 525, delivery target 1000
Intraday
Buy GMR Infra around 128 Tgt 135 SL 124
High Crude Oil prices - Bubble???????
It’s a bubble, for sure…because of the following:-
1. Consumption is almost stagnant
2. OPEC supply has infact increased this year
3. The increase in demand from Index Speculators is almost equal to the increase in demand from China!
4. Apart from crude, the Index Speculators have raided other major commodities too. Huge jump in future prices tell the real reason behind this “Super Spike” theory.
What do you say???????
Tuesday, June 3, 2008
Psychology - Your worst enemy in the market
Psychology - Your worst enemy in the market
No one will believe if I say that I lost more than 25 Lakhs in just 6 months when I started first several years back.(I nearly destroyed my parents net worth ) But thanks to my stars that I pick the right culprit - YES IT WAS IN ME ONLY, yes even with all the domain expertise, knowledge and all skills - PSYCHOLOGY.
It take me another 5-6 months to win it. In that time I started breaking even and in next 6 months I earned enough to open 5 offices with a capacity of 10-15 people in the New York City.
Before moving ahead please ask yourself whether you classify yourself as a winner or a looser in respect of stock market.
Humans in general grow up being taught by their environment of the importance of always being right. Those who are right are envied as the winners in society and those who are wrong are cast aside as losers. A fear of being wrong and the need to always be right will hold you back in general, but will be deadly in your trading.
How Most People Associate Profitable Trades:
Right = Winner
Right = Success
Profitable Trade = Right
Profitable Trade = Success
Wrong = Loser
Wrong = Failure
UnProfitable Trade = Wrong
UnProfitable Trade = Failure
With this in mind lets say that you have been trading and feel that I am an intelligent trader, so you want me to give you a strategy. I say fine and give you a method and tell you that the method will trade 100 times a year with an average profit of 100 points for winning trades and an average loss of 20 points for loosing trades. You say great and take the strategy home to give it a try.
A few days later the first trade comes and quickly hits its profit target of 80 points. Great you say and call a bunch of your friends to tell them about the great system you've found. Then a few days later the next trade comes but quickly takes a loss. You hold tight however and then the next trade comes, and the next trade etc until the trade has hit 5 losers in a row and amounting to 100 points in loses on the losers so you are now down 20 points overall, and all your trader buddy's who started following the system after the first trade are now down 100 points.
Now you feel really dumb and are the joke among the group of guys that you trade with, so the next day you come back to me yelling about how bad the system I gave you is. I say ok and tell you I have another system for you. This one also trades 100 times a year but has a higher success rate that I think he will be happy with. You take this system home and the next day it quickly hits a winner followed by another then another and then another until over the next few days you have 5 winners in a row totaling 50 points in gains for your account. Getting very excited you call all of your trader friends and tell them that this time you have found it, you tell your wife how you haven't lost on a trade in two weeks and you rub your perfect trading statement in the face of all your trader buds as revenge.
So now ask yourself this question. If you were really the trader in this example which system would you rather have?
SYSTEM1 SYSTEM2
Day 1 - Winner Winner
Day 3 - Loser Winner
Day 6 - Loser Winner
Day 9 - Loser Winner
Day 12 - Loser Winner
Day 15 - Loser Winner
I can tell you from experience that the large majority of traders will take the second system without a second thought, and on top of that will stick with it even if it hits a few losses that wipe out most or all of its gains.
Although the successful trader will want to know a lot more about both these systems.
Not including transaction costs such as commissions and slippage, for the first system I only need to be right 1 time for every 5 times that I am wrong in order to break even. With this in mind seeing the system trade for one profit and 5 losses is not giving the system a chance to prove itself. It would not be out of the ordinary for a system such as this to hit even 10 losers in a row and still end up profitable for the year.
As I did not give the trader success rates for the second system there is no way to know for sure but the first suspicions that the successful trader is going to have of the second system is that it is simply a system which sets tight profit targets and very wide or no stops at all. What this means is that the system is going to take a lot of small winners and a very few large losses which have the potential to wipe out all the gains in the account and possibly a lot more.
Most of the successful systems that I have seen fall into the category of the first one we looked at in that they take a lot of small losses and make their gains for the year on a few big winners. As in this example however most traders do not have the mental toughness to stay with these types of systems during the long loosing streaks and give up on them prematurely, and throwing a profitable methodology in the trash without giving it a chance.
This concludes this lesson. You should now have a good understanding of the affect that losses have on ones decisions in trading and can begin to prepare yourself for the losses which are going to inevitably come with any trading methodology whether good or bad.
As always if you have any questions or comments I encourage you to please mail me as a feedback.
Regards,
Free Tips - 03 Jun 08
The monthly candlestick chart of Allahabad Bank shows a sharp decline from
Rs.143.70 to Rs.70.65. The short term oscillators have reached oversold zone and
hence a chance of a pullback. One can gradually buy at current levels as well as
in declines at Rs.74-76 with a strict stop loss below Rs.71 in close for a target
of Rs.95-98 which if sustained Rs.107 in the coming 4-6 weeks.
* Avoid gap openings and volumes are less hence trade in small quantity
Buy GNFC for Short Term CMP: 152.65 Tgt: 168 & 182
The daily candlestick chart of GNFC shows that it is oscillating in an upward sloping
channel in blue. Support is pegged at Rs.145 which if holds can test Rs.168 and
Rs.182. One can gradually buy at current levels as well as in declines at
Rs.145 with a strict stop loss below Rs.138 in close for a target of Rs.168
which if sustained Rs.182-188 in the coming 6-8 weeks.
* Avoid gap openings and volumes are less hence trade in small quantity.
NIFTY VIEW - S&P Nifty (4871.10 points)
Again the month of May (even years) saw the markets close deep in
red. The Bulls failed to overcome the “May fear” losing around 400
points in the last fortnight. Market sentiment appeared weak on
rise in inflation and crude prices. Among the Sectoral Indices, Auto,
Banking, Oil & Gas, Realty and PSU stocks pulled the Indices down
while the Metal stocks rallied. The underdogs Healthcare, IT and
Teck sectors were the star performers (closing 5% above). In the end
the Nifty lost around 300 points while the volumes remained almost
the same.
Now in the Nifty, the 78.6% retracement of the rise from 4628-5298
points is at 4772 points. Trend line support in blue is pegged at
4747 points. Hence the 4750-4775 points’ area is likely to attract
some short covering. Follow stop losses and trade. Unless and until
the 5040 points is not decisively crossed, the short term trend is
down and for fresh up momentum, trendline resistance in pink
(daily chart) at 5262 points needs to be sustained.
Currently it is a traders market with stock specific movement. No
one is keeping commitment from a long term scenario. The Nifty is
oscillating, while volatility of around 400-500 points is seen for the
past two months. Pullbacks are unable to get converted into rallies.
As long as 5078 points is not crossed in close, markets will remain
under pressure with crucial support in declines pegged at 4681
points. The Index Heavy weight stocks have to move up in tandem
which will motivate the Midcap stocks to join and in turn could see
a broad based rally on high volumes.