Guideline for Trading

Buy stocks while they are moving up; don’t try to catch a falling knife.

An old saying, but true The most important thing in trading is to trade with the trend. A stock should be bought while it is in an uptrend and is moving up. A number of investors think that is has already moved so much how far it can go and ignore the stock thinking that they should have bought it a month ago. But actually there are more chances of a momentum stock’s climbing higher than those which have yet not started moving up. Last year sugar stocks fell more than 50 percent and a number of investors thought that they have already halved, how far can they fall so it becomes a good buy, but the fundamentals did not suggest buying sugar stocks and now they have went down to as low as a third of what they were a year ago. There are oversold situations in the markets and there is a bottom to every fall, but it is impossible to predict a bottom. We have to wait till the downtrend reverses and the stock starts rebounding, there you have to catch it and ride the momentum. Let the knife fall, vibrate for some time and then you may pick it up; there are less chances of injuring yourself.

2. Do not lose patience and let the stock come to your target.

It happens to most of investors that when they want to sell, the stock does not go up and when they have to buy, the stock does not come down. The fault lies not in the stock but in ourselves that we become impatient and try to initiate a trade without waiting, it is very difficult to sit on cash. When you have chosen a stock for buying, decide a price where you are comfortable and wait for some time, let the stock come to your price and you should not be chasing the stock, and bear it in your mind that if the stock does not come to your target, you do not lose anything. But the same is not true while selling, if you get decent profits, sell the stock, don’t expect a fortune from your pick and expect only reasonable returns. Once you have converted into cash some other opportunity will come your way.

3. Invest in blue chips, market leaders and aggressive companies

Don’t buy a stock just because it is going cheap. Look at the prospects of the company, you would see that in the long run blue chips and market leaders would not disappoint you though they cannot be expected to be multi baggers but a decent return is always expected. You would see Infosys, Reliance Industries, ICICI Bank, Bharti, Bajaj Auto, Maruti and Unitech in the portfolios of most of the Mutual funds. These stocks are the firsts to recover from any corrections or recessions. These are the first preferences of foreign investors, Mutual Funds and traders therefore they attract a lot of buying interest whenever they fall down to a bargain price.

4. Play both sides of markets.

Most of the retail investors are bulls by nature they only buy stocks and do not short the markets or individual stocks. There is an inherent fear in short selling than in going long but truly speaking there are equal chances of markets going up or down so why not pick the trend and go with the trend. When there is panic in the markets or there is any negative news on which the markets are bound to fall, then you must be on the short side, of course with stop losses as in case of going long. Play both sides of the markets if you want to completely enjoy the game. Don’t be a batsman or a bowler, be an all rounder.

5. Opportunities always exist in equity markets.

Believe in the fact that opportunities always exist in equity markets and lament not for a missed one, there are ample waiting to be discovered. Have an eye for watch and you will find another gem at a handsome price, you don’t need to make all right calls to make money in stock markets, rather you need to keep your senses with you and play intelligently. No one knows the future; he who plays smartly will win the game.

6. Check fundamentals before buying.

You must check fundaments and do your own analysis before buying any stock. A street call or an expert’s call should not be followed blindly. In these markets everyone can be wrong or right, you must satisfy yourself before putting your money. Have tips from everywhere, weigh them well in your own way and decide yourself which stocks to pick and when to pick.

7. Strictly follow stop losses.

Everyone knows this, it is taught everywhere but we still get carried away with our emotions, yes, we tend to fall in love with our stocks, it feels painful to part with them and that is why when it breaches our stop loss we tend to give it one more chance to make a comeback, but it doesn’t and keeps going with the trend, deepening our losses. It takes courage to accept losses but it should be part of the game, when you had decided to invest in stock markets you had agreed to accept both profits and losses, didn’t you? Now by adhering to your stop losses you are trying to restrict your losses and that is a wise thing to do, so we strictly need to put stop losses to our trades and stand by them to maximize profits.

When it comes to make a long term call, I think 9 out of 10 analysts will be right or may be 10 out of 10, and even an experienced investor who reads well, will be able to make a right call but when it comes to making a short term call it becomes an arduous job for the most learnt researchers. There are so many factors which contribute to the movement of prices that it becomes very difficult to predict their trend. However an insight of all major events, news flows, financial information and basics of the company gives us a view whether the price of the stock is justified or not, is it worth owning the stock at the given price or the stock is already overvalued. It works well if you make a prediction for the long term, but the short term movements are always governed by macroeconomic factors, general trends and Government announcements which are not predictable, therefore it is easy to make a long term call by using fundamental analysis. And that is why most of the mutual funds take long term calls considering them to be safe. For example you find a stock which is going very cheap and fundamentals suggest buying the stock but suddenly some negative factor triggers in US and there is a sell off in Global markets and our markets are also not spared and that stock also could not swim against the stream and is hammered down and a good stock gives you a negative return in the short term in spite of being a value buying. But if you have bought if with a long term view and the company is fundamentally sound the stock will rebound when the crisis is over and will give you a good return in the long term. The whole discussion was to bring home the fact that if you are novice to this market make your first call a long term call, there are more chances of making money. After some experience you can become a swing trader or a day trader but first be an investor.