Fear, Greed & Other emotions

Trading is all about controlling your emotions. Fear and greed..If a trader is out of the market and he sees the market rising and his friends making money, greed makes him enter...only to see the market crashing after he entered...If an investor is long and a stock crashes, fear makes him sell the stocks at lower levels...only to see the stocks rising again....fear and greed is what makes the 5% of people in the stock market make money from the other 95%.....how do we conquer fear & greed...using technical analysis and charting...just follow your charts for entries and exits....ignore your friends, relatives, stock analysts etc...this is the only way to conquer your emotions...In 2009 display emotions of love, caring for your near and dear ones...but conquer your fear & greed! Have a great new year and make loads of money in 2009!!

Short Selling - Scary or Sexy?

To most people short selling is synonymous with gambling...they rather buy and hold battered real estate and infrastructure stocks but will never go short. Risk is something that always exists it is how you manage risk that is paramount. If you close your eyes and cross the road it is risky. A good way to understand this is to look at currencies. If you take the USD EUR pair some people are long on USD which is the same as being short on EUR. Conversely if you are long on EUR it is the same as being short on USD. The idea is to be on the right side of the trend...because at the end of the day the trend is your best friend! Wishing everyone and their families a merry xmas and happy holiday season ahead!

Nifty upward momentum

Today the Nifty Futures closed at 3073 points. I am long on the Nifty. Everybody I speak to wants to know how high will it go or will it go and retest the 2200 lows. My answer is it can go as high as it wants or fall as low as it wants. The advantage of trading on momentum is we can exit longs as soon as the upward momentum changes. And take a short position if the downward momentum gets established. No guesswork. Just trade with the trend. Jai mata di.

Nifty - Volatility & ATR

The Average True Range (ATR) is a great measure of volatility, much more useful than Beta from a traders persepective. The current 14 period ATR for the Nifty is 180 points (in percentage terms 6.1%). This is down from 230 points (7.8%) around the end of October. In end August it was 109 points (2.4%). So it appears the volatility is reducing albeit it is still very high. This can be good for momentum traders as too much volatility results in stops getting hit frequently.

The short term trend for the Nifty is up currently. The market seems to have discounted the bad news and the auto industry news didn't seem to have impacted Nifty at all. The coming week is going to be very interesting - let the market decide if this short term uptrend is upheld.

Trend-following vs Trend-prediction

Most of us like to be leaders...predict tops and bottoms....put on any business channel and everyone is trying to predict the market bottom ...attempting to beat the market. What we fail to realise is that the Market is all-knowing, all-supreme. It reflects the views of all the participants - bulls, bears, fundamentalists, technicians, fund managers, brokers, operators, TV experts, insiders, Investment Bankers, Fed, PM, FM, CEOs, uncle who is a stock market expert and also your milkman. So for once try and be a trend follower rather than a trend predictor. Observe what the market is saying. Trade with the trend. Make the market your friend and not your opponent. Am 100% sure you will be pleasantly surprised with the results.

Buy-and-Hold or Buy-and-Hope?

Yesterday I went to a party. As ususal the stock market became the topic of discussion. Everyone seems to be an expert on the market despite having drawdowns of 70-80%. TV commentators seem to have tough competition! One gentleman told me he got saved because HLL and ITC comprise 30% of his portfolio. I asked him what about the other 70%. He admitted rather sheepishly that he has got slaughtered in that. This man has been investing for the last 50 years in the market. But people have a short memory. He claims he is a long term investor and believes in buy-and-hold. I asked him about the shares which he had bought before the 2000/01 tech crash. He admitted that those couldn't rise to the 2000/01 levels even during the height of this bull market (2007 December). My point is:
1) Every bull market has its separate heroes..when they crash they don't recover even during the next bull market
2) Buy-and-hold type of investment has been popularised by the likes of Warren Buffet...everybody talks of knowing someone who bought Infosys and held onto it....but talk to others who didn't buy Infosys and are still holding onto their investments....in most cases its a case of buy-and-hope
3) Momentum trading can give very good returns if done with discipline...compounding that can turn a small amount of money into a massive fortune...

But people will still buy-and-hope...they will go through fear and greed...that is why 95% of people lose money in the stock market....the 5% who make money make it because of this...

Cash, Gold and Singh is King

The current levels of volatility in the Nifty are extremely high...4 times what it used to be some time ago. I still meet people who have some spare cash and are interested in bottom fishing. They ask for tips or multibaggers. My advice to them is as follows:
1) Let the volatility get out of the system
2) The next bull market will start after a base huilding process...the charts will let us know when that is in progress
3) Money management is key and suggesting a few names here and there is bound to fail

If you are sitting on some spare cash my advice is to go and enjoy a part of it (and now is the right time to get deep discounts on everything) and preserve the rest for the right time....it is very well worth the patience...

Volatile Bear

Research has shown that there are 6 market types:
1) Volatile Bull
2) Quiet Bull
3) Volatile sideways
4) Quiet sideways
5) Volatile Bear
6) Quiet Bear

There is no trading strategy which works well in all 6 market types. A smart trader should have different strategies for different market types.

Ever since the Lehman Brothers crash, Nifty has been going through a volatile bear phase. Traders will find their stops getting hit frequently. How should we trade this market? It is best to remain out of this market from a momentum trading point of view. Having no position is also a position. One could look at various products in the derivatives area to profit from this market type.