July 18, 2005

Bull market strategy for traders

Should you trade or buy & hold ?

The current state of the markets is a difficult one for all participants in the equity arena. For investors / traders, it can be a frustrating one as the choice between midcap / large cap scrips, trading v/s investing and lastly long v/s short is a matter of very delicate judgement. In such trending markets, moves tend to be typically large and getting caught on the wrong foot can land you in a soup. I attempt to shed light on the subject from my point of view -

Trend identification - the first priority of every type of market participation should be to identify where the markets are headed. Then go with the flow. Unless you wish to wear a contrarians cap, you should go with trend and ride the waves in stock prices. Though it sounds easy, the discipline and patience involved in this strategy cannot be taken lightly. Currently, we are of the opinion that markets are in a bull groove and short selling is a strict no no.

Stock identification - after identifying the larger trend, go down the value chain and zero in on the individual stocks that you will put your money in. As advocated earlier in our report on choosing market out-performers ( click here to read that report ), choose scrips that will yield atleast 50 % more than the Nifty in terms of appreciation. Remember, the risk involved in putting your money in a single scrip is infinitely higher than investing in a bouquet of scrips ( Nifty 50 ), therefore, your scrip should be a market out-performer.

Know your downsides - when we met a client recently and structured his portfolio for him, we talked about the possible losses before we projected his profits. Naturally he was disturbed ! Then we advised him that knowing his possible losses was crucial for him as much as the potential gains. Also, it is possible ( using risk management techniques of advanced technical analysis ) to forecast possible losses and risk containment. Not only will it be a robust exercise in damage control in the event of a loss, but it will also sober down your trading attitude, which may tend to get over ambitious in time of strong upmoves.

Buy & sell v/s Buy & hold - this is actually the real reason of this email ! What most of the traders tend to ignore is the potential of profits that can be made in trending markets. We are so pre-occupied with collecting small sums of money from the table that when bull markets unfold, we are still in that traders frame of mind and encash our profits pre-maturely. Also tilting against us is our own subconscious self ! We all make mistakes in our trading activities and tend to be risk averse at the beginning of bull markets. Fears of losing our profits if we don't encash soon enough constantly hound us. Believe me, it's very difficult to hold on to a winning scrip even when you are given the possible targets especially when you are making more money than you imagined. Rather than exploit the entire upmove, we tend to bail out and look for safer stocks ! This leads us into the analysis paralysis trap. Chances are you will enter a scrip at the fag end of the upmove just because it is lower priced than the one you just sold because you felt a false sense of security in it's lower price ! This is one trap that you must avoid at all costs !

Have a profitable day.

 

Lachmandas R. Bhambwani

MD :- Bsplindia.com

The author is a Mumbai  based investment consultant and invites feedback at Vijay@BSPLindia.com and  ( 022 ) 23438482 / 23400345.

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