Trading tips

Follow the trend for profitable investing

• The trend is your friend. Always trade in the direction of the trend
• Add more positions only if current position is profitable
• Never buy or sell just because the price is low or high
• Never average a loss or hedge a losing position
• Always use stop loss orders. Never cancel a stop loss after you have placed it
• When in doubt, get out, and don't get in when in doubt
• Be willing to make money from both sides of the market
• Never change your position without a good reason
• Avoid trading after long periods of success or failure
• Don't try to guess OR time the tops or bottoms. It never works!

When you lose, don't blame your luck!

TRENDLINE TRADING

Technical analysis is a study of past prices of an index/ Stock or Commodity with the assistance of certain mathematically derived tools to forecast the future price movements. However, the simplest & most effective tool devoid of mathematical applications which identifies and confirms a trend is called a trendline (Channels) .
Stocks move up on persistent demand(buying) or down because of relentless supply (selling) or sideways because of a close tussle between buyers & sellers. A trendline in most occasions says it all. If you observe lane discipline and travel by the sign boards, you reach your destination safe & sound. Trendlines help you reap the richest haul from the markets in a similar safe way.
A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. The upward sloping trendline may be called a demand lineas stocks bounce of that line due to a rise in demand and similarly the downward sloping trendline may be called a supply line as every time the stocks reaches that line supply comes in & prices fall. In a sideways market, the unresolved "supply & demand" gets into a tussle for supremacy which gets resolved when either demand or supply overpowers the other. As long as the larger trendline is intact, each sideways move will get resolved in favour of the main trend.
Uptrend Line(Demand line)
An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope. Uptrend lines act as support and indicate that net-demand (demand less supply) is increasing even as the price rises. As long as prices remain above the trend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that net-demand has weakened and a change in trend could be imminent.
Downtrend Line (Supply Line)
A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price declines. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.

Semi-log Chart for Higher cycles(Week/Month)

High points and low points appear to line up better for trend lines when prices are displayed using a semi-log scale. This is especially true when long-term trend lines are being drawn or when there is alarge change in price. Most charting programs allow users to set the scale as arithmetic or semi-log. A semi-log scale displays incrementalvalues in percentage terms as they move up the y-axis. A move from Rs10 to Rs20 is a 100% gain, and would appear to be a much larger than a move from Rs100 to Rs110, which is only a 10% gain. The rate of ascent appears smoother on the semi-log scale. On the semi-log scale, the trend line fits all the way up.The semi-log scale reflects the percentage gain evenly, and the uptrend line was never broken till jan.08. Long term investors will do well to use this semi-log charts to maximise their gains by increasing their holding period. Smart investors will exit at the channel peak when the sentiment reading is of "Euphoria" with highest PE.

Arithmetic Chart for lower cycles(Day/Hour)
An arithmetic scale displays incremental values (5,10,15,20,25,30) evenly as they move up the y-axis. A Rs10 movement in price will look the same from Rs10 to Rs20 or from Rs100 to Rs110. On the arithmetic scale, three different trend lines were required to keep pace with the advance.


It takes two or more points to draw a trend line. The more pointsused to draw the trend line, the more validity attached to the support or resistance level represented by the trend line. The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity.

The magic of trendlines unfold into channels when parallel lines are drawn and these channels give you often the "targets" to book out as well as "fresh entry point" as illustrated in the chart of "UNITECH".

As the steepness of a trend line increases, the validity of the support or resistance level decreases. The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support or resistance level.

Combining timecycles:

As illustrated from the chart of "SAIL"- Daily & Hourly, a trendline breakdown in the lower time cycle(Hour) may be construed as a merecorrection as long as the higher timecycle prices are trending up within the channel. When the price breaks down in the hour which also coincides with the likely breakdown in the daily, a critical reversal point is spotted early on and a trade could be initiated with a high potential profit with limited risk.


In EW study, trendlines play a very important role in identifying a wave(as Elliott never defined what is a wave?), the end of corrections, type of corrections, target setting coupled with fibonacci relationships and most important of all is the early warning signal of the end of the 4th wave with a small(false) break down in the trendline, thereby initiating the swift 5th wave trade which then completes the trend.

Trend lines can offer great insight to trading coupled with horizontalsupport and resistance levels or peak-and-trough analysis.

Trendlines are easy to apply and the trader need to be persistent as well as consistent and balanced in his approach. Highly traded stocks has highly tradeable channels. As trendlines follow only the prices, not the often distracting technical oscillators, many traders swear by it and base their trading strategies with only trendlines.

The simplest of all technical analysis, Trendlines, which effectively captures the demand & supply - the very basic of stock price behaviour, if exploited in a balanced way with tremendous amount of patience & conviction, can bring the riches beyond a trader's/ investor's imagination..Believe in it.
Get Rich Slowly.

General Market Advice:

1. Never chase a stock.

2. Buy when markets are in the grip of panic.
3. Only buy fundamentally strong stocks, which are undervalued.
4. Buy stocks grown in top line and bottom line over the past years.
5. Invest in companies with proven management.
6. Avoid loss-making companies.
7. PE Ratio and Growth in earnings per share are the key.
8. Look for the dividend paying record.
9. Invest in stocks for sure returns.
10. Stocks have been the high yielding asset class over the past.
11. Stocks are an asset class.
12. The basic property of any asset class is to grow.
13. Buy when everyone is selling and sell when everyone buys.
14. Invest a fixed amount each month.

What you should do in a stock Markert

1. Get rid of the junk Stocks
Any shares you bought but no longer want to keep? If they are showing a profit, you could consider selling them. Even if they are not going to give you a substantial profit, it is time to dump them and utilise the money elsewhere if you no longer believe in them.
Similarly with a dud fund; sell the units and deploy the money in a more fruitful investment.
2. Diversify Your Porfolio
Don't just buy stocks in one sector. Make sure you are invested in stocks of various sectors.
Also, when you look at your total equity investments, don't just look at stocks. Look at equity funds as well.
To balance your equity investments, put a portion of your investments in fixed income instruments like the Public Provident Fund, post office deposits, bonds and National Savings Certificates.
If you have none of these or very little investment in these, consider a balanced fund or a debt fund.
3. Believe in your investment
Don't invest in shares based on a tip, no matter who gives it to you.
Tread cautiously. Invest in stocks you truly believe in. Look at the fundamentals. Analyse the company and ask yourself if you want to be part of it.
Are you happy with the way a particular fund manager manages his fund and the objective of the fund? If yes, consider investing in it.
4. Stick to your strategy
If you decided you only want 60% of all your investments in equity, don't over-exceed that limit because the stock market has been delivering great returns.
Stick to your allocation.

What you Must not do in a Stock Market

1. Don't panic

The market is volatile. Accept that. It will keep fluctuating. Don't panic.

If the prices of your shares have plummeted, there is no reason to want to get rid of them in a hurry. Stay invested if nothing fundamental about your company has changed.

Ditto with your mutual fund. Does the Net Asset Value deep dipping and then rising slightly? Hold on. Don't sell unnecessarily.

2. Don't make huge investments

When the market dips, go ahead and buy some stocks. But don't invest huge amounts. Pick up the shares in stages.

Keep some money aside and zero in on a few companies you believe in.

When the market dips --buy them. When the market dips again, , you can pick up some more. Keep buying the shares periodically.

Everyone knows that they should buy when the market has reached its lowest and sell the shares when the market peaks. But the fact remains, no one can time the market.

It is impossible for an individual to state when the share price has reached rock bottom. Instead, buy shares over a period of time; this way, you will average your costs.

Pick a few stocks and invest in them gradually.

Ditto with a mutual fund. Invest small amounts gradually via a Systematic Investment Plan.
Here, you invest a fixed amount every month into your fund and you get units allocated to you.

3. Don't chase performance

A stock does not become a good buy simply because its price has been rising phenomenally. Once investors start selling, the price will drop drastically.

Ditto with a mutual fund. Every fund will show a great return in the current bull run. That does not make it a good fund. Track the performance of the fund over a bull and bear market; only then make your choice.

4. Don't ignore expenses

When you buy and sell shares, you will have to pay a brokerage fee and a Securities Transaction Tax. This could nip into your profits specially if you are selling for small gains (where the price of stock has risen by a few rupees).

With mutual funds, if you have already paid an entry load, then you most probably won't have to pay an exit load. Entry loads and exit loads are fees levied on the Net Asset Value (price of a unit of a fund). Entry load is levied when you buy units and an exit load when you sell them.
If you sell your shares of equity funds within a year of buying, you end up paying a short-term capital gains tax of 10% on your profit. If you sell after a year, you pay no tax (long-term capital gains tax is nil).

How retail investors lose money

The reason is simple - a retail investor is driven by greed or fear. Never logic.

• Retail investors are always the last to enter a bull run
• "Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
• When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter.
• Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs"
• At this time, the retail investor starts buying as he does not want to miss out the "action"
• The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive"
• This is also the time when "smart money" starts moving out
• When a correction happens, it is usually quite severe
• The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to "catch a falling knife"
• At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
• Sometimes the retail investor will do nothing but wait for the markets to rise
• When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run

Other facts

• In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue
• Those who have never participated when the rally started will invariably jump in towards the end of the bull run
• Retail investors rarely follow stoplosses. Circumstances eventually force them to take a bigger loss
• Lastly, retail investors spend an insignificant amount of time researching an investment as compared to buying a mobile or fridge.