HOW TO PICK STOCKS FOR TRADING?

 

                                                    STOCKS FOR TRADING

            I WOULD GIVE PREFERENCE TO BTST (BUT TODAY, SELL TOMORROW) OVER INTRADAY AND TO SWING TRADE (WHEREA STOCK IS AVERAGED OUT EVERY WEEK UNTIL A RETURN BETWEEN 4.5% AND 0.5% OVER AVERAGE PRICE IS AVHIEVED) OVER BTST.

         I WOULD EVEN GO TO THE EXTENT OF GIVING YOU A NOBLE ADVICE AS YOUR ELDER BROTHER THAT YOU STICK TO SWING TRADE ONLY IN NIFTY/SENSEX STOCKS, AS THE SAME IS NOT ONLY SAFE BUT ALSO PROVIDES YOU THE MEANS TO TURN YOUR INVESTMENT OF $10,000 INTO $1.24 CRORES IN 30 YEARS EVEN IF YOU ARE ABLE TO GENERATE AVERAGE RETURN OF ONLY 2% EVERY MONTH. MUCH HAS BEEN DISCUSSED IN THIS REGARD IN PREVIOUS CHAPTERS.

           FOR SWING TRADE, YOU NEED TO PICK STOCKS FROM NIFTY 50- THIS HAS ALREADT BEEN EXPLAINED TO YOU. HOWEVER, YOU SHOULD PICK THE STOCKS THAT ARE TRADING NEAR (MAXIMUM 15% BELOW) THEIR 52-WEEK HIGHS, I.E, THE HIGHEST LEVEL DURING THE YEAR.

         WHY?

          BECAUSE STOCK MARKET RUNS ON THE INTINCTS OF GREED AND FEAR. HENCE, WHEN A STOCK KEEPS DECLINING AND ULTIMATELY REACHES THE LOWEST LEVEL OF THE YEAR, STOP-LOSS OF INVESTORS START GETTING TRIGGERED AND EVEN THOSE INVESTORS START SELLING THE STOCK, RESULTING IN FURTHER DECLINE.

             ANOTHER THEORY IS THAT STOCK MARKET KNOWS EVERYTHING, IN THIS AGE OF INFORMATION TECHNOLOGY, IF A COMPANY, IS EXCEPTING A DECLINE IN THEIR FORTHCOMING PERFORMANCE, THIS FACT GETS LEAKED THROUGH VARIOUS INTERNAL SOURCES AND FINDS ITS WAY THE NEWS COMES OUT IN THE OPEN. IN THE LANGUAGE OF STOCK MARKET, THIS IS CALLED "RUMOUR". YOU MAY CALL IT A RUMOUR, BUT EVEN SUCH RUMOURS ARE NOT WRONG IN 80% OF THE CAUSE, THE THOUGHT IT MAY TAKE A TIME OF SIX MONTHS TO A YEAR, THESE RUMOURS ARE PROVEN RIGHT QUITE OFTEN. HENCE, IF A STOCK COMES TO ITS 52-WEEK LOW WITHOUT ANY SPECIFIC REASON, IT IS GENERALLY OBSERVED THAT THE STOCK KEEPS ON DECLINING FURTHER AND MAKING NEW LOWS EVERY 10 TO 15 DAYS. EXACTLY THE SAME THING HAPPENS IN THE CASE OF A STOCK TRADING AT ITS HIGHEST LEVEL OR NEAR ITS 52-WEEKS HIGH. SUCH A STOCK KEEPS ON MAKING NEW HIGHS AT A FAST PACE. TRADING IN SUCH STOCKS PROVIDES YOU SEVERAL OPPORTUNITIES TO BOOK SMALL PROFITS (4.5% TO 0.5%) AT FREQUENT INTERVALS.

             THUS, THE FUNDA IS THAT SELECTING THOSE VERY 10-15 STOCKS OUT OF NIFTY/SENSEX STOCKS THAT ARE TRADING AT THEIR HIGHEST LEVELS OF THE YEAR OR TRADING WITHIN A RANGE OF 0% TO 15 % OF THEIR HIGHEST LEVELS MAY PROVIDE PROFITS AT A FASTER PACE.

          HERE, IT MAY ALSO BE RELEVANT TO MENTION THIS MAXIMUM OF THE STOCK MARKET - IF YOU BUY CHEAP STOCKS, YOU WOULD SEEL CHEAP, IF YOU BUY PREMIUM STOCKS, YOU WOULD SELL AT PREMIUM'.

         YOU MAY BE WONDERING, "WHILE TRADING NEAR HIGH, WHT IF I GET STUCK IN A HIGH POSITION? I MEAN, WHAT IF I HAVE TO FACE "MISFORTUNE IN THE VERY FIRST ADVENTURE" I.E, THE STOCK MAY BE AT ITS PEAK RIGHT AT THE TIME I BOUGHT THE SAME AND AFTER THAT, THE STOCK JUST KEEPS ON FALLING? THIS WILL BE ANSWERED IN SUBSEQENT TIPS.

                                      

                            WHY SHOULD YOU INVEST IN INDEX STOCKS?

   

            THERE IS A SAYING IN THE STOCK MARKET - IF YOU CAN'T BEAT THE INDEX, GO WITH THE INDEX.

           SUPPOSE, YOU STARTED INVESTING IN STOCK MARKET WHEN NIFTY WAS AT THE LEVEL OF 8,000. NIFTY IS AT 10,800 TODAY. THAT MEANS, NIFTY HAS GONE UP BY 30% DURING THE PERIOD OF YOUR INVESTMENT.

           IF YOU MADE A PROFIT OF OVER 30% DURING THE PERIOD OF YOUR INVESTMENT, YOU MAY BE TREATED AS A GOOD AND PROFICIENT INVESTOR (MOST OF THE SMALL INVESTORS, ON THE CONTRARY, LOSE VALUE OF THEIR PORTFOLIO BY 30%).

          THAT IS THE REASON THAT EVEN MUTUAL FUND MANAGERS TREAT SOME INDEX AS THEIR BENCHMARKS.

           ETFS HAVE BEEN DESIGNED ON THE SAME PRINCIPLE, FOR EXAMPLE, NIFTY BE ES OR NIFTY ETFS INVEST IN ALL THE STOCKS OF NIFTY INDEX IN THE PROPORTION SAME AS THEIR SHARE IN NIFTY. HENCE, THEIR MARKET PRICES HOVER AROUND 1/10 TH OR 1/100TH (AS PER THE PRICE DECIDED BY ETF FOR TIS UNITS) OF NIFTY AND SMALL INVESTORS MAY CONTINUE MOVING WITH INDEX BY INVESTING IN THEM THROUGH SYSTEMATIC INVESTMENT PLAN (SIP), JUST LIKE A MUTUAL FUND.

                             AVERAGING OUT IS NOT BAD EVERY TIME

            YOU HAVE READ IN TIP NO. 10 THAT YOU SHOULD NOT AVERAGE OUT A FALLING POSITION.

          THIS IS TRUE FOR AN INTRADAY POSITION, BUT AVERAGING OUT IS NOT BAD IN ALL SITUATIONS, FOR EXAMPLE, IN THE CASE OF A MUTUAL FUND, YOU USE SIP (SYSTEMATIC INVESTMENT PLAN) TO BUY UNITS FOR A SPECIFIC AMOUNT EVERY MONTH, THIS IS IN  WAY AVERAGING OUT THE UNITS ONLY.

          SIMILARLY, THE PROCESS OF SWING TRADE THAT HAS BEEN EXPLAINED IN PREVIOUS TIPS IN ALSO BASED ON A DISCIPLINED WAY OF AVERAGING OUT INDEX STOCKS FROM NIFTY, ETC, TO EARN RETURNS BETWEEN 4.5 % AND 0.5 % ON AVERAGE COSTS.

         THIS PROCESS IS SO EFFECTIVE THAT YOU WOULD BECOME ITS FAN ONCE YOU USE THE SAME, AS YOU BUY STOCKS ONCE IN A WEEK OR ONCE IN A MONTH FOR A DEFINITE AMOUNT AND YOU KEEP ON REVISING YOUR PROFIT TARGET DOWN WITH EVERY AVERAGE OUT ACTION, THIS ENSURES THAT YOU DO GET AN AVERAGE RETURN OF AROUND 2.5 % AND ALSO AND OPPORTUNITY TO EXIT SAFELY FOR EVERY POSITION. YOU HAVE TO JUST KEEP ACCUMULATING GOOD DIVIDEND-PAYING INDEX STOCKS BIT-BY-BIT AVERAGING OUT EVERY WEEK OR EVERY MONTH AT PREVIOUS DAY'S VWAP. THIS HAS BEEN EXPLAINED IN DETAIL IN PREVIOUS TIPS.

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