By S. P. Tulsian
We have seen many of our members, as also traders in the market, losing money. If we lose money in this bullish market also, it will be difficult for us to make money ever. We need to respect and obey some rules and techniques in this market.
Why do people lose money in the market? Some reasons:
- They go overboard in Futures & Options (F&O) by creating huge positions, which largely results in losses.
- Investment calls are converted into trading calls, that too by taking big positions in F&O. By doing this, one can hardly make money.
- Some members are seen buying huge quantity of Options, presuming that they are safe. This is a myth.
Options generally rule at a premium of 3 to 6% at the start of each series, on either side viz. CE and PE. This leaves limited room for upside and hence gives losses in 90% cases. We need to be selective while picking few such calls. Also, many of them are seen taking intraday (ID) view on Options in stocks and sectoral indices, which is difficult to yield gains, due to limited time horizon. If someone is buying Options, he/she must remain prepared to lose it full, as well, which can really be painful.
- Due to gap up and gap down opening, ID trading potentials are seen very low in this market. Still, we see many of the traders playing ID only, by which, it is difficult to make money, in our opinion.
- Even for investors, they seem to have limited time horizon, during which, one gets caught at the end of their time horizon. So, if you are a ST investor look for time horizon of 1-3 months for a gain of 5-10% and exit in this period, without waiting till end of your time horizon. No one can time the market!
- Traders and investors are generally seen chasing momentum and buying stock after it has seen big run up at the upper levels, or seen selling the stock after it has corrected and get caught at the wrong end.
- Pure technical view can never work in this market, as technical experts only extrapolate the present trend. They see bullish trend for a rising stock and vice-versa.
- Improper allocation of funds is seen to be landing investors in losses. One must allocate over 50% of the investible funds in blue chip or frontline stocks, while 30% in mid cap and 10% in small cap. Infact, we see investors selling TCSs of the world and buying the likes of Roltas in the respective sector. This imbalances the quality allocation within the portfolio.
- In a bull market, traders start expecting 10 to 20% return in a week or a month, which is not possible, as it happens only with a few stocks. So, set reasonable expectation of 3 to 5% as a trader in a month.
- Investors become greedy and are not able to sell a rising stock and get fearful and not able to hold a falling stock, without considering its fundamentals. Also, everybody wants to buy in upper circuit (UC) and wants to sell in lower circuit (LC). One must control this instinct.
- Habit of rolling over trading position beyond one series is seen suicidal and loss making. Still, we see traders doing this for months at end. Also, sectoral indices need to have positional view, with position in small lots, if money is to be made. No sector or entire market can remain bearish or bullish for the whole F&O series.
Under the given circumstances, we advise our members to adhere to the following guidelines:-
- Request to read guidelines given with each section (of the Member Zone).
- Avoid trading in F&O for stocks, on which investment view and call is given by us.
- Restrict trading in F&O, in not more than 2 stocks, with not more than 2 lots for each stock, depending on your risk profile.
- Trade in Options to as little as you can,.
- Avoid taking huge position in sectoral indices, especially in Options, as they are having poor track record of giving profits.
- Avoid ID view on all the trades.
- Define yourself as a trader and investor with time horizon and look to stick to that, for each stock / trade.
- Keep booking gains of 3 to 5% in trading over one month and of 5 to 10% in investment over and above 5 to 10%.
- Even while trading in Futures, avoid taking only technical view and look to combine it with fundamental view as well.
- Avoid BTST (buy today sell tomorrow) or STBT (sell today buy tomorrow) trades, as same trend is not likely to continue next day as well.
- Avoid borrowing money above 10% per annum to invest in the stock market.
- Avoid availing T+5 margin funding kind of facilities, which is infact a big trap for the retail investors. This facility is seen profitable for only for NBFC and brokers.
- If a trade is executed on our call, stick to the given time horizon in the call.
Instances of Greed:-
- Marico Kaya – Stock moved from Rs.280 to Rs.590 in the month of August. Till yesterday (Wednesday 27th August 2014), all experts on channels were giving buy call on the stock and everybody wanted to buy it. Reason was that it was hitting UC. Today (Thursday 28th August), no one is even talking of it, because it is available now (not locked in circuit). Fundamentals do not justify the stock to rule at Rs.590.
- Force Motors – We gave buy call in Stock Recommendation (SR) column (of Member Zone) on 14-08-2014 at Rs.684 and for whole of that day, stock was ruling below Rs.690. Nobody shown interest to buy it on the recommended day. On 18-08-2014 (the next trading day), it moved to Rs.740, and some interest came in from buyers. On 19-08-2014, it moved to Rs.855 and many members were keen to buy it. Now, it is ruling at Rs.790 and no one is interested in buying it.
- Indiabulls Real Estate – We gave buy call in SR at Rs.88 on 11-07-2014 and since then it has not been moving up. Many members have seen created huge long position in futures and incurred losses. Typical case of an investment call converted into a trading call!
Our sincere advice is to -
- Curtail F&O trading, as much as you can.
- Return Expectation: Expect 36% annual return as an investor or 5% monthly return or 10% in 3 months.
- Asset Allocation: Invest more than 50% in blue chip and quality stocks. Also, don't put more than 5% in 1 stock and not more than 15% in a single blue chip as well.
- Tax Planning: Look to avail long term capital gain as well, by holding quality stocks for 1 year and above.
- Investments: Develop conviction and patience on investments.
- Trading: Avoid greed on trading and ST calls.