Your perfect emotional setup explained-- Part 1

Thank you for all your mails and feed backs. We indeed have a good lot of dedicated readers. As promised I will elaborate
the bullet points mentioned in the earlier article. Taking the first one first:-

·         Never go against the market trend.

All of have heard people saying “trend is your friend” But saying this alone will be vague. Actually “a trend is your friend until it ends”. Ya now it makes a complete sense. You should board a trend only till it does not reach its dead end. Many people especially over confident ones try to ride against the trend. Catching bottoms, picking tops and all related drama continues. During a bull run they are like its the end of the financial universe, when the markets give them a tight blow and continue to rally further. Every time they predict a trend reversal, markets eagerly prove them wrong. The best strategy would be to trade in the direction of a trend. Notwithstanding all corrections in a bull market the broader trend remains positive. It would be better to own quality stocks during a bull market and bear the entire pain of correction instead of hopping around with randomized buy or sell calls.

·         Do not ride a matured trend.

This statement counters the above one at a certain point of time. You will be a bit perplexed thinking “the when trend is my friend why not ride it at last?” Well because a matured trend is similar to a euphoric bubble. Whenever it bursts it gonna take you along with it, erase all your gains and put a major stress on you capital. So what to do now? Ride a trend but be out when its approaching its end. Just like the 5^th Elliot wave (don’t get confused we will talk about this sometime later).

 ·         Don’t increase your positions when a trade is going against you.

This is the mistake majority of traders commit. In a layman’s word it is “Averaging”. What most traders do is, they buy a stock and it goes against them then they average their position by increasing the quantity at a lower price and again it falls, people average again, this goes on. Ultimately they see the stock gliding down with their long positions. They suffer a huge lose. This is a bit practical concept.  For example: You have 2 businesses, one is running at a loss and the other at a profit. Now you have some more money to invest in your business. What would you do? Invest in the loss making business in hopes of recovery or invest in your profitable business and gain surplus. Of course you will choose the latter. In the same way it’s no use investing in a losing stock, until and unless the opportunity is very much compelling.

I guess it is enough for today. Stay tuned for the next article where we will continue the same discussion.