Friday, 9 November 2012

Understand market sentiments but don't follow them

The stock market does not run on money, it runs on sentiments. Sentiments are the prime motivating factor that drive the individual to execute transactions on the market, may it be cash, derivative, or forex. So how do investor sentiments play a role in driving the markets. Novice investors are purely emotional. Now when I say novice, it doesn't mean individuals who started investing or trading in the stock market only yesterday. But novice investors means people who have stayed in the market for 1 day or 10 years, but have failed to learn from their mistakes and continue doing the same again and again. So, this emotional sentiment is the thing that drives majority of the people in the market and that's what in turn drives the market. 

Why do I suggest not to follow market sentiments?
An individual can be emotional, but an institution is never emotional. An institution, may it be a brokerage house, FIIs, DIIs, or QIBs have enough potential to cause a rally or even a pull-back. But institutions just don't enter the markets at any point. They are looking for cheap bargains. This is why you get 'Sell' calls from all brokerage houses. Suppose you are watching this news channel saying "Stock Broker ABC is giving a sell recommendation on whatever stock", "Investment House DEF is giving an underweight rating to whatever market", "Someone is downgrading an entire country". Now as an investor who wants to make it big in the markets, you are brain-washed into believing that the market is definitely going to experience a pull-back. And it is true, it does experience a pull-back because majority of investors like you, who do not a firewall installed on their minds, have accepted the negativity these institutions are trying to spread in the market. These institutions manipulate investor sentiments. Yeah, that's right, they manipulate the market.

But my point was, yes, you will see a small pull-back when majority of individual investors give in to the hype created by these houses. But, why is the pull-back so small? Because, after majority of you have sold their stocks, these institutes get the bargain they were looking for and start accumulating at that level  causing the pull-back to convert into a rally.

If you really want to make it big in the market, stop watching and tracking news. Go against the sentiment.

TWAT -Trade With A Target

When you are entering a trade, it is obvious that you have done your research before entering into it. It is equally important to analyze right before buying a stock or derivative to decide what would be the appropriate price to exit it with a profit. This exit price should strongly be embedded in your mind and you should have the discipline to exercise what your mind says in the first instinct.

It might happen that when you reach the target the greedy fella inside you might tell that there is still more upside to this trade, play along with it. The prime lesson over here is that you should know to control greed and book profits on time. Don't wait for the market to beat you. You should be the one beating it.

Moral: Have the selling price in your mind before entering a trade.

Wednesday, 7 November 2012

Random Thought - Strategy Formulation

A strategy is not developed in a day. For formulating a successful strategy, it is important that you fail in the earlier strategies. Strategies mature with time. You fall and rise. Strategies can only be developed by learning from experience. Your strategy cannot come out of a book. If it has come out of a book it cannot be called a strategy, it is a technique. And techniques are too predictive to be true.

When it comes to markets, keeping patient and controlling greed is what helps in creating successful strategies.

Nice saying by Sir John Templeton

"Bull markets are
Born on pessimism,
Grow on skepticism,
Mature on optimism
And die on euphoria"

The time of maximum pessimism is the best time to buy. The time of maximum optimism is best time to sell. Tried and Tested.

Saturday, 3 November 2012

A nice thought

An arrow can only be shot by pulling it backwards. Same is the case with markets.