Trading Rules

I take this privilege to share few of my experience with all of you. In our ongoing bull market, we all think that whenever the price come down it is cheap and right time to buy. But please remember price cheap or expensive is a relative word. If you read articles or listen to various analysts, they all are in the opinion that even the prices come down, if you accumulate stock at these prices and hold for so called long term you will get good return. I am afraid to say that who has seen future! Whatever way we try to find the prices of stock either fundamentally or technically, it is based on theory of probability, which is not always correct.

In every bull market, we ignore all bad news around us and hype the news to such an extent that there is no top of share price. If we really do self-retrospection, are we really can justify the share price of most of the companies? In all bull market few sectors and stock moves in such a fashion that they looks like a premium sector or company and will fly all around us for a indefinite period and we all are attracted to such movement. In our bull market few hundred of companies have listed on premium values with their much hyped business prospects and are flying high. But we have forgotten their basic valuation. All the promoters of these companies have minted money and have left their investors in the dark. Whenever too much speculation is made on certain sector or company all the investors are trapped due to their poor know how of the companies. And in any major corrections, these sectors comes down so heavily in such a fashion that there is no bottom. There are several examples of such incident in all bull market. In the year 2006, sugar sectors, automobile and few others were the darling of all the investor. But in 2007 all these are falling like ninepin. In 2007 reality sector power sector, few stocks like IFCI, Educomp, Jaicorporation GMR Infrastructure are doing the same. In all these areas price can never be justified. In these areas, you can never be an investor for a long term. You can trade for a short term but forget the same for the long term. You may argue on these statements but before you do so please look into the following observations. For example IFCI ( the company was making loss for last two decades and all on a sudden the company’s performance is improved with FII’s money. Even when the stock is available around Rs.60/-, one FII is willing to buy its share @Rs85/. It is hard to understand for a general investor. In power sector, why such hype as there is a huge shortage to power in India and all these companies will grow. Do we really know how much time is required for installing a power plant ? It will require minimum five to six years and what ever way they forcast, nobody knows what will be the cost of production. Why so much hype for Suzlon Energy, the company will never be a major player in power sector whose net contribution in the sector will be less than a percentage. In todays market if any company declares that it has got a land bank , the stocks immediately fly on speculation. But please note that until and unless the land / property is sold and the profit is reflected in the balance sheet, there is no materialistic value of such valuation.

Please bear in mind that we are at the top end of a bull market. At this stage you can not be a investor for a long term. You can trade for a short term and take profit even in small percentage. We are complacent of the market and believe in buy on decline theory. But please look at the price where you are buying whether it is at its top band or lower band to minimize the risk involvement.

I have come across an article on “ Trading Rules” by Richard Rhodes , few of its styles are enclosed for your ready reference.

Best of Luck

Himadri Roy

Attached Files

TRADING RULES.doc (30.0 KB, 108 views)

We will have to think in this line in the wake of biggest fall on 21/01/2008

well say,I accept ur points Mr. Himadri