Tuesday, September 23, 2008

Panics should be trading opportunities

The past few weeks have seen many panic like situations in the stock market. We have seen sharp sudden declines, as also sharp, sudden rallies. These panics have turned out to be decent trading opportunities.
After a sharp decline, the market stabilises. This is the first sign that the decline has been excessive, at least in the short term. There are buying opportunities here, for the trader, as well as the investor. The reverse happens when the market suddenly moves up, giving the impression of urgent buying. Soon, the buying fizzles out. The first sign of weakness is a selling opportunity. Investors should take some profits.
One reason why such panics have turned out to be reversals is the current nature of the market. It is a tarding range market. A range defines the maximum and minimum limits of prices. When prices, pushed by panics come near these limits, a reversal seems possible.

All good things must come to an end. The panic trade will also end when the Nifty moves out of the trading range between 3800 and 4650. For now, such trades can be safely taken with Nifty options which have acquired a lot of liquidity.

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