Wednesday, October 1, 2008

Better Safe than Sorry

Nouriel Roubini who correctly predicted the sub prime crisis is not optimisitic. He has written an article titled "The US and global economic crisis is becoming much more severe in spite of the treasury rescue plan. The risk of a total systematic meltdown is now as high as ever". This is a long title, and it sumamrises the views of Mr Roubini.

In India, volatility is going up. Historical Volatility (HV) has moved up to 46% from a low of 25% in late August. Volatility is mean reverting. This means, volatility comes back to an average value after reaching extremes. The current 100 period average is 37%. Therefore, a slight decline in volatility is possible. This could mean either a straight line trend, or choppy markets with small ranges - both will lead to a fall in volatility.

Trading is based on rules. Many emails and comments ask this question: how to trade ? The answer is: develop a set of trading rules. Rules should be identified for entry, exit, stop loss, profit target and trailing stops. (profit target and trailing stops are optional, but entry, exit and stop loss are a must). Once you make these rules, follow them with discipline. The profits come by using discipline to follow the rules. There are many ups and downs in trading (whipsaws). Accept that losses are part of trading. For short term traders, remember that most of your trading profits for a given month will come from one or two trades. You trade throughout the month since you do not know which two trades will give you the money.

Finally, 'Better Safe than Sorry'. Investors should wait for clear signs that the bear market is coming to an end. Once such signs are in place, then go and begin your investment. Till then, keep your cash wih yourself.

6 comments:

Deepak said...

World over there is a consensus that USD will do well going forward (Shanker Sharma, marc faber.both of them I hold in high esteem, including many other technical chartists who keep on coming on channels)probably because of deleveraging. The USD will go to its origin homeland from various other countries. It will augur very well for the commodities as strong USD will bring down the prices in USD terms.

But a big BUT will it help India. I dont think so bcos as the USD will strengthen, INR will weaken and theerfore any fall in commdoities will not hv any favorable impact on India. As we are seeing in crude prices. Crude may have fallen 33% from 147 to 101,but INR has also fallen abt 25% from 38 to 47.

Moreover deleveraging would mean the sale of shares by FII. Long and short that the Nifty is headed quiet lower as predicted in your technical analysis as well (nifty has no support below 3800 levels)

Shashank Jogi said...

Exits in the trading rules encompass stop loss, profit target and trailing stops. So I suppose stating these three under rules is redundant if you simply mention exits.

And of course, the most important rule: position sizing, i.e. how much to buy/sell.

I would say the trading rules should have:
1.) What to buy/sell
2.) When to buy/sell
3.) How much to buy/sell
4.) How to exit, either with a loss or with a profit

Not to mention how to maintain discipline in following the rules each time, time after time.

ashu said...

Dear Mr. Sukhani,

I completely agree with your view that entry, exit and stop-loss are mandatory for trading.

My belief is that these are ACTUALLY the ONLY Three parameters necessary to define ANY trade be it for ANY freely traded security in ANY environment in ANY timeframe.

I allude to your remark... "...For short term traders, remember that most of your trading profits for a given month will come from one or two trades."

I would like to know how one should understand the definition of a short term trader.

Warm Regards

aashish

rajivhtc said...

namaskar sudarshan ji,
what is your guidance to people like us who are stuck with stocks bought at 6000 levels and holding them as long term investors.
now we hold them or sell portfolio and enter again at 3600/3500 level.
i am utterly confused and it is painful to see my investment going down day in a day out.
warm regards
rajiv malik

piyush modi said...

Can you provide a few pointers towards keeping stops, & how to manage them, also about exit methods.

Thanks you

VOVEK said...

DEAR MR.S.SUKHANI JI
I AM YOUR GREAT FAN AND WATCH YOUR SHOW WHENEVER YPU COME TO CNBC TV18AND AWWAZ. MY QUESTION IS THAT I HAVE PURCHASE 130 L&T @ 1300 AND 100 RELIANCE @ 1800 AND 100 HOEL @ 138. FROM THESE L&T AND RELIANCE ARE MY TRADING PLAY .I BOUGHT THIS RECENTLY HOPING THAT AT SOME PINT DURING NEXT WEEK WE COULD SEE ANOTHER 15-20% BEAR MARKET RALLY DUE TO OVERSOLD NATURE OF THE NATURE(PUT CALL RATIO 0.9).
IS MY STRAGETY CORRECT THAT AT THAT PINT OF BEAR MARKET RALLY I WILL SELL L&T AND RELIANCE IN 10% PROFIT.I AM STILL SITTING IN 15% CASH.

PLEASE REPLY ME QUICKLY.