Wednesday, November 16, 2011

How to catch falling knives - Don't Try

Lakshman wants to buy Auro Pharma while Srinivas asks if VIP Inds justifies a buy after its severe decline.

All of us love a bargain. If a product worth Rs 100 is available for Rs 50 then surely we will try to buy it. Therefore, when a share falls from 560 to 280, we tell ourselves - here is a share available at half the price - surely it is a bargain, let us buy it for the 'long term'. Please continues reading, since this is a real life example. After we buy the share at 280 we wait for the 'long term'. Then, in Nov 2011, the share price falls to 29. Yes, twenty nine. The share I just described is Bajaj Hindustan. The company makes Sugar. It is respected in the business, so it is not a scam. But, share prices have their own logic.

When share prices are falling rapidly, there is a strong desire to buy the share since 'it cannot go down much more'. As buyers have realized, share prices can, and, do go down lower than we imagine.

When we try to buy in a falling market, we are trying to catch falling knives. If we catch the knife, we will own the knife, but if we get hurt while catching the knife, we may be in deep trouble. So, why try to do so?

The only reason to catch falling knives in the market is: inside knowledge. If you have in depth knowledge of the business, then you have some kind of inside knowledge. But if you are basing your decisions on information based on TV, Newspapers etc.. then you have no edge over the people who are selling the stock. What makes us feel that we are wiser than those who are selling now?

Sometimes, prices fall, then suddenly reverse and rally sharply. This is called a V reversal. Such reversals are unpredictable. Traders should not try to catch these sudden, violent moves. Trades that emerge from accumulation or distribution are much easier to manage.



18 comments:

sandy said...

dear sir i am big fan of urs,i buy mothersumi @ 195,(after u reco on cnbc) today its 152, can i average or hold.
and can u plz give me long term picks for 10 years. i want to invest for my child,
thanks.
p.s.: earn 5000 yesterday after reading ur "Nifty: Trading range Breakdown"
thanks,
take care.

Pi said...

market movement over the past 3 sessions this week has been really surprising..

most ppl would say that international mkts have been flat over the same period, why have we fallen. that is acceptable. very often we do this, we remain out of sync with world markets. i remember last year jun-july we refused to fall when globally there was a lot of turmoil.

But what has been surprising the wholesale battering of stocks outside the major indices. The way stocks have been clobbered 20-40% in a matter of 4-5 trading sessions has happened before, but when there has been global turmoil and sell-offs, or domestic unwinding of huge F&O positions. Neither is the case presently, nor have we seen much institutional selling. Infact Mon-Wed has seen net institutional buying of 1000crores (FII+DII).. who is doing this much selling which are taking stocks down so much so that every day the list of stocks down >5% is atleast 10-20 names long..

anyways.. i was having a discussion with a frnd of mine over chat..
humourous.. enjoy !!



Hrishikesh: ash gave birth to a baby girl.how will it impact the markets?

me: okay...why shud that affect mkts

Hrishikesh: why are markets moving lower?!I thought they'd move higher today

me: tera positions liya hua hai kya?

Hrishikesh: nope... I only take intellectual positions! :D

me: to phir itna tension kyun le raha hai...

Hrishikesh: oh because it's against my expectations!I demand an explanation! :D

me: thr is no explanation stuff like this happens

Hrishikesh: hmm

me: as a casual observer you can keep wondering at the irrationality of it.. as a trader i just take a loss and move on

Hrishikesh: is rupee the reason?

oh casual observer?! :-)

sudhin said...

Some stocks like hdfc/bank have fallen less than others like sbi so if one is to buy for the next up turn which would it be? Should one buy the strongest or the one which has fallen the most, also do technicals work in such situations when we have gap up/downs? Thanks.

SWEETY said...

very true

srinivas said...

Sir, are you conducting any training classes for technical analysis? Are there any manuals or books which will help me out in understanding the mechanism behind the technical analysis?

piyush said...

AGREED SIR,very very true, suffered the same with UNITECH after it came from 600 to 400 in January 2008, finally got rid of it only at 36.

Bharat Thakwani said...

hi sir.. its good to see u on cnbc...

just now on tv u said u had initiated shorts at 5040 today... can u pls throw some light on the logic behind this trade... i was looking to short below 5000 as 5002 was yesterday's low...

Rushabh Shastri said...

with our talk on DIWALI that this uptrend is continue till 4900 not broken(may give closing basis too), Today I feel looking at option data....some confirmation are getting let us hope for the best....there was too much traffic with 5000 due to psychological as well as familiar figure...tomorrow will be important day to see

sanjiv said...

Dear Mr.Sudarshan,

I bought AutoLine Industries today. I was asking myself if I am catching a falling knife or if i have a rationale - which i think is this :

1. Last 3 days (Nov 14-16) volume has been increasing with prices falling.
2. 16th is a hammer and it is around near the lows of early 2009
3. MACD divergence

But today 17th prices again fall. So if my theorey is wrong is it because of :

1. ADX
2. Averages do not confirm.

When can we trust a hammer ?

Regards,
Sanjiv.

Technotrader said...

Sir Alstom Projects a classical case of Head and shoulder pattern on daily as well as weekly charts. Your comment please

Rushabh Shastri said...

first confirmation nifty cash/future both given closing above 4900, hope for the best...

rohit said...

Sir have you had a look at srf and south indian bank I feel they are going to be multibaggers? As you have said, i booked profits at 5050, the 5000 and then 4950? what next? S&p is not breaking 1200, what are the chances that we take support between 4700-4800 and once again break above 5150, should one go long only after nifty crosses 5200?If you sense is that we are going to 4000, will it be within the next 3 months, because timewise the market has been in the bear market for more than an year, or we wait at 4500?Also what are these long term charts, all technical analysts say that in the long term we are going to go to 12000-15000 on the nifty, how long?

santosh said...

Hello sukhani sir..Good evening..

I am santosh from bangalore, 21, .you are truly model expert for others when it comes to ground to earth kind of interactions and kind advisories..I am following your blogs since two years and learnt many things from your blogs and ideas you have shared..

I trade heavily in options and rarely in cash..I am engineering student now and i am interested in TA, so learning it all the time along with my engineering studies..
.now i have some serious dilemma and confusions in trading, i mean selection and implementing the trade that i choose, maybe holding it and booking it at the right price..my questions are as follows..

1.which are the tools and important indicators (must indicators) you use for trading nifty and any other stock...

2.while selecting options in nifty or particular stock how does OI play important role in selecting the right strike price option...also what are the things that one should look into particular strike before buying that strike option of stock..

3.how to select or shortlist stocks for day trading and also for short term trading, say for week..

4.please do share your and best adapted methods for trading nifty in intraday, i mean strategies..

All these questions are interlinked to many questions that are running in my mind now, hope your answers will satisfy all the confusion by unlocking these 4 dilemmas..missing your presence on TV..be back soon..keep blogging..we just love it..

Balu said...

@Bharath thakwani

Hi Bharath! Sudarshan explained the logic there itself.. the logic was sell on rallies..

But that rally was so minor one because of strong existing downtrend.. In such case shorting can be done more convincingly with say some 60, 70 point stoploss...

well.. that's my opinion...

Regards
Balu

Sachin said...

Dear Mr. Sukahani,

I wolud like have your personal advise I like your comments and sincere advice which are like personal request about taking position is what i like the most. Is their any subcribtion please send me the details .

Thanks,

Sachin Patil

pranav.kulkarni said...

Dear sir,

In some of your earlier post you said about 10000 hours practice is the min required to acquire the chosen skills. could you pls elaborate on this???

Thanks and regards,
Pranav Kulkarni

Bharat Thakwani said...

@ Balu

thanks man...

i think i need to be more nimble in grabbing opportunities...

kuldeep singh said...

hello sir.
i have a basic knwldge of technical analysis but till noow i dnt understnd the fibonnaci series to find out the target price.
so it will be great for me if u guide me

thanking you
kuldeep