Philosophy

Let me take a scenario on a Retail shop. Normally shop owners buy the different kinds of products to keep it in their shop. First, they buy the products with small amounts, and later on they will add the quantity if the customers are interested in those products. If the customers are not interested in any of the product, they keep in the ON SALE area and want to rid of those products from the shop as soon as possible.

Same principle works in managing the stocks. Initially you need to buy quality stocks with very small amounts, if it is acting well and going up as you expected, then you need to add more. This is called Pyramiding. If it is going against you, then you need to sell immediately by taking small loss.

If you don’t take losses short and keeping un-favored stocks in the portfolio for a long time and it will lead you big losses. Even in the shop, owners won’t piled non-saleable products for a long time.  I have seen some people are holding Citi Group (C), Bank of America (BAC) etc for a long term and eventually they take big losses. They don’t have good earnings, sales and still they are holding, because they like those stocks.

Owners should not like the product in the shop, it is the consumers should like the product and they decide whether to keep in the shop or not.

It is same in the case of stocks. You should not like the stock and , moreover,  buyers should decide whether to keep it in your portfolio.

You need to take the 5-8 % risk for any stock. If you are risking the more than 8% with your buy point , then there is something is wrong with YOU. If any stock is breaking down more than 8% with proper buy point, then the stock is not ready to move up at that moment. You can buy back later if it sets up.

If you apply this simple principle in real scenario, you will succeed in any business.

Here is the story about the two monks. The two monks are very simple and follow strict principles by the order from Guru. One day they happened to cross the small canal on the way to visit the temple .They found one beautiful woman, who also wants to cross the canal, but she doesn’t want to wet herself. So she asked help from these monks.  One-person ready to carry her on the other side of the canal and other person doesn’t want to carry due to the fear of breaking the principles of monkhood. Anyway, First person helped her to cross the canal. The second guy was always reminding to the first one on the way to temple that you made a big sin by carrying her. And he explains, this is against the monkhood principles. All the time he was thinking about this one for two days continuously. The first person told to second one that why you are carrying this thought for two days and I forgot it at that moment when I helped her.

What we can learn from this story?

Be unattached …The first person, never has taken into heart, that he has done guilty. In fact, second person has taken to heart, found himself guilty.

While doing trading or investing, there will be lot of influence from the media. Media change your mental patterns, which directly reflect in your trading.

Lot of news around the globe, opinions, suggestions, tips, and this will create fear and disturbances in you …One day you feel you are optimistic about the market and other day you feel pessimistic..

So Learn how to detach with this media content and focus on your mental setups, patterns, methods, fundamentals, supply and demand.. etc

Do not change opinions by reading newspaper and watching news on the TV. News comes last to the public, by that time Stock has enough progress in his/ her life cycle.

This is true in life situations also. If you apply the unattachment concept in your life situations, then you are free from worries. You can only act and make a decision for a particular situation and rest will happen whatever it supposed to happen.

Forget noise from the media ..

Be like a LOTUS 🙂

Correction is always good.

Let me take an example. Day and Night cycle is a gift from the nature.  Day is life and Night is death. When the Day starts, you feel much energized. Energy levels are very high in the morning and goes down when the day ends. Body needs rest during the night and it repairs itself to get energized for the next day. If you don’t sleep in the night, that will be reflecting in the following day. So night is as much as important as day.

Correction is very much important in the case of Stock Market or stock life cycle. It will take rest for few months and jump from there.  Stocks will jump fast at the initial stage after it takes sufficient rest and will move slowly once it has reached certain point.

If you want to work in the night, you know what will happen. Your energy levels are very low during the night, productivity reduces and this will reflect in the following day. If you play or buy stocks during the correction, your productivity reduces, and you will end up with big losses. Because stocks behave very volatile, it reflects your emotions during correction.   If market takes rest and you take rest. That will save you lot of money.  Whatever you earn during the bull trend, will wash away in the correction stage. This is where most of people do mistake and ends up investing or trading career.

Productivity can happen only when your energy levels is high.  You can make money only when the market is in trend, and not every day.

See the below chart has couple of rest periods in his/her life.

Buying cheap stocks is like walking on the thread. You know what will happen once thread is cut.

If any of the institution is pulled out the money  from the cheap stock, the price of the stock will just  free fall.Because these penny stocks are holding by 1 or 2 institutions. No institution will not ready to buy cheap penny stocks. They prefer to buy high quality stocks which is more than $20.

All penny stocks will disturb your emotions a lot because of volatility.So beware of buying penny stocks.

Yes. Nature tells everything if you observe closely.

For example, every year there is a spring, summer, winter and fall.  Once season starts, it will stay for a while.  The season changes very slowly it will take either 1 or 2 weeks, but definitely not in a day. When the season starts to change, you will see one day you feel like cold, other day you feel like hot , another day you will see rain and sometimes it would be both cold and hot etc. There is little bit of turbulence or whipsaw in the weather before it actually starts the season.

This is exactly with the Stock Market.  Trend (Bull or Bearish) will not change in a day. It will take a while to change either bullish or bearish. When it tries to change from bullish to bearish, there will be lot of up and down days before it trends to bearish.  Same in the case of bearish to bullish. There will be tough war between bulls and bears to determine the direction of trend. If trend starts, it will continue for a while.  Most of the people will be overlooking and feels like market corrects at anytime. However, it never happens.

How can you determine whether the trend is changing?

It’s dead simple. For example if you take the above example, when the season changes to summer, what can you observe?

The temperature increases day after day. You can feel the high temperatures in 1 or 2 days during the starting of the season. But It is not continuously. It will take a while to feel high temperature days.  When the season starts to ending, then there will be 1 or 2 days temperature drops and after that the next season takes off.

Exactly same principle applies to Market. You can see the 2 or 3 up days before market changes to bullish mode and bull trend continues afterwards. In the market terminology, it will be ‘Follow thru’ day.  Mutual funds, Hedge funds and other institutions are putting money into the market once they see the market character is changing. They are continuously investing with small amounts. So like that, you can see the lots of stocks are breaking outs at that time. For example, if you see the stocks are breaking out either 4% or 5% or 6% continuously, then there will be indication that the major institutions are putting money into the market.  This is what called ‘Market Breadth’.  And also, Institutions won’t take out money in a day, because they handle with millions or billions of money. They will take out with regular intervals. Same in the case of Bearish trend.

Sometimes, you can observe that there will be 1 or 2 big down days in a uptrend.  That’s fine , if you are sitting in the good fundamental stocks, it will come up easily. Because market breadth won’t affect that fast. If you take the above example, you can see there will be heavily rainy days during summer, it doesn’t mean summer is ending.

All books are telling same thing in a very complicated manner.

Nature reveals subtle truths  if you observe closely….

Here i want to explain why trading and life are very much similar..

There is no difference between Life and Trading as per my experience. Life has ups and downs and Trading has up and downs. But, how you treated with life is only in your hands and which is similar in the case of trading too. Personality of the life and personality of the stock runs according to law of nature.

Every person has some kind of unique personality and has same kind of emotions.  Whenever he/she gets the angry, happiness, sadness, jealous etc, he behaves similarly as compared to other person.  Every stock has its own character and personality, runs in his own way, but acts in very much similar manner whenever it has good / bad news. 

Fundamentals are very important in everybody’s life and if the fundamentals are good, he takes a right decision even though environment is good or bad.  Fundamentals of the stock are also important whether it move upward or downward direction. Fundamentals of the stock would be Earnings, Sales,  Fund ownership, float etc.  All the stocks with same kind of fundamentals behave in similar manner.  If we experience happiness and the expression would be Smile. If the stock has good earnings and sales report, it tries to go up either in the short term or long term.

 If you understand your own psychology, you will understand the stock market psychology. Because it is running by the people with similar kind of expressions.

 You need to know yourself first, and then only you will succeed in stock market.  This is essence!!!