Simple Method to Make Good Profit in a Bull Market
Bulls Run on Indian Stock Market and Naive Traders
The world witnessed skyrocketing stock market in India, in recent years, especially in last year till the great fall in Jan 2008. I remember a 1000 points rally on SENSEX took only a week.
When market is on Bullish, it is obvious that traders want to make short-term profits. As most of my clients do not have detailed understanding of Technical Analysis, I saw them buying stocks relying unreliable sources. They tend to believe false news and rumors. When the market is bullish, one could see many self-appointed experts giving recommendations on stock picks. As the market always reflects sentiment of majority market participants, there is no acid test that could predict market behavior.
Many a time, I could see a client buying Infosys, few days earlier to the announcement of its quarterly results, expecting the price would move up. For his surprise, from the day Infosys gave exceptionally good results, price of the stock started falling down, thanks to the sentiment created by the good earnings of Infosys, price of every other stock in Information Technology sector would move up. The reason that is hidden to the eyes of a naïve trader is that Infosys was overbought on the day, and because of its good results, there was selling pressure due to profit booking, by the majority market participants, by Institutions and by long term investors, who would had bought Infosys at lower price. After all, good speculative trading is all about understanding the science of demand and supply.
An Entrepreneur's Dilemma: How To Support Naive Traders
Although my official responsibility as Stock Broker is limited to executing trades on behalf of my clients, actually I was in need of supporting my clients to push the business, where competition has become the way of life.
Decent gains and no huge loss is good trading practice for me, if not for every one on earth. Technical predications on future behavior of the market are the outcome of in-depth, sensible analysis of a set of technical indicators that supports the analyst's strategy.
What I Found As The Best Choice In Bullish Market: Relative Strength
After thorough research and detailed readings, I selected Relative Strength, popularly known as RS, as my ground base to pick a stock on daily basis for my clients. RS denotes the strength of a stock in comparison to the strength of entire market. Though calculating RS under various circumstances is beyond the scope of this article, it is sensible to have a layman's idea. RS is represented as a numeric figure that ranges between 1 and 100, considering 100 as the best RS. It is a ratio of past price movement of a stock to the past movement of the market. Logically, when the market is going skywards, the stock that has best RS value would go up in price. If the market moves up by 10%, the stock that has best RS would move up more than 10%. On the other hand, if the market falls down by 10%, for some unforeseen reason, the same stock would move down by less than 10%.
Decent Gains and No Huge Loss
RS guarantees decent gains and no huge loss. Norman G. Fosback writes “Chart and trendline analysis is grounded partially on highly subjective, crude, and largely inefficient measurements … One of the best tested systems is relative strength” , in his book "Stock Market Logic". I stared picking stocks that have good RS and I found them making good upward movement in roughly 95% cases.
According to Fosback, Robert A. Levy, a fund manager and an expert in using computers to simulate the price movement of stocks, has given concrete evidence that shows that the relative strength works best in a rising market.
On a day I recommended NOIDA TOLL BREIDE, which had a relative strength of 95, though I found few other stocks having RS value of 95 or 90, I recommended NOIDA for the reason that it was lowest in price among good RS stocks on the day. That day NOIDA made new life high, which made me more confident in my stock picking strategy. Forsback further writes “Aside from the overall market atmosphere, the only important caveat which need applied to the relative strength system is a check on unusual causes of observed price strength, such as tender offers, which might induce a one-time price strength boost”
Surprise of the Naïve Client
The day I recommended NOIDA, the naïve client asked “How did you know that NOIDA was going to make a new life high today?”
