When it comes for trading on stocks, timing your entries and exits are extremely important. That is going to decide what you earn or lose. If you don't lose your money, There are chances that you could be trapped into illiquid stocks, in two ways.
You may sell your stock incurring loss, and you could call yourself it as a stop-loss. But the concept of stop-loss is entirely different from what we discuss here.
You can turn to be an investor though you want to be a trader. Yes, if you have a policy of not selling a stock for loss, you can keep them with you, waiting, watching them to move up at-least to the price level that you have purchased. But investment decisions are different from trading decisions.
I don't undermine the wonderful returns of Investing. I just want to caution you, how you can behave as an investor which may not a right strategy for you, as a trader.
What is the Difference?
Well, the buy decisions taken by an investor are entirely different from the decisions taken by a trader. An investment decision is all about "buying a business", wheres trading is all about "buying a price". An investor go by Fundamental Analysis and the trader go by Technical Analysis (or by some random indications).
Fundamental Analysis is about analyzing a company in-terms of its soundness in its business, considering its chances for future growth.
Technical Analysis is about analyzing a the demand and supply situation of a stock, considering many complicated market parameters.
Let me share with you the little experience I could gain.
The Three Things That Should Be Handled With Care
News
I remember it was a Thursday (in India), media came out with the news of Ranbaxy-Daichi merger. One of my client exclaimed "See the price of Ranbaxy, moves up!". I smiled at him. He was busy with the television news, he could not even recognize the smile at my face! He was buying the stock from people who had bought at lower price level, earlier.
How could a news cheat you?
Well, do you honestly think a great news like this could be kept secret till the media releases it?
Can you afford to "buy" so called first-hand-information? Though you can, is there any guarantee that it is a first-hand-information?
Can you go on digging, analyzing everything you hear about?
Why Ranbaxy have good R&D activity than any other Pharmaceutical company in India? Why it tops the list of companies in patent filing? Why it is the second on the list in patent filing in US, till the day I am writing this article? and about how Ranbaxy is smart in a tie-up with Bayer, when it comes for its one day pill for Aunthrax?...the questions go on... it is not reasonable, and it is beyond the scope of stock trader to investigate everything.
I have been pointing out the fact to my clients, that Japanese Candle Stick chart was showing..oh! sorry, the charts were predicting the price movement of Ranbaxy earlier on Monday. The stock was moving up right from Monday and really it did not move up much on the day the news came out, as it moved for earlier three days.
Expert
If you have not thru with my earlier article Single Technical Indicator for Making Good Profit in a Bull Market, I suggest a reading so that you can understand how easily one could pick a profitable stock during bull run.
I picked a stock on a day and the stock moved 10% up on the day itself. Very next day, an Indian Market expert recommended the same stock to public, which was already 10% up!! (No harm it was really a good recommendation)
I am not such an expert appearing on television; I don't beleive that expert could have missed the thing what a person like me could see one day earlier.
I worry...some experts are traders themselves and some of them are portfolio managers too, who trade for their clients. Obviously, an expert's opinion would influence majority market participants decisions.
Self Appointed Expert
Self appointed experts could be your friend or relative. Thanks to sophisticated charting tools, one could draw some trend lines as they think wise. They may say "NIFTY is heading towards 2000" or something like that.
Some of the self appointed experts collect news, views of experts, and write on every magazine as they believe that they have something to write about the market!
Advice
Generally, I would prefer giving suggestions rather than advice. This time I would like to break my own rule.
"Be ware of the three pitfalls and learn how to prevent yourself"
Good Luck!
prabhat mishra