Perform or Perish

As always the markets have not been very kind to investors/traders in the months of May-June. These months, besides being crucial for world markets; they are a lot more significant for India as they are the harbingers of monsoon in our country. Being a largely agricultural country that India is, a lot depends on the monsoon and its arrival on time.

The markets have been moving sideways with a downward bias showing little, if any hope of recovery. The markets have been choppy since November 2010 and traders and investors alike are wondering as to which way the markets are headed.

Is it really so important to know as to which way the markets are headed? Well, you would like to argue that how should one trade if he/she is not even aware of what the market is going to do next. A lot of so called experts and analysts will tell you it is extremely important to anticipate market movement to make any headway in this chaos. But wait, hold your breath. What if I told you that it makes absolutely no difference to your trading? Would you believe me if I tell you that one can make money in bull, bear or flat market condition and that we are least bit interested in knowing which way the markets are headed.

Well I know this does not really make sense to you. Let me explain.

Market movements are like tides in sea. Whenever it goes up, it does not take everything up with it and whenever it goes down, it does not take everything down with it either. That simply means that there are stocks that beat market movements and are the least bit affected by market conditions. These stocks have the potential to move substantially higher when the markets are crashing and vice versa. The stocks that move up continually when markets are crashing are ‘blessed’ and the stocks that continually go down even when markets are firing are ‘cursed’.

The idea is very simple; find the ‘blessed’ and the ‘cursed’ ones and trade them. These stocks seldom become a victim of market volatility thereby giving you a much needed edge that will eventually shape your trading fortunes. Now the question is “Where and how do I find such stocks?” But even if you are able to find such stocks, do you have the will and courage to trade these stocks. Your thought process is already biased towards the market movement and also when you are contemplating trading these stocks, you think that you are challenging the market and going against it. But the truth is much different. You are actually confirming to what the market is telling you about that stock. The market is itself declaring, “This is a blessed stock or this is a cursed stock.” In fact, by trading these stocks you are going with the market and not against it.

I wish to showcase some classic examples of blessed stocks that have in no way been affected by market movements.

Vakrangee Software recommended for buying on the T3B Forum on 25th October 2010

TTK Prestige recommended for buying on the T3B Forum on 26th July 2010

Titan Industries recommended for buying on the T3B Forum on 29th March 2010

Bata India Ltd. recommended for buying on the T3B Forum on 23rd August 2010

Ador Fontech recommended for buying on the T3B Forum on 31st Jan 2011

Here we have discussed some ‘blessed’ stocks. Next week we will discuss some ‘cursed’ ones and when and how they have been traded by T3B.

Best Regards..

I hope we all agree that stock trading is a probabilities game. Whenever we are in a probability game, the only way to ensure that we end up on top is by ensuring that the probability is on our side.

Our success and/or failure lies in how we trade this probability to our advantage or disadvantage. Literally speaking the stock market is 50:50 probabilities trading. But think again, is it actually 50:50?

Let’s say we toss a coin, the result is there for us to see immediately. It is either a ‘heads’ or a ‘tails’, and the issue is settled. The winner and the loser are declared and the game ends.

If we buy a stock then there are 50% chances that the stock will go up and 50% chances that the stock will go down. But do we sell the stock as soon as it goes either up or down? The answer is ‘NO’. Then just how do we calculate the probability?

Let’s treat this stock trading game like that of tossing a coin. Heads we win, tails we lose. But as we have already discussed we don’t sell the stock immediately after it goes up or down. Then how do we play this game. Here, we come to the Risk: Reward ratio. That means we will sell either when the risk has reached our pre defined levels or the reward is double or more than our anticipated risk. More on Risk: Reward ratio in my next post.

Now, let’s assume that it is still a tossing game but it is a best of 5 series. The one who manages to win 3 or more times out of 5 will win the game. However, there is catch; every time out of 5 you lose, you will part with some of your capital and every time you win out of 5, you will get some. If you lose the series you lose all the money that you have bet and if you win you get the amount that you have bet. You have the choice of quitting any time into the game.

Let the game begin.

Scenario 1

Toss number 1 and you win and you get some money, 4 more to go. What is your probability now, 50:50? Because out of 4 tosses remaining you can theoretically win 2 and lose 2.

Toss number 2 and again you win and again you make some money. Now your probability has increased. Because you need just 1 out of 3 and you have won the series. You win 1 more and you make the entire amount that you have placed on the series. Do you want to quit the game at this juncture, or should you quit? The fear in you tells you that I have made some money. Let me take it and quit the game lest I should lose all that I have made.

This is what most people do in the Stock Market. They quit when they have entered the right trade and when the probability is in their favour. Of course you can still lose, but then if you quit, then you are an emotional trader and most likely don’t understand the concept of ‘Probability Trading’ and if you do not understand this then you have no business to be in this business.

Scenario 2

Toss number 1 and you lose and you lose some money, again 4 more to go. Will you quit at this stage. You shouldn’t, because the probability is still 50:50 and you can still make it. If you mange to win the next one it is even stevens.

Toss number 2 and lo and behold again you lose. Again it is time for you to part with some money. The Market now needs just 1 win out of 3 to settle scores with you. The probability is no longer on your side; forget it being 50:50. Should you continue with this game? The logical and most appropriate answer is ‘NO’. Because you stand to lose everything that you have bet, with the probability in the market’s favour.

Once again, traders fail to realize the dangers involved and continue trading hoping that if they manage to win the next one then probably they’ll lose less and with the hope that they have lost 2 times, there is no way they can lose a third time in succession, least realizing that every time the coin is tossed the probability is 50:50 regardless of the earlier outcomes. The market theoretically, still has an equal chance of winning and if it does then you stand to lose your entire capital.

Before you start playing a game, identify the rules of the game and follow them. Unfortunately, for many they don’t even know nor have the rules. And many who have the rules don’t realize how important they are in the context of their trading.

So, the quintessential question is ‘Do you have a System for trading?’ and even if you have one; are you following the rules set up?

If you cannot sincerely answer these 2 questions then all I can say is you are not into trading; believe it or not you are in the business of gambling.

‘Happy Gambling’

Stock Traders are always a confused lot. They spend most of their time trying to analyze the market and where it is headed. Some even go to the extent of predicting the future course of the market which is an exercise in futility, a complete waste of time, energy and most importantly money.

How do stock traders inculcate these habits and why is it so difficult for so many millions of traders/investors to have that paradigm shift.

The answer lies in their past experiences. Stock traders/investors rely so heavily on their past experiences (which at most times are unpleasant) that they tend to use it as a yardstick for their current or future trades. These traders suffer from the ‘Outcome Bias’ which shapes their destiny in the stock market. ‘Outcome Bias’ is the habit or rather the bad habit of judging your decision by the outcome of the trade rather than judging it by the rules that were set up at the time of making the decision. When you judge your decision by the outcome of the trade then most likely the trades which make profits will be ‘Right Trades’ and trades which lose money will be ‘Wrong Trades’ for you. Many don’t know but in their sub conscious they always tend to look at things this way. This is one of the biggest mistakes one can make while trading in the stock markets.

As a result, when people fall back upon their past, their experiences being largely negative, they always bring in negative energy, negative thoughts and believe it or not negative expectations from themselves as well as their newly adopted system.

So, a good system trader is the one who can bundle his past and dump it in the nearest garbage bin and start trading afresh without any negative expectations or outcome bias.

Always remember, ‘The Past is not important, The Future is not known’. So live in the present and enjoy life and enjoy trading. Therein lies your success.

And last but not the least, never enter the market with the objective of recovering your past losses. In this way you will treat the market and the market will treat you as enemy. Befriend the market and the market will accept you with open arms.

See you all again. Till then goodbye and happy trading.

Warm Regards

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