Holding 250 shares @ Rs 88.5. Closing price on 29 Sep 09 was 83.25
There is a human tendency to give too much weight to recent experiences and extrapolate recent trends that are at divergence to statistical odds and rationale. That is how investors become more optimistic and aggressive in their trade when market goes up and more pessimistic than necessary when market goes down. Let greed and fear not grip you in such situations. Simply remember that what goes up has to come down, and vice versa. Laws of nature will ultimately govern everything in our lives and stock market is no exception. The legendary W D Gann gave utmost importance to the laws of nature and astrology while devising his super successful trading strategies in different markets. Later on in this series we shall also learn to pay our obeisance to the laws of nature.
With due deference to W D Gann's rules, I would like to hazard a couple of exceptions to the general rule of applying Stop Loss Order in all trades. If you are an investor never put a stop loss order when the stock is trading 80% below its all time high. If you feel that you are entering into a good trade at that level, just go right ahead and buy without stop loss order. You will get a chance to exit honourably even if your trade goes wrong. Simply hold the scrip with patience.
Secondly, if you have confirmation that you are buying in the 2nd phase of a bull run then you may dispense off with stop loss order because the stock price is bound to move above the previous high. If you are not placing stop loss order, then you need to have a firm mind and not panic under any circumstances. In next post we shall dwell upon certain issues relating to investor psychology.
Rules enunciated above are to be adhered to in letter and spirit. You may crib about these rules since they may curb your style, but they are a must for your long term survival and success. Let me assure you that if you take few right decisions now, it won't take you more than a year to accrue profit equal to your initial capital employed. And imagine a scenario only one year down the line when you are trading in the market with your initial capital fully protected by following Rule #3. You will have the psychological advantage to go aggressive in trade and make killings after killings. Of course those killing trades will have to be entered into with proper protection of stop loss order. Always remember to put on your protective gear, since its a war - a jungle war! Next post we shall evaluate the efficacy of this protective gear called Stop Loss Order.