Survival Kit For Newbie Investor - Stop Loss Order

In the last post we had realised that making few right decisions can completely protect our Capital and thus allow us to be triumphant in stock market ever after (http://archana-archdeb.blogspot.com/2009/09/starter-kit-for-newbie-investor-capital.html). Even Warren Buffet maintains that to be successful "you only have to do a very few things right in life so long as you don't do too many things wrong". But there is a catch here. You are bound to take many wrong decisions in stock market over the long haul. Warren Buffet was well equipped to avoid too many wrong decisions, besides being properly groomed in trading right from early childhood. A little known fact is that Warren Buffet's father was a stock-broker and a parent's influence at an early age in such matters can have tremendous advantage. But most of us are not so very well placed and hence will be prone to making many mistakes while taking trading decisions.

If that be so then what is the solution? The solution lies in limiting your losses from wrong decisions by way of Stop Loss Order. We shall now postulate some golden rules in the words of a legendary trader W D Gann:-

• Rule #1. Remember when you make a trade, you can be wrong, therefore place a stop loss order for your protection.


• Rule #2. When in doubt, get out of the market.


• Rule #3. When you have nothing but hope to hold on to, get out of the market.

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.

Survival Kit For Newbie Investor - Capital Management

We understood the value of own capital in the last post (http://archana-archdeb.blogspot.com/2009/09/survival-kit-for-newbie-investor-in.html ). Money invested in the stock market is your hard earned money. Preserve it with all your power of will and wit, because believe you me, its a jungle out there where might is right. If that is fully understood then lets go right ahead and enunciate few golden rules of Capital Management in stock market.

• Rule #1. The capital that you employ in stock market should be from your disposable income. Under no circumstance should you violate this rule. This means that you should not ever take loan to finance your trade. To drive home the point let me remind you that investors had taken huge loans from financial institutions ably aided by broking houses for the much hyped and overly priced IPO of Reliance Power. And they got bust! That is not to mention the plight of investors in Gujarat over this IPO, indulging in the grey market trade.
• Rule #2. In any single trade never commit more than 10% of your capital. In case it fails then you will not have to spend sleepless nights over it. And you will be in a fighting fit condition to recoup that loss in other trades. But just imagine if you were to commit 80- 100% of your capital in a single trade and it fails. You will be wiped out of the market for good.
• Rule #3. Initially make it a habit to take out the profit you earn from stock market and keep it in separate bank account not linked to your trading account. You should keep on siphoning this profit till it equals the amount of your initial capital employed in stock market. For example you have done an initial investment of Rs 1 million. You should take your profit out of your trading platform till your profit equals Rs 1 million. Then you are mentally free to trade the market since you have fully secured your initial capital in this manner.

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.

Survival Kit for Newbie Investor in Stock Market

New to stock market investment? If your answer is 'yes' then read on. If your answer is 'no' then also read on, because to survive in stock market on long term we need to constantly remind ourselves of the simple age old and proven golden rules of investment in stock market.

At this point I am taking the liberty to seek a promise from newbie investors and that is a promise to not make the mistakes most seasoned investors have made sometime or the other in their lives. The harsh reality is that the market does not pardon mistakes and some mistakes can be almost fatal. You can avoid all these pitfalls by simply adhering to certain golden rules which I am terming somewhat flamboyantly as 'Survival Kit for Newbie Investors'.

To further drive home the point let me present to you an unspoken secret of investors in stock market. It is on record that in Wall Street the seasoned traders/investors always talk of their profits and not the losses sustained by them. This gives newcomers the feeling that there is only money to be made in this market and hardly any chance of losses. But the damning truth is that if you do not enter the arena having donned adequate protective gear then the chances of losses are far too many. And your protective gear comprises of the golden rules contained in this series called the 'Starter Kit for Newbie Investors'.

In case you manage to survive without the protective gears then you should consider yourself extremely lucky. If that is the case then you would be better advised to try your hand at a casino, since your Lady Luck is benevolent towards you. For most of the investors though, that is not the case and hence my over-emphasis on adhering to golden rules of investment. To stretch the point further I would strongly maintain that even with protective gear, you need to be always on your guard. Keep your guard up anytime and every time because a champion boxer knows that the moment he lets his guard down in complacency, he can be knocked out by a freak blow. In recent memory one is reminded of Satyam scam as an example of such freak blow.

The bottom line is that if you want to be a consistent champion investor you need to abide by some golden rules. If you have to err, then please err on the positive side. Make no such move that can erode your capital. So what if you have missed an opportunity, at least that mistake has taken nothing from your pocket which is a huge positive in a stock market. This brings us to an important issue of Capital Management which we shall discuss in the next post. Keep an eye on this space daily and get yourself fully armed before joining battle in the stock market.

PORTFOLIO ANALYSIS - SAMPLE 3 ( X-8 )

In this series of Portfolio Analysis for Mr X , we have come to the end of the road with this tranche. Today we have analysed some assorted stocks which covers the complete portfolio of Mr X. I hope you have enjoyed reading the complete portfolio of Mr X as much as I have, analysing it. Here's last of the wilds for your eyes only!!

SESA GOA

Holding 100 shares at average price of 206. Closing price on 11 Sep 09 was 242.1.

6 mnth tgt - 300; 1 yr tgt - 470

Sesagoa seems to be in belligerent mood and is constantly trying to notch higher scales. But it has moved up too fast too soon. It is likely to touch level of 155. So take your profit now at current level and wait for correction. Pick up the scrip again at 160 and wait for a year to reap benefits from the scrip at 470.

BEL

Holding 10 shares at an average price of 1202. Closing price on 11 Sep 09 was 1371.

6 mnth tgt - 1800; 1 yr tgt - 2500

BEL will fall to sub 1300 initially and maybe jump to 1400. But that will be short lived and you may see the scrip trading at 1000 level in short term. Be conservative and take home your profit at current level. Re-enter the scrip at 1000 level and wait for one year to sell the same at 2500 level.

DLF

Holding 50 shares at average price of 525. Closing price on 11 Sep 09 was 398.6

6 mnth tgt - 700; 1 yr tgt - 900

DLF may correct from here but do not be disheartened. Hold the scrip for one year target of 900. If you can keep the share for a longer term of two years then you can see the target of 1200 also.

OMAXE

Holding 60 shares at average price of 310. Closing price on 11 Sep 09 was 123.2

6 mnth tgt - 180; 1 yr tgt - 240

Omaxe is again a hold for you. But you should add shares in your portfolio at 110 or even at current market price. You should sell this bundle of 120 shares at its one year's target of 240.

PARSVNATH

Holding 60 shares at average price of 300. Closing price on 11 Sep 09 was 119.2

6 mnth tgt - 195; 1 yr tgt - 240

Parsvnath may correct to 80 so keep adding this scrip in small packets till level of 80. Then hold the scrip for its one year's target of 240.

MUNDRA PORT

Holding 45 shares at average price of 440. Closing price on 11 Sep 09 was 534.

6 mnth tgt - 800; 1 yr tgt - 1100

Mundra Port may correct to 400 level. So book your profit now and again re-enter at 475 and keep adding to your position till 400. Then you can hold your position till target of 1100 is achieved.

ONGC

Holding 52 shares at average price of 850. Closing price on 11 Sep 09 was 1177.

6 mnth tgt - 1350; 1 yr tgt - 1900

ONGC is likely to correct to 975. So it will be best to book your profit now. Re-enter at 1000 level and hold till the target of 1900.

THERMAX

Holding 40 shares at average price of 598. Closing price on 11 Sep 09 was 478.1.

6mnth tgt - 650; 1 yr tgt - 890

Thermax will correct to 350 level. But do not worry. Just add 40 shares at 350 level for target of 890.

VOLTAMP

Holding 20 shares at average price of 690. Closing price on 11 Sep 09 was 840.

6 mnth tgt - 1150; 1 yr tgt - 1300

Voltamp is moving sideways in a tight band between 700 and 900. With market expected to correct in near future it would be advisable to book profit at current level. You can re-enter the scrip above 900 for a target of 1100. Otherwise wait for correction and enter the scrip at 600 level for a target of 1300.

VOLTAS

Holding 100 shares at average price of 122. Closed at 147 on 11 Sep 09.

6 mnth tgt - 195; 1 yr tgt - 300

Voltas is looking for excuse to fall in near term and hence would qualify for sell. It may fall to 90 level and so book your profit at current level. Pick up the stock again at around 90 for a target of 195 at least.

PORTFOLIO ANALYSIS - SAMPLE 3 ( X-7 )

In this tranche of Mr X's portfolio we will dwell upon some scrips belonging to Auto Sector and Steel Sector. Stay tuned!

MARUTI
Holding 80 shares @ 750, CMP - 1518

1 yr tgt- 2600

Maruti has had a fabulous run up and is probably a spent force. You are sitting on more than 100% profit and there is no reason to hold on to such a position. With market correction Maruti can so easily come down between 800 to 875. Booking profit and re-entering after correction would be a prudent thing to do.

ASHOK LEYLAND

Holding 200 shares @ 36, CMP - 41.25

6 mnth tgt- 55; 1 yr tgt- 70

Immediately Ashok Leyland can touch 44. That should be the point to book profit but then you should re-enter at 36 during its correction. From there on you should hold the scrip for one year's target.

TATA MOTORS

Holding 50 shares @ 780, CMP - 565.8

6 mnth's tgt- 700, 1 yr's tgt- 830

Tata motors should correct from here to about 400. You should pick up 50 additional shares at 400 level. Keep one year's target to exit the scrip

JSW STEEL
Holding 55 shares @ 618, CMP - 731
6 mnth tgt- 1050, 1 yr tgt - 1350

JSW Steel can be held for 6 month's target of 1050 and then trading techniques should be employed for maximising profit at major dips. Major correction in the scrip could also come around 850.

TATA STEEL
Holding 120 shares @ 270, CMP - 464.8
6 mnth tgt - 700 , 1 yr tgt- 900

Tata Steel could be held for at least six month's target of 700 and then trading at dips could be done. However if you do not want to trade then keep the scrip for one year's target of 900.