Investment in Equity (Part 15)
Buy when
price rises 5% from the last formed low and sell when price falls 5% from the
last formed high –
this is my theory in a nutshell; I keep repeating it lest we forget.
The theory is easy to follow most of the time. But there are times when it
becomes difficult. One of the difficult moments is when the price jumps the
level at which we were to buy or sell. This needs some explanation.
Let us imagine that Rs. 100 is the last formed low or bottom of the scrip A.
Our guiding principle tells us to buy it if the price climbs 5% and touches the
level of Rs. 105. Let us imagine that yesterday, the price had risen to Rs.
104.50 and had closed at that level. Let us also imagine that today the scrip
opens at Rs. 107.
When the scrip had closed at Rs. 104.50, we had hoped that we would be able to
buy the scrip if it climbs further and touches Rs. 105 today. Unfortunately, it
is at a much higher level of Rs. 107 that the scrip opens today. The price has
jumped (over) the level of Rs. 105, at which we were to buy in accordance with
our system, to Rs. 107. The sudden spurt in price did not give us the chance to
buy the scrip at Rs. 105, which was the level we had desired.
What do we do now?
The answer is simple: buy it at the present level of Rs. 107. That is, since
the scrip has opened at Rs. 107, buy it for Rs. 107.
Some might think that the scrip will come down to Rs. 105 at some point of time
soon, and that there is no need to hurriedly buy the scrip right now at the
high price of Rs. 107; they might even advise us to wait until the scrip comes
down to Rs. 105.
I do not favour such a stand. My advice is simple: buy the scrip at Rs. 107 if
that is the level at which the scrip opens.
The logic behind my stand is that the scrip can continue its climb and can rise
to Rs. 108, Rs. 109, Rs. 110, and so on, giving us no chance to buy it at every
level at which we hesitate to purchase. The principle is this: if the price
doesn’t come to the desired level, accept the level that becomes available, and
adhere to the price movement. The point is, we should not wait in the sidelines
when the price keeps moving upward. The system is intended to make sure that
whenever the price keeps rising, we remain invested.
We shall take an example of selling too.
Suppose the high or top the scrip B had last formed is Rs. 200, and that we are
holding 10 shares of the scrip. According to our theory, we are to sell the
scrip away if it falls 5% from its last formed high. Thus, we should sell the
scrip if it falls from Rs. 200 to Rs. 190. Suppose the scrip had closed at Rs.
191 yesterday, but opens today at Rs. 185. This denies us the opportunity to
sell the scrip at Rs. 190. Instead, we are given a choice to sell at Rs. 185,
or not to sell at all.
In such a scenario too, we should sell the scrip at the current rate of Rs.
185, even though it is five rupees lower than the level at which we were to
sell it away. We shouldn’t wait thinking that the scrip will rise from the
current rate of Rs. 185 to Rs. 190 giving us a chance to sell it at that level.
No, we shouldn’t wait for the scrip to rise to Rs. 190. Instead, just sell it
away at the current price of Rs. 185.
The logic behind this advice is that the scrip can crash to Rs. 180, Rs. 170,
and so on, and, if we do not sell the scrip away at the price available now, we
will find ourselves remaining invested while the price keeps crashing. The aim
of the system is to see that we are not holding the scrip when it is crashing;
we must have sold it away as soon as it had started crashing. Simply put, we
must not be, and we will not be, holding the scrip, when it is crashing. I am
repeating this repeatedly, I know, but this repeated repetition is to emphasize
the principle.
Thus, when the price is rallying we will rush in to cling to the rising price.
When the price is crashing, we will have sold it away at the first signal of
the downward spiral, the signal being a 5% fall from the last formed high.
In the buying example given above, we will be incurring a higher cost. In the selling
example given above, the proceeds which will be getting from the sale will be
less than what we would have got in accordance with the principle we were
following. We can’t help it. When price thus jumps over the level which we want
the scrip to hit, we should boldly bear the additional cost or losses which
such price-jumps might cause us.
The point is, we should cling to the price movement by readily undertaking such
risks. There should not be a moment in which we are not moving in tandem with
the price movement. If we are not moving in tandem with the price movement, two
things can happen: (1) We might lose the opportunity to buy the scrip and gain
appreciation in wealth when the price rises further. (2) We might lose the
opportunity to sell the scrip away, and the failure to sell the scrip at the
appropriate time might cause us loss which can be massive.
Here, clinging to the price movement means two things: remaining
invested in a scrip when it climbs, and distancing from the scrip while it
crashes. Price jumps are common and will certainly have adverse effects on the
profitability of the system, but we have no choice but to boldly stick to the
system. In the long run, these adverse effects which the price jumps cause are
most likely to be only marginal. If we are part of every major rally and if we
manage to keep away from major crashes, that itself should be enough to ensure
substantial profits and growth.
Not being invested when a scrip rallies, and remaining invested when a scrip
crashes, are two blunders which many an investor has committed. The trading
system which we profess will prevent you from committing these two serious
blunders, the risk of price jumps notwithstanding.
Several other circumstances can also cause price jumps. Power failures can
cause it. If the power fails for several hours, with no alternative source of
power supply, and if the price jumps over the desired price level, without our
getting a chance to take the desired action, we might lose the chance to stick
to the trading principles, though temporarily.
I will stress the word, temporarily. Because, if the power failure
occurs in the middle of the trading hours, it may not affect us much if we take
the precaution of entering the necessary stoploss orders. If we were to buy at
a certain level, we will have entered a stoploss buy order. Even our computer
terminal remains shut down owing to power failure, the stoploss order remains
valid in NSE, and if the price touches the ordered level, the order will get
duly executed. You can keep checking with another office (preferably the
regional office or the head office) of the dealer, and can ascertain the status
of the order. In case they say that the order has got executed, you can, then
and there, give them the next order.
If you are trading from home, using your computer, and power fails, you can
contact the dealer over phone, find out the status of the past orders, and if
any of the orders has got executed, you can get your next order entered by the
dealer himself.
I had been promising to devote one chapter to home-trading. By home-trading,
I do not mean sitting idle at home and occasionally calling the dealer over
phone and giving him orders. No, that is not the way of trading in equity. Such
a method should never be adopted. Everyone following my method of trading
should watch the trading terminal from close quarters; the investor should
remain within a few feet of the terminal, and should watch the price movements.
Unless he watches the price movements, he will not be able to stick to the trading
system we profess. For watching the price movements, either the investor should
visit the dealer’s trading hall and remain there throughout the trading hours,
or he should have internet (broadband) at home, and should be able to keep the
trading terminal open in his own computer throughout the trading hours.
When the investor has the necessary infrastructure, the dealer will, upon
request, provide the necessary software. Either they will send the software
file through email or, the investor can visit the dealer’s website and download
the software. The downloaded file will have to be double-clicked and got
installed. In the process, the necessary icon will get created on the desktop.
Well before the trading hours start, he can click on the icon and the trading screen
will open.
Initially, the trading screen will not be having any scrips in it. The screen will
have a plus sign and a minus sign prominently displayed somewhere on it. When
the plus sign is clicked on, a small window appears. Enter the code of the
scrip you want, and press enter, the scrip will appear on the trading screen.
In the same way, you can enter all those scrips which you want to deal in. If
you want to delete a scrip from the terminal, select the scrip first, and then
click on the minus sign; it might ask you whether you want to delete the scrip,
and if you confirm it by clicking on ok, the scrip will disappear from
the terminal.
Some of the dealers provide an alternative trading screen too. It is a simpler
one, and does not need a software to be installed in your computer. You can
visit the related webpage on your dealer’s website, enter your username and
password, and the trading screen will open up. This screen will not be having
some of the features and facilities which are available in the
software-supported terminal, but is still good enough. Since it is simpler,
many investors might prefer it too.
The software-supported terminal might need updation occasionally. The dealer
will improve the software at times in order to make the trading easier and
faster. My terminal has a Help menu. One of the items under the Help
menu is Check for updates. When I click on it, it will tell us if the
software needs updation. If an updation is necessary, it will take us through
all the necessary steps. All of this should be over in a matter of seconds or,
at the most, a minute. Sometimes, you may have to log out and log in again, for
the updated version to take effect.
As indicated already, there are four things which might adversely affect
home-trading: power, internet, dealer’s own website and your own computer. Your
own computer is well within your own control. Keep it in excellent condition.
Get it serviced and maintained in good shape at all times. Any unusual symptom
should be taken up with the technician and got rectified then and there. If you
do not do it promptly, it might disrupt the trading at some crucial hour,
causing you loss.
A UPS is a must whenever a computer is used. Whenever power fails, the UPS will
automatically take over, so that the operating system does not get corrupt and
the unsaved work does not get lost. The capabilities of a UPS are limited. It
might give you power for some minutes only. In course of time, if the trading
has been sufficiently profitable, you can go in for a UPS of a larger capacity.
Until then, if power fails, you will have to rely on your phones. If you are
using a laptop, it will help you tide over two to three hours of power failure.
The laptop battery will have to be kept fully charged throughout the trading
hours.
If the broadband connection is through a fixed telephone line, the internet
connectivity will be lost if the telephone line snaps or is damaged. Needless
to mention, the trading screen will freeze the moment internet connectivity
gets lost. When the telephone line breaks, the DSL lamp in the modem will turn
off. If the line isn’t broken, but there is some other fault in the line, the
DSL lamp will start flickering. In either case, you need to get in touch with
the related telephone exchange, if it is a BSNL line.
Having broadband connections from two different internet providers will be
ideal. If one of the lines fails, the other will take over. This is going to be
costlier than having just one broadband, but it will ensure disruption-free
trading. Though initially such an additional facility may not be warranted, if
the level of trading is high enough, such infrastructural facilities are a
must.
At times the dealer’s own server might fail or malfunction. In such cases,
there is no alternative other than just to bring the issue to the notice of the
dealer, and wait for him to rectify it. Keep in touch with the dealer until the
fault gets rectified. In my experience, such interruptions were rare. At times
deleting cookies and temporary files will rectify the fault.
Home-trading has its own comforts too. You are sitting comfortably in your own
chair in your own room in your own house. This could be a great advantage. You
can have your lunch, snacks or tea, while the trading is going on. While the
trading is going on, you can also use your computer for other, useful works.
You should have two phones too. One can be a fixed line phone, while the other
must be a mobile phone. If the telephone line breaks disrupting the broadband
connectivity that comes through it, you can use your cell phone to get in touch
with your dealer. Keep the cell phone battery too fully charged during the
trading hours. Some of the dealers allow their customers to access the stock
market through mobile phones, too. Frankly, I am not familiar with mobile phone
trading, and therefore I am not able to comment whether the mobile phone
trading facility will be adequate or safe enough for us to follow our trading
system. The costs and reliability of the mobile connection too have to be
ascertained and compared.
A TV is also a necessity. You will be able to monitor the prices watching the
related channels on the TV. This will eliminate the need to frequently get in
touch with your dealer. Good dealers will always be busy. Even getting into
touch with them can be a time consuming affair. When you are frantically trying
to get in touch with them, the delay can be maddening.
An alternative trading method – Graph Walking – will be dealt with in the next
chapter.
(To continue)