After many years of stock market experience and having worked at senior managerial positions, I have discovered 2 vital elements for success.

a)      Right Stock Picking

b)      Money Management

a) Many sources of information are available in today’s globalised world.  Lots of Stock recommendations are available on daily basis. But when one has not researched why it should be bought or sold – there is one element which is missing:  CONVICTION

Post purchase if the stock goes down the person holds it till it returns to breakeven levels and sells it the moment he gets more then 4-5% profits! This phenomenon is normal to human psychology but not ok with market. If one has to be successful then it is needed to have “Conviction” first which will help the person to hold till the TARGET is achieved. On the flip side if stock moves against what was anticipated one should be ready to exit at “Stop Loss” levels determined at the time of purchase. To sum up this in 1 single golden rule:

CUT LOSSES AND MAXIMISE PROFITS.

(Not maximise losses and cut profits)

b) The second important element to consider is proper money management. Well, the word is exciting but how does one do it? Let’s try to understand this with a very basic example.

A person approaches market with Rs.10 to invest. He decides to invest Re.1 uniformly into 10 different opportunities indentified based on RISK to RETURN possibility at target. Lets assume that this has been kept at a uniform to 1:3.

What happens?

FOR EVERY STOCK WHICH HITS SL –  LOSS = Re.1

FOR EVERY STOCK WHICH REACHED TARGET – GAIN = RS.3

What will be the outcome EVEN IN THE WORST CASE?

6 STOCKS HIT SL – LOSS = RS.6

4 STOCKS HIT TARGET – PROFIT = RS.12

NET PROFIT ADJUSTING LOSS = RS.6

WOW ! Money management paid the individual in spite of loss in 6 stocks out of 10.

Friends, if you all follow this discipline engraved on your heart then I assure you shall never ever cut a sorry figure in stock markets. Money is easily made in markets but for those who act wisely.

Finally, let me explain SL on CLOSING BASIS only:

A market opens each day with thousands of buyer and sellers (BULL and BEAR). During the time its open there are BULLS who buy on every dip and BEARS who sell on every rise, correct?

So how do we conclude who is winning? A simple effective way to find this out is to know - how did the market close?

GREEN  - indicates BULL WON

RED – indicates BEAR WON

The same applies to any particular stock. If one has to decide entry or exit on a particular stock then it’s important to wait for it to close.  Post closing we shall find out who won on the stock for the day and then take our call on the following day!

SL – In my view should be exercised on closing basis. If hit then one should exit the next day and if not then position should be maintained.

Many times it’s possible that due to intraday SL levels get visited and later it recovers. So please avoid such moves.

Cheers,

PREMAL