Sunday, April 23, 2006

>Protecting Your Stock Portfolio

Protecting Your Stock Portfolio: When to Sell to Cut Losses
By William J. O'Neil

Success in the stock market is as much about limiting losses as it is about riding winning stocks. A rule-based selling strategy can help you avoid heavy losses and preserve your portfolio. This article explains how to sell when a stock selection doesn’t pan out.

Know When to Fold ’Em

Nobody’s right all the time in the market, not even veteran market professionals. But as the famous investor Bernard Baruch once said, “Even being right three or four times out of 10 should yield a person a fortune if they have the sense to cut losses quickly.

Being a successful investor is just as much about limiting losses as it is about riding a winning stock. Downturns are a part of life in the market, and you must act decisively to shield yourself from excessive losses. If your stock selection doesn’t work out and you’re faced with a loss, don’t let your pride stop you from admitting you’ve made a mistake and acting quickly. Cut your losses early and move on. You must make rational decisions, instead of trying to rationalize your way out of a costly mistake.

It’s not just your own personal opinions that can be wrong. Analysts or market commentators can be just as erroneous, and basing your decisions on their opinions can often lead to disastrous results. Investors often buy loser stocks, justifying their decision with remarks like, “All these Wall Street analysts are saying great things about this company,” or “This technology is the greatest thing since sliced bread. The market doesn’t realize it yet, but it’s bound to become a household item.” Famous last words.

Cut Your Losses Early

My primary rule is to sell any stock that falls 8% below your purchase price.

Why 8%?

Research shows stocks showing all the right fundamental and technical factors in place and bought at the proper buy point rarely will retreat 8%. If they do, there’s something wrong with them.

You may think a stock is due to rebound. But the market could send the stock to lower depths regardless of your views or what analysts and commentators say on TV. No excuses, no alibis. You may want to sell even before an 8% loss if you see other signs of weakness in a stock.

This sell rule emphasizes the importance of buying at the right time. If you don’t and you buy a stock that is overextended (in other words, it is reaching the end of its climb), chances are it will hit the 8% sell level as it goes through a normal pullback. Make no exceptions to the timing of your purchase. The best stocks will always give you other opportunities to buy.

Here’s another way to look at it: Once a stock falls 8% below your cost, does it still look attractive? Is it still among the best stocks? Probably not. There’s no guarantee that it will go back up, and you need to protect yourself.

The bigger the fall, the harder it is to recover. Say you bought a stock at $100 a share, and it falls 20% to $80. To get back to $100, the stock has to make a 25% gain.

Another example: The stock plummets 50%, to $50 a share. It would take a 100% jump to get it back to $100—how often do you buy a stock that doubles? And if it does, how many weeks, months or even years does it take to get there?

In short, it is much easier for your portfolio to recover from an 8% drop than from a 50% drop. Wouldn’t you rather cut your loss early, and free up money to purchase another stock with better chances of doubling?

Of course, it could happen that you sell a stock that falls 8%, and then watch it go up afterward. But you have to think of the 8% sell rule as your insurance policy against catastrophic losses. The rule will in effect limit any losses on your portfolio to no worse than 8%.

How It Helps

Table 1 shows two sets of hypothetical trades that illustrates how cutting losses can help your overall portfolio.

Both portfolios start out with an equal dollar amount invested in five stocks, for a total of $25,000 invested; both portfolios invest in the same stocks, but the second portfolio’s two winning stocks have more gains.

Table 1. How Cutting Your Losses Helps Your Portfolio: An Illustration

Original Investment Ending Investment Profit/
Sell Price
Portfolio 1
Stock 1 100 $50.00 $5,000 $46.00 $4,600 -$400 -8
Stock 2 60 $83.33 $5,000 $76.66 $4,600 -$400 -8
Stock 3 125 $40.00 $5,000 $36.80 $4,600 -$400 -8
Stock 4 208 $24.03 $5,000 $26.91 $5,600 $600 12
Stock 5 125 $40.00 $5,000 $44.80 $5,600 $600 12


Portfolio 2
Stock 1 100 $50.00 $5,000 $46.00 $4,600 -$400 -8
Stock 2 60 $83.33 $5,000 $76.66 $4,600 -$400 -8
Stock 3 125 $40.00 $5,000 $36.80 $4,600 -$400 -8
Stock 4 208 $24.03 $5,000 $31.24 $6,500 $1,500 30
Stock 5 125 $40.00 $5,000 $52.00 $6,500 $1,500 30


As you can see, in each portfolio, if you had made these five trades over a period of time—and taken losses on three of them—you would still either break even if you had modest gains in your profitable two stocks (Portfolio 1) or you would come out ahead by $1,800 with solid gains in the profitable stocks (Portfolio 2). That’s because the two stocks that worked out resulted in a combined profit of $1,200 in Portfolio 1, and $3,000 in Portfolio 2, while the three losses—all capped at 8%—added up to $1,200.

The point is, it takes several 8% losses to wipe out the profit from one or two good stocks.

Rule Applies to Purchase Price

The 8% sell rule applies only to drops below your purchase price and does not apply to situations where you’ve already made worthwhile gains on a stock.

If you are a stock investor, you must learn to weather temporary sell-offs that may be 8%, 10% or even larger.

How can you tell the difference between one such dip and a real problem?

Hyperactive Stocks

About 40% of stocks pull back close to their buy point for one or two days. This is not the time to panic and sell if you have timed the purchase properly as it came out of a sound basing area. In other words, by timing your purchase right—at an already established floor—your sell rule should not interfere with the normal pullbacks that typically occur. As long as the price doesn’t drop 8% below the point at which you bought it, you should, in most cases, hang on through the first pullback.

Watch how the stock performs relative to the general market and its industry group peers. Often, a stock pulls back close to the buy point for one or two days because the general market has temporarily pulled back. This is normal.

On the other hand, if the market has been rallying over several days and your stock hasn’t come to life, then this might be a warning sign, even if the stock hasn’t dropped 8% below your purchase price.

Another point to consider: Stocks that are doing well relative to the market (with high relative strength) are usually more volatile, increasing the chance of slipping 8%, particularly if you buy them extended in price beyond the exact buy point.

Other Protections

One way some investors implement the 8% rule is through stop-loss orders, which are instructions to brokers to sell a stock at a predetermined price.

This might be useful for those who can’t watch their stocks closely or for those who may be less decisive and want a strictly mechanical approach.

In addition, don’t let tax considerations and brokers’ commissions interfere too much with your sell decisions. For instance, some investors are afraid to take gains because of the taxes and commissions. You shouldn’t always hold a stock for more than a year just because you’d pay a lower tax rate on the profit, and with lower commissions today, brokerage fees should not be the most important factor. Your main goal should be to obtain and nail down gains and cut losses.

Losers in Your Portfolio

You may now look at your portfolio and see that there are some stocks already 8% below your purchase price—or worse. Should you sell them?

Probably, unless a stock is showing strong signs of recovery, such as a rising stock price on solid trading volume and improving earnings. Even then, there is no guarantee it will rebound, and the chances are it could go even lower.

The greater the loss, the greater the chance of it developing into a really serious loss.

Key Points to Remember

Here are the main points you should keep in mind when trying to protect your portfolio against losses:

  • The first sell rule is to get rid of any stock that falls 8% below your purchase price.

  • It’s critical to follow this loss-cutting rule regardless of how highly you value a stock. Personal opinions get in the way of smart selling decisions.

  • The larger the loss, the higher the recovery you need to get back to the break-even level. (A 50% loss on a $100 stock, for example, requires a 100% gain to get back to $100.)

  • Strong stocks sometimes initially retreat close to their buy point (as determined by the stock’s chart pattern). This doesn’t necessarily mean you have to sell—unless the stock goes 8% below the purchase price.

  • Avoid making sell decisions based solely on tax concerns or commission rates.

>Ten Lessons I Have Learned From Traders

Ten Lessons I Have Learned From Traders

1) Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.

2) Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.

3) Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.

4) Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings.

5) Training is the path to expertise – Think of every performance field out there—sports, music, chess, acting—and you will find that practice builds skills. Trading, in some ways, is harder than other performance fields because there are no college teams or minor leagues for development. From day one, we’re up against the pros. Without training and practice, we will lack the skills to survive such competition.

6) Successful traders possess rich mental maps - All successful trading boils down to pattern recognition and the development of mental maps that help us translate our perceptions of patterns into concrete trading behaviors. Without such mental maps, traders become lost in complexity.

7) Markets change – Patterns of volatility and trending are always shifting, and they change across multiple time frames. Because of this, no single trading method will be successful across the board for a given market. The successful trader not only masters markets, but masters the changes in those markets.

8) Even the best traders have periods of drawdown – As markets change, the best traders go through a process of relearning. The ones who succeed are the ones who save their money during the good times so that they can financially survive the lean periods.

9) The market you’re in counts as much toward performance as your trading method – Some markets are more volatile and trendy than others; some have more distinct patterns than others. Finding the right fit between trader, trading method, and market is key.

10) Execution and trade management count – A surprising degree of long-term trading success comes from getting good prices on entry and exit. The single best predictor of trading failure is when the average P/L of losing trades exceeds the average P/L of winners.

Brett N. Steenbarger, Ph.D.

Saturday, April 22, 2006

>Nifty Latest Screen Shot

Nifty Latest Screen Shot. (Click on image to enlarge)

Nifty near a small channel top.
It remains +ve if keep's greater than middle channel at extreme right side.
3740 target for this wave. Stop loss if lower channel cracked.

>ITC Analysis

Latest image of ITC loaded now.
Its indeed at 16o now..!! cheers.

I hope readers of the log must have enough caution earlier to mkt crash..!!

====== to see the analysis made on 22-april-2006 see under

ITC update:

======= +ve case =======
its very well inside a rising channel and
simple hourly ema cross over trend following systems are in trailing mode.(no sell signal)
Crossing 210 then next long term target is 265 & 330.

====== -ve case ==========
Itc level of 200-210 is very imp from elliott wave criteria.
Many long term and short term targets converge there.
It would act as a super strong resistance and we can see a large correction in itc from here.

The peak at 205 area formed on much less volumes than that at 180.
A volume top is normally not a good sign.

Hourly macd gave a sell 3-4 days earlier and now if itc rises to touch earlier high it would face stiff resistance.

The RSI had for the first time in many months dipped strongly and touched 30. Even though RSI is now at 54.. The strong dip to 30 suggest more correction coming.

Targets if correction sets in is 170 and 160.

Action to take.
Sell ITC near to previous top. (207-202 area)
Can purchase again at 160-170.

Open Image in new window to ZOOM...

Thursday, April 20, 2006


Trade what U see….not what U believe.!

Successful traders think in probabilities.

U don’t have to know what the market is going to do to make money. In fact, U CANNOT
know what the market is going to do, so trying that would only interfere with your thinking in

The techniques you use should give you an edge, which is nothing more than a probability that the trade will go in my favor.

Take every clear trade setup according to my edges; this guarantees that the probabilities will work in my favor.

One is never right or wrong, because right and wrong on trade outcomes has absolutely nothing to do with successful trading which requires thinking in probabilities.

Trading edges are like a coin that is rigged to give heads more often than tails. Taking a trade setup is like flipping the coin. The concept of ‘right’ and ‘wrong’ do not apply to trading, anymore than it would apply to the rigged coin coming up tails.

Don’t try to predict outcomes. By taking every clear trade setup, I generate a sample size sufficient for the probabilities to work in my favor.

Do not seek ‘certainty’ on trade outcomes, because certainty does not exist in markets.

Always pre-define my risk prior to taking a trade. If a trade does not work, it’s history and patiently await the next trade setup.

Have profit objectives on every trade, but no beliefs as to what will happen next. If a trade does not go in my favor, I am no more concerned than a casino operator would be about losing a single hand of blackjack.

The market is your own personal casino. By taking all of ur clear trade setups, the casino is rigged in ur favor.

Every moment in the market is unique…anything can happen!

This are some of the ideas I discuss in EagleEye seminar. Visit here.

Friday, April 14, 2006

>Sensex target 14,400<->14,500 !!!

new update: sunday, april 16th 2006, 11:20 pm..

After doing some more carefull analysis over weekend I choose to cancel and with-draw this post.

Would post a different view sometime soon and it would have a more "negative" view.

I am sorry for this 14400 post and here is a promise to post more carefully in future and not to post in haste.


dear friends..

This is a semi serious post ... and directly conflicts with previous ones..

Next target for sensex is in the range of 14400 to 14500 .

The IDEA is that the indian mkt is a phase of serious extensions in the 5th wave up from 4600 area. The 5th wave which started from 4600 in sensex is already extended and the 5th of the 5th is super-extending. (pardon me for this ..!! :p )

Confirmatory trigger: The target gets more credence when sensex crosses 12000.
(Making new high in more style and more speed than the dump.)

Failure Scenario: Sensex under 10500 would mean this idea is wrong.
So we donot have to wait a lot to find out.

Time Frame to target: Max 4-6 months (mostly under 4 months)

AfterEffect: This super display of firepower would suck in even the last suckers (read MF's) and the dump which follows would feel equally more astonishing.

Donot get overly excited with this.
Donot Base your investments on this.
Treat this post just as an educative one.

Wednesday, April 12, 2006

>25 rules of investing in the stock market

The 25 rules of investing in the stock market

1. Bulls, bears make money, pigs get slaughtered.
2. It's OK to pay the taxes.
3. Don't buy all at once.
4. Buy damaged stocks, not damaged companies.
5. Diversify to control risk
6. Do your stock homework.
7. No one made a dime by panicking.
8. Buy best-of-breed companies.
9. Defend some stocks, not all.
10. Bad buys won't become takeovers.
11. Don't own too many names.
12. Cash is for winners.
13. No woulda, shoulda couldas.
14. Expect, don't fear corrections.
15. Don't forget bonds.
16. Never subsidize losers with winners.
17. Check hope at the door.
18. Be flexible.
19. When the chiefs retreat, so should you.
20. Giving up on value is a sin.
21. Be a TV critic.
22. Wait 30 days after preannouncements
23. Beware of Market hype.
24. Explain your picks.
25. There's always a bull market.

originally sent to Aiii group from Suneels.

Monday, April 10, 2006

>What are the 17 STEPS for Successful long term Trading??

There are a series of steps and important questions that any trader must address to work consistently and long term in the markets.
  1. Assess your beliefs about trading and about yourself. Although it’s difficult to grasp, did you know that nobody actually trades the market? Instead, you always trade your beliefs about the market
  2. Determine your objectives for trading. System experts know that understanding your objectives thoroughly is half the battle in developing a system but most people have never taken the time to even consider what their objectives might be.
  3. Understand the big picture. What’s the market doing overall and how can you measure it for yourself? It's important that you know how to determine the big picture for yourself and how to measure it.
  4. Include three strategies that are compatible with the big picture in your business plan. Although there are thousands of systems out there, there are not many types of strategies. Know the essence of ten key strategies that you could use, the general picture of how they work and how you can adapt them for yourself.
  5. Understand what your personal edges might be and how they set you off from the crowd. Having an edge in the markets isn’t just a slight advantage; it could be the pivotal difference in your success. So it’s very important to list your edges in your business plan and be able to capitalize on them. You need to know the key edges that almost any investor has over market makers or institutional investors. Or if you are a CTA, hedge fund, or portfolio manager, you need to know what your key edges might be.
  6. Understand the key systems that almost every business must understand and start to think about developing structures for those systems. From marketing to cash flow, to back office and clients, trading is a business and should be regarded as such. More importantly, developing the right structures and systems is crucial for business success. For example, if you are a private trader, you must deal with clients – even if those clients are you and your family.
  7. Select your trading market based upon two key factors. Learn what you need to know so that you can determine the following: Are you going to trade stocks? Are you going to trade futures? Are you going to trade mini-forex or real forex through the big banks? Are you going to do options on any of these? What market will you trade? Whatever you select must take into account the big picture and what is likely to happen in the next five to ten years.
  8. Develop a worst-case contingency plan. Most people don’t even consider this crucial component until it’s too late, but the key to a successful business plan is to be able to overcome disaster.
  9. Know about strategy preparation. There are several key sub steps that you should take before you think about trading. You need to know what you should do to get ready and how to follow up.
  10. Know the key steps in strategy development and how to test for each. You’ll need to understand how to test exit signals, determine what your initial risk will be, and select and test your profit taking exits.
  11. Properly evaluate your system. Know what information you’ll need to gather to really test and compare your system with any other system. It's good to have a formula that will allow you to compare your system with any other system in the world and rank that system. Thus, you’ll know whether your system is weak, average, good, excellent, or superb.
  12. Master a simple way to get to know your system well without a lot of cost. You need a method to understand if your back testing is accurate. And, to understand what the worst-case scenarios will be for your system. Through this testing, you’ll be able to develop a simple position sizing model to fit your objectives.
  13. Work on your objectives to actually develop position sizing models. This step is one of the keys to developing a system that fits you.
  14. Know how to do a complete self-assessment. A successful trader needs to know the answer to these questions: How does my personality type impact trading? What is the most important attitude that I must have as a trader and how can I assess if I have it? What are my beliefs and values and how can I assess them? How do I begin to assess my key issues so that I know what could happen that might really interfere with my trading?
  15. Commitment to do what it takes. There are many things you can do on a regular basis to really improve yourself. And if you have the commitment to really doing them, you’ll be unstoppable.
  16. How to develop a top down approach to discipline. Few traders have the kind of discipline needed for successful trading, but if you combine top-down discipline with regular self-work, you’ll be amazed at the difference in your trading.
  17. Put what you know into action. Learning and studying are very important factors in any endeavor, however the only true way to be successful as a trader is to take action. Getting in there and learning from your experiences.

Thursday, April 06, 2006

>NSE 06-04-2006

Earlier Target of 3400 was meet and exceeded.

Now in this post I only seek to guess what can come next and how one can trade it.
Remaining with trend is important now... even then more imp part is to remain safe.
This channels is what we would use as primary guiding light.

See the rest of DETAILS in Image.

((Open Image in new window and Zoom to see clear image))