'Will the market go up soon?'
'Why has it come down?'
'Is this a crash?'
'Will these shares go up?'
'Should I hold these shares any longer?'
'Oooops I sold it too soon!'
'Sh*t I missed the low price to buy'
'I bought these, what should I do now?'
'Those manipulators robbed me!' ...........................
the list is endless.
The reason, as I figure out, for all these outcomes is, the trading related (psychological) stress; and associated trading mistakes.
In my case, I have been in all of those situations, more than anybody in the market:
But not anymore!!
To help anybody who wants to improve consistency in trading, I thought of sharing a technique which helped me to improve myself.
This is a very simple position sizing technique. Intended to bring the 'mentality' form novice stage to consistency. However, when used intelligently, it can be used as a stand alone trading plan to beat the market as well.
**** A word of caution: every method has its limitations as well as favorable conditions. So there is no 100% guarantee that this will work if used "blindly".
There are few "so called bad" practices in the market quite similar to what I am going to describe, such as;
Averaging Down/ Scaling out/ Market neutral trading, Non directional trading, martingale, Grid Trading etc.
But non of those are exactly matched this method so I called it by a new name; that is
Constant Average Position Value Method.
I will explain it through an example below.
The language may sound a little 'childish' since this will be done keeping a novice trader in mind; nevertheless, I am sure, some experts may also find things interesting.
Here we go........
The first step of 'Constant Average Position Value Method' is to find which stocks to invest in.
1. Screening and short listing:
You can decide to select any share you like. However, for better safety, I recommend selecting a corporate with a stable business; witch may not go busted within next couple of years.
For better performance, pay attention to counters which looks like to undergo some price fluctuations ( more that 20~30%) within next 3~4 months.
('Cause if price never moves, we will never make any gains. Isn't it obvious?)
OK. after selecting a share, we need to consider engaging (buying).
BTW. If you wish, you can use any fundamental analysis you like to select the stock.
2. Look for a signal to buy:
What I mean here is, deciding on a price at which to buy the shares. There is no hard and fast rules. The idea is to have an expectation that the price will appreciate by about 25% in near future (few months). If you like, you are free to use your favorite technical analysis methods here. If not, or if you are too excited, go ahead and buy now! : no price is too high to buy.
3. How much?
Now we have selected a share and decided at which price to buy. But how much should we buy? Now comes the most important part.
Before coming to this stage, you need to decide upon your 'risk capital' on one counter (stock). That means, how much you are ok to loose on one stock. In other words, let's say, today you buy this stock; then tomorrow you will hear that the company has closed and you would loose all you money invested in it: so how much would not make you uncomfortable?
Fine! now let's say you're ok to let go Rs 20k on this stock.
Then, at this stage use only 50% of that amount. That means use Rs 10k to buy shares at our decided price.
As an example; let's say your selected share's price is Rs 100. Then use Rs10k to buy 100 shares. Now, your 'position value' is Rs10k.
(Note: for the time being let's ignore the commissions and other overhead charges).
Now we have bought shares; what next?
4. Leg jump.
In this method, we need to decide on a leg size. That means how much the share price should move before we take the next action.
Let's consider a 25% leg size.
So we will wait until the price moves a 25%; Up or Down.
If the price moves 25% up before it hits a down leg, and if your target is a 25% overall gain, then you're free to sell the whole quantity and enjoy; and look for the next stock.
But, Let's imagine the market moves down and the price goes down 25%.
Then, you will invest 25% more so that the position value again becomes your original value of Rs10k.
In other words, if the new price is Rs80, you will buy 25 more shares so that your new position value is Rs 80*(100+25) = Rs 10k.
Then, if the price moves down again 25%, you invest 25% more.
On the other hand, If the price goes up by 25%, you sell 25% of shares, which will be your PROFIT!
So do like that whenever there is a 25% price movement; UP or DOWN!
And enjoy your stress free trading!!
Constant Position Value:
Essentially, at the end of each 25% price movement, you either buy or sell a portion of shares and make the value of the remaining lot a constant.
There is no panic since we are ok with the market to move up or down. There is no regret since we always have enough shares in our position for 'another more' 25% profit.
We do not care what our original buying price was since we always use our last 'action price' as our new reference price.
In this method, if we use 25% leg size, 4 swings will give us a 25% of overall profit (out of our first investment).
as I have observed, if we select the right shares, we can gain about 20~40% within a year.
You are free to select any leg size to match your taste. Higher the leg size lower the number of swings needed but longer the time to wait.
After all, the main point here is not the profits, but learning to eliminate trading stresses and funny mistakes.
Pls tell me about your views ; I like to learn any alternative ideas.
Last edited by hunter on Mon Nov 18, 2013 10:45 am; edited 2 times in total