The objective of these discussions is to identify how we can improve our chances of making profits in the stock market.
So far, we have discussed the following:
* If we trade randomly, our winning chances are less than 30%
* A biased (bent) coin can demonstrate the importance of using probability to win in the long run.
* Stock market is made up of 4 variables: shares, prices, volumes and time
Now, let's look at the variable - time.
Usual perception of most of us about time is something like; it always moves forward; it is not reversible; it goes in a straight line etc.
Does time ravel in a straight line always?
Can't we bend it?
If you monitor the stock market or shares over a period of time, you will see non of them (their prices or volumes) move in a straight line. There are always ups, downs sideways etc.
Suppose we knew exactly when a share would start moving up and exactly when it would stop moving.....
That is enough to make a living out of; isn't it?
Now, if you monitor them slowly and more closely, you might suspect, there could possible be a pattern to these movements, or there could be an external pattern of events affecting their movement.
Sounds too technical?
OK, let's make it easier;
There are two type of patterns in the market (with respect to time)
1. Irregular patterns
2. Regular patterns (or cyclic patterns)
I will take regular patterns or cycles to our discussion first. Let's look at 4 such possible cycles.
1. Time of the year cycle:
There are some shares (please note not all shares only some shares) goes through an annual cycle. For example; there could be shares drop in price during December and rise in price during January, or there could be shares with bottoms in April and peaks in September and so on.
2. Time of the Month.
Likewise, some shares (not all only some) may behave according to a monthly pattern.
For example, their prices may drop during the last week of the month and peak during the mid week etc.
3. Time of the week.
Similarly, we might identify some patterns within a week as well. There could exit shares which go up on Mondays and drop on Fridays etc.
4. Time of the day pattern.
Sometimes, we may see intra-day patterns as well. For example, may be some shares peak between 10~11 am and drop during 12.30~1.30 pm.
In addition to the above, we might see irregular patterns as well. For example, if there has been exceptional drought periods in the country, some of the plantation sector shares may have taken the same pattern of dry period and wet period.
Do I make any sense here?
To make things more significant, we can try combining some of these patterns together. Say, you have identified all 4 cyclic patterns of one share. Then you can wait for buying (in reverse, selling as well) your share until the right month comes and wait further until the right week comes and wait further until the right day comes and finally press the trigger at the right time.
Combination of multiple such cycles can create a powerful-enough standalone tool to bring you consistent profits. Believe me; there could exist some investors just do that and earn regular profits.
Anyway, let's not go into extremes. Let's just attribute a fair percentage of our winning probability to this (bent) nature of time. I would assign 10% to it. Fair enough?
[An additional word here: I am not an expert in identifying all such cycles in time. But there must be experts out there (even in this forum) mastered this subject matter. For example, there could be people who (follow some macroeconomic trends) can say what is the best time to enter (or exit) banking sector shares; there could be experts who can point out the perfect Month to buy (or sell) hotel sector shares. The objective of this discussion is to enable us to identify such patterns ourselves or take expert views with an understanding of their effect on our profit making probability. (time bending) EXPERTS, we want you to help us here!].
Earlier, our chance of winning was 30%.
Now, with making use of these 'bents' in time, our winning probability becomes 30%+10% = 40%.
But, still 40% is not good enough to make consistent profits.
Therefore, we need to move forward in our quest for more 'bent coins'.
If you find this discussion useful and there are no questions, we can take another 'variable' in to our discussion.
To be contd........