Riding a Trend.

As the Nifty continues to make gains, the up move has been restored after a decent correction. The trading theme is simple: look for strong stocks, thn buy on dips.

One risk in the buy on dips scenario is the stock that does not dip. Many stocks will take some rest, then move up. Most of such stocks are within reach of the trader, because the period of rest actually repersents a dip. A consolidation can be taken as a dip and a move out of the consolidation represents a buying opportunity.

Some stocks will nethier dip or go into a consolidation. A sudden up thrust will see them rallying towards higher prices. We can think of such moves as V shaped reversals. How do you catch such reversals? The answer is : you do not. There is very little sign that the stock price is likely to move. In such stocks, it is more a question of luck, or being in the right place at the right time.

Losing by Buying

For market participants, it is possible to lose in an up move, even if you buy. There can be many reasons for this:

1. Wrong stock. The weakest stock was selected for buying since ‘this one should move now’.

2. Greed. As the market moves up, the trader refuses to sell, expecting higher and higher gains,  Usually, such stocks are carried forward to the next bull market, not always finding their original levels.

3. Fear. The impatient trader who is not in the market sees prices going up, while the expected dip does not come. At some point she says “this time it is different. there will be no correction”. She enters the market to buy, usually at the highest prices of the move. Such traders will often liquidate at the lows of the inevitable correction.

4. Not doing your home work. This could be repharsed as “Listening to analysts without applying your mind on the above three points”. ( Easy on this one. It is written in a light vein!).  But, you have to do your own analysis. TV can provide you with ideas. If you use these ideas as trading signals, then you are going to be in trouble, the only question is: when.

There is an underlying theme here. All of these errors can be managed provided the volume involved are small (small in relation to the trader’s capacity).