Trading with probability.

Aashish writes:
“…..you project both sides of the coin and leave it to the readers to take a responsible call! . On the downside, newbies like me who cant make out wrong from right, are left confused 😛 like in this case, I would feel worse in either case, if I sell and market shoots up or if I sell nothing and market crashes :-P”

This is a fair point. Thanks to a holiday tomorrow, and a rather relaxed evening, I am free to discuss this.
There are no straight forward answers in the market. I think all young persons need to understand this. The Stock market (and futures markets) must be the only area where 2+ 2 is not equal to 4. Sometimes it is equal to 1, sometimes 22 and each time the answer changes.
You succeed in the market when you understand that the market movements are unpredictable. Traders attempt to identify the broad moves of the market. They adapt themselves to market movements. The market does not change acording to the trader’s wishes.
Specifically, the Nifty should move up after a trading range breakout. Now, the other side is that it has moved up 30% almost non-stop. Then, there is risk and a potential reward. Now, you have to balance the risk, the reward and your own attitude towards risk and reward. if you buy now and the market falls, what should you do ? if you do not buy and the market goes up, then you go through regret. The answer is: understand this nature of the markets. Then, plan your trades. Finally, accept the outcome. Sometimes it will be favorable, sometimes it will not be so.

First Signs of Exhaustion

Strategist Teun Draaisma (from Morgan Stanley) is telling clients to take advantage of the recent rally to SELL.
Draasima says none of the signposts which will call an end to this downturn – US housing, banks’ balance sheets and corporate earnings – are flashing green. In fact the fundamentals are not turning at all, says the Morgan Stanley man.
So, where are the markets, now ?
Teun says “We are currently in one of those classical 20%+ bear market rallies on the hopes of successful policy action. For instance, in the US between 1930 and 1932, there were five 20%+ such rallies (up to 35%) lasting 35 days on average.”

Now, I am writing this at 8:40 Pm when I know that the Dow is down 104 points. So, I have the benefit of some hindsight. But, to be fair to me, this view was formulated at 5 PM today when I wrote our daily newsletter to clients. I said, “A technically driven market instead of a bull market.” Again, I wrote “Should we become cautious at the current juncture ? The answer seems to be: yes for Traders!”
How do you become cautious ? By not taking new positions on breakouts. Buy only on dips. Then, keep tight stop losses.

Kevin Lane is one of the founding partners of Fusion Analytics, says: From a trading perspective the best way to play this market, (especially for those investors who bought aggressively a few weeks) is to place tight trailing stops (such as a penetration of the 5 or 10 day simple moving average) on your positions and letting the stocks weakness take you out at a profit rather than trying to sell at the exact right market resistance level.
Based on his thoughts, I have formulated a view on the Nifty: An alternative could be selling ½ of your profitable holdings @ 3400 (with trailing stops on the balance). A final alternative could be selling everything if the market gets to 3700 (or if it gets above 3400 but fails to stay there and then trades back below 3400). If you make strategic sales there will be a chance to buy stocks again, the question is will it be lower or higher than here ? The jury is still out. The question one has to ask is will I feel worse if I sell nothing and the market pulls back or would I feel worse if I make some profitable sales and the market goes higher after I sell. Depending on how you answer those questions will go a long way as to determining your strategy.