While the stock market rewards in the long term, short-term fluctuations can be very frustrating. You do not want to lose all your chips at a point where you feel helpless, lose trust in the equities, and reach an extent of pulling out with big losses, never to come back again. For an active player investing in direct stocks, it is an incremental process over months and years where one needs to chalk out some strategy (even though none would be remotely perfect) and discipline and not get into a mode of trying out luck through random actions.
I chose to define a few goals and devise some strategies to align with them.
Goal 1 – Draw hard boundaries on equity exposure
Goal 2 – Stay in the game for long. Avoid abruptly exiting out of a stock fully.
Goal 3 – Avoid getting stuck at high price levels.
Goal 4 – Set reasonable expectations on profit booking.
Goal 5 – Minimize losses. Very obvious isn’t it ?! But this is way more important than maximizing profits.
The aspirations are very broad and there could be 100 different strategies that could work in one’s favor. By learning from mistakes (even “blunder” wouldn’t be an overstatement in some cases!) and iterating, I found balance in a few strategies that have worked well for my risk appetite and return expectations.
Investing within equity portfolio range
Let us assume you have 100 cash units (in whatever currency) demarcated to invest as part of your equity portfolio. How do you spread out the investment over time? I keep a 70-90 window for investment. This means I do not buy beyond 90% of marked investment cash, and neither do I sell enough to go below 70% of marked cash. I do all trades (buy/sell) to stay within this equity exposure window. How does that help?
a. It guides me not to panic sell. I stay invested in at least 70% of planned equity exposure.
b. It guides me not to follow the euphoria and jump over my equity diversification plan. I reign myself to 90% of planned equity exposure with the rest 10% as a buffer for any significantly high-opportunity buying ( it could be something like a good stock bouncing back from dirt cheap PE level )
The total equity investment limit (i.e. 100 cash units mentioned above as an example) can increase over time as you grow your wealth. So I can continue to increase my absolute equity portfolio while staying within 70%-90% for trading.
Downward averaging in 30 – 30 – 40 at support levels
Most of us at some point would have done downward averaging on stock price fall. In the past, I had executed bad choices and gone too soon too much. Support levels are key trailing indicators that gives near-term to mid-term pattern of stock price movements. The information is readily available on any financial website and you can check the Support levels for different time horizons.
Stock prices would generally tend to rebound near to support levels unless there is a bigger bearish pattern. I try to take buy positions near to 3 support levels in tranches of 30%, 30%, and 40% of my pre-determined total allocated amount for downward averaging. I do not go for a Daily view since I am not a short-term trader, but the choice of Weekly versus Monthly levels depends on whether you want to be more or less reactive in downward averaging.
Partial Exit through 25 – 25 at resistance levels
If you want to read about profit booking, I have an earlier post that talks about it in detail. One of the strategies I follow very diligently is not to exit a “healthy” stock fully. A healthy stock does not always mean that the valuations stay reasonable. When it tends to become irrational, or for any other reasons I mentioned in my detailed post, I take some exit positions in tranches. My 25 – 25 strategy means, I exit 25% of the stock at first resistance level R1. If the stock jumps to the next resistance level R2 within a short time, I take another 25% exit and stop.
Swing Trading
You may or may not have heard this term. It is a form of trading for a short-to-mid term (unlike intra-day trading) wherein you can rely on technical indicators to make your buy/sell trade calls. Some of those technical indicators could be Support/Resistance Fibonacci levels, RSI indicators, and likewise. There is enough literature to educate oneself on this. This strategy comes with its risk of course, but interestingly a lot of robust stocks exhibit range-based price patterns in the short to mid-term. I follow the strategy of focusing on Large to Midcap stocks to look for profit-taking opportunities.
Tranch Exits on strong bearish patterns
Since long back I have stopped being foolishly hopeful in the stock market. The chances of a stock going from 1000 to 0 are minuscule, but there is a chance! Daily traders use stop-loss strategies which is a must to cut their losses. What I follow is a similar stop-loss discipline but at an extended time duration.
Stocks could exhibit strong bearish patterns over an extended period which could run into months quite possibly. So like everyone I can always make wrong buy judgments, or the buy call was good at that point in history but there could be a turn of events that could make in a bad investment. Understanding bearish patterns such as price moves below 200 DMA is important to catch such signals and make exit decisions more objectively instead of being at extremes of panic selling at one end to holding a dead stock forever on the other end. Here is an example of a stock GLAND PHARMA which you can experiment and test out bearish patterns on.
My idea of exiting battered stocks is to start cutting losses in installments and take the losses on the chin.
Each of these above-mentioned thumb rules I follow helps me follow a process, instead of chasing price movements in short to midterm like a headless chicken! I go wrong many times, but if you scroll up and read the goals I set, it is not meant to be correct most of the time.
