How many of those assumptions are correct, that is proven only when they feel the jitters in the market – not the usual 1% to 3% intraday rise or fall, but massive fallout of say 10% or more.
It’s easy to say that “My observation has been that markets go up or down -1% to 2% everyday, so I’ll try and bet to capitalize on this range. I’ll attempt to buy at the -1% lowest range and attempt to sell at +2% highest ranges. In the process, I’ll make 3% or so profit.”
The assumption looks good and is true also, as long as you can see the historical values of stock prices. However, it is NOT practical and becomes impossible to achieve when you start trading. The reason is that an intraday trader simply has no idea what is the -1% bottom price or what is the +2% upper price. Whether the stock will keep going down today or will it keep going up. More so, they don’t have any idea whether the bottom -1% price will be hit first or the top +2% price will be hit first. So whether they should first short and then go long or they should go long and then short – nothing is certain.
Another thing is that everyone in this world can observe this kind of price range on intraday basis on historical data. Markets are efficient. If it was so easy to follow this well observed price range, then everyone could easily make to 2%-3% profit on intraday basis and become billionaire within no time. Hundreds of books have been written, so many people run websites, so many blogs are now contributed towards short term trading, yet no body is there to guarantee anything.
Now, many other practical-lish assumptions are made. For example, Andy may like to go after the annual bank rate by following the 0.84% net profit per month from his trading activities. Overall, on annual basis, he attempts to make around 10%-11%, slightly higher than the bank rate. The question is, is it possible to achieve that?
Fortunately (or unfortunately), a lot of examples and lessons can be learnt from the recent mayhem that have hit in the Indian stock markets in the last few days. One such important lesson is about withstanding the sudden downfall in the markets.
Let’s take an example. I have a strategy that I want to make 12% per annum from stock trading business. So, if I can make even 1% per month, I can easily beat the bank rate of 10% by 2%. It is easy to make 1% in the stock market in a month, so I don’t see any problems with the strategy. Hence I start with 100,000 capital and at the end of the year I would like to see it translating into 112,000. I made my assumptions and started betting in the market on a monthly basis.
Continue to Part 2: Problems with Short Term Trading Strategies
No comments:
Post a Comment