Wednesday, August 11, 2010

More lessons

There are some fundamental mistakes I have been making and not putting much waitage

1. Preservation of capital
2. Dealing with leverage
3. Buy and sell options with regard to situations 1 and 2

It is of unlimited importance that when a portfolio of say 5k and a 5k leverage is available, then when investing in a stock with 8k say a certain price x, it is important that when one is highly leveraged,
one should never hold even a cent lower than price X, although one is confident of future rise in price.

One should be in a high leveraged stake one should be very confident of the situation and should get profit right away. If one is not certain about the trades upside one should not be in a high leverage situation. One should be in 1 to 2k investment risk situation.

When under high leverage even a 5 % loss on the original capital is a huge loss and one tends to hold the asset to recover the loss and there could be even greater changes of losses incurring.

Thats what happened with VXX which i bought at high leverage then it slided from buy price 25.5 to 21.5. If I sold the stock at 25.5 and then got into it at a lower price I could have made more money.
Hold on a price below buy price is not a good trading practice on high leverage situation. This is mistake NO 1.

2. Mistake NO 2 was dealing with IDT. The concept of RS, relative strength compared to the market indicators should be taken into consideration which determining buy or sell decisions. IDT had a good volume pushing the price upward even when the market was sliding down, then it was rocketing above 30 day MA. The problem was it was far apart from the 30 day MA base line. One tends to get confused in case there is a sudden sell off. But the high volume was a good indicator that there were people holding the stock, unlike pure gambling.
If not a high leverage atleast some money could have been invested in this stock. Another mistake was that if the stock is moving far apart from the 30 day MA one has to draw another base line touching all the down points of the IDT curve. This new base line needs to be used as the new base line for sell considerations. 

I completely forgot about this concept from the book Profiting in bull and bear markets. Now I understand better in experience.

Companies like VRX that have shown good RS have actually stood study in the turmoil. Even IDT has done will in the market down situation.

If one is buying one has to buy stock that are showing good RS and above 30 day MA. 
If one is shorting one has to short stock that are showing worst RS and below the 30 day MA. 

Preservation of capital should be the number one priority in trading. Otherwise any kind of knowledge is of no use, when one does not have money when one needs most. Never take a loss on high leverage. 

If one buys above the 30 day average and the stock is gliding on the 30 day average, one can buy on the dip in the curve on the 30 day average. Thats a good buy situation but even then not on high leverage. With  a small quantity one can take a  loss of may be 5-8 percent and see the stock move up on the 30 day average. But not when on high leverage. What ever the situation. 

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