Problems with Short Term Trading Strategies: Finance Trading Times

Problems with Short Term Trading Strategies

This is part 2 of the article: Short Term Trading Strategies: Possbile Options. Please read the first part before continuing with this one.

The market is at 6000 level when I started trading. The first question I need to ask myself is, Out of 100,000 as initial capital, How much should I place on my first trade? I have options:

1) I can put entire 100,000 at 6000 levels of the market. But what will I do if the market falls to 4500 within 3 days? All I’m left with is my 100,000 translating into 75,000 and no further capital left with me to play around. A clear loss of 25% and no money to play around with any further. My strategy of monthly trading and getting 1% per month has failed miserably. I don’t know how many more months it may take for me to even recover my capital.

2) In the above case, I can do one thing as well. Book my losses, get back my 75,000 and start afresh. However, my target will now increase substantially. I need to reach 112,000 from 75,000. This becomes a 49.34% or almost 50% increase in the annual target or 4.2% per month. Compare it to the initial monthly target of 1% - it has quadrupled now. More so, is it really easy to achieve 4%+ monthly profits on your entire capital?

3) Other option is that I can place partial bets – say the first bet can be of only 10,000 and I keep my remaining 90,000 safe. Say instead of just 1%, my buy stock went up 4% in a month and I book my profits. Cool and easy 4% profit. However, this 4% is only on 10,000 not on entire 100,000. On the entire capital, you’ve earned only 0.4%. Annualize it, and it becomes only 4.8%. Even with a 4% monthly profit, that too consistently month after month, did you achieve the target of 12%? No, it’s way short of 12% by 7.2%

4) More options: Increase the bet amount. Come up with an increasing capital investment strategy. But are you sure how much you should bet each time? Whether you should book your monthly profits or should you let you profits run? If booking monthly profits, should you select another stock? If letting your profits run, how much should they go to?

Ultimately, you will see that you are left far behind in this complex market mechanism and stock trading circus. There is no such scheme which can give you consistent returns even of 0.5% each month, year on year in the stock market.

Need proof? Approach a Mutual Fund Manager and tell him that you want him to manage your 1 million dollars which should be invested only in the stock market (not in bank or bonds) and you need a sure shot monthly returns of 1% (12% annually). No fund manager would guarantee that for you.
Relax him a bit further. Tell him that he is free to play around with any stocks (including penny stocks), futures, options other derivatives. Can he still guarantee anything?

Need More proof? Approach your broker offering discretionary services. Ask him the same question giving him full liberty. Is he willing to do it for you?

The fact is that it is not easy to make money consistently in the market – however small your target is. There is a huge level of uncertainty, whether you aim for 1% profit per month or 12% profit per annum. Only long term investment can help, that too with your luck. You never know when you will need money; you never know when you may get completely wiped out. Happy and safe Investing!!!
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4 Comments: Post your Comments

Simon Ducknell said...(on 25 January 2008 at 01:22 )  

Dear Mr. Shobhit,
My name is Simon Ducknell and I am based in New York. I was introduced to your site through one of my Indian friends & I am following your bloposts regularly. I have observed that you write really excellent articles.
Will it be possible for you to please cover the US markets and the different mutual funds and other financial instruments that are traded in US?

I am with you on the point that you have a India centric website. But I was just wondering if occassionally you can touch upon the US markets as well, probably an article every 2nd or 3rd day? There is so much happenings in the US stock market.

I regularly try to express my gratitude towards the knowledge you are imparting to us by regularly clicking on ads on this site. You have removed the "Buy a Coffee" link, else I would be more than happy to donate towards your site.

Please keep up the good work.

Cheers,
Simon

Andy K said...(on 25 January 2008 at 05:15 )  

Hi Shobhit,
as you rightly said in previous article, i managed to put my cash in the market now waiting for overall portfolio to come up in green. :)

Yes. it's true that it's not easy to make 3% consistently in the market, but whenever you see you are in profit more than what you want..then just quit. this strategy might help.

Anyways, year 2007 was a great learning for me. as I am preparing my tax papers i can see that i managed to get only 15% (Though i manged to beat the bank returns, i fell short of 36% as i decided) overall on my average capital amount of 400k (there was less capital in the beginning of 2007, later increased)
whatever we learn we have to implement immediately. Hope 2008 we will manage to do as per our expectations..

Thanks Again
Andy

Anonymous said...(on 26 January 2008 at 00:38 )  

Great & Informative article. No wonder the author has generated so much of fan following.
There is one shortcoming however in the entire blog, that, baring investment in Index fund/ Exchange traded funds, the author has so far not yet disclosed investment strategies for short/long term investors.

Anonymous said...(on 31 January 2008 at 04:20 )  

hi
u r correct buddy, its not easy to get 3 percent return per month in indian stock market, but i am doing it consitently from last 7 months (except january 08). the trader has to be active, on the toes and keep focussed. i missed my target in Jan(everyone here knows why), but sure to do it in february. thats how the life is...keep active, keep cautious.

Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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