Hi readers,
How many times has it happened that you ‘found’ a great stock to buy….
Placed an order and got into it…..
And the stock went down L L L
And as we all have a general tendency to console ourselves that I can’t be wong, you averaged out the way down……
And the stock fell further….. L L L
(If it has not happened to you, I have seen many who have experienced this situation)
I was just reading this book by John Boik wherein he analysed how great stock traders of all times like Jesse Livermore, Gerald Leob. etc traded, their strategies and the discipline with which they managed their money.
Found something very helpful and would like to share it with you.
One of the greatest used strategies used by them Probing and Pyramiding.
Lets understand this strategy:
Probing involves inspecting whether your view on the script is indeed genuine.
Lets say I feels that script X of Rs.100 is going to go up 10% over the next 10 days.
And I have the capacity to invest 10000.
So ideally 100 shares J
Now by probing I decide to buy in lots.
I place a first lot of 20 shares (with my predetermined stoploss limit of course)
There are 2 possibilities > Stock moves my way, stock moves opposite
If the stock moves the opposite way, I bear the loss on 20 shares.
If the stock moves MY way, I place an order of 30 more (this 30 is just an example)
Here I am confirming/probing/inspecting that my trend is correctly observed by me.
For every rise in the stock price, I add till my 100 share limit comes.
This forms like a pyramid.
The advantage of this strategy is that when one’s view is not correct one loses out only on the 20 initial shares instead of losing out on all 100.
The disadvantage is that potential profits tend to decrease when compared to going in full on.
But if one is to trade by taking less risks, these strategy can work wonderfully.
Happy trading
- Taken from “Lessons from the greatest stock traders of all the time” – John Boik.
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