Thursday, 23 June 2016

The consequence of stock market speculation

I have transacted more than 30 times last month, the highest in my history.

It all started with MISC, when it dropped 13% per day despite a good quarter report. I saw an opportunity coming the next day of the plunge: a chance of rebound. MISC has fundamentals. The daily chart is out of BB lower band. These two features satisfy my rules to catch a rebound. The feeling of securing a return of 20% intraday is so good.

MISC plunge

For a long time I have not earned like this in a single day. My next unconscious reaction is to continue speculation. I started to buy in stocks without even looking at the fundamentals and technical chart. KANGER and LSTEEL, just to name a few. I did not have solid grounds like I bought MISC call warrants. I just thought that luck will be on my side, and I can continue winning just like that. But once again, how unbelievably, I vomit out all earnings.

Only then I realised that the more I trade, the more I lose. 
Only then I realised that winning is the beginning of losing.
Only then I realised that my thought of playing stocks has ended up getting played by stocks.

After all, my best strategy is to hold for a few months. In the mean time, wait patiently for any opportunity of "fast money". If this kind of opportunity comes every week or fortnight, it is probably good enough to generate a considerable extra income.

Thursday, 2 June 2016

The technique of average down

Say if I buy a stock today at RM 1.00. Unfortunately the share price drops to RM 0.90 a few days later. I decided to purchase additional units of the stock. Say if I purchased the same quantity as the other day, then my average entry price is RM 0.95. In this case, I do not have to wait until the share goes back to RM 1.00 to break even, RM 0.95 is enough.

The idea of average down is simple. It sounds nice, as if averaging down will be easier to break even or even making profit. However, from my experience, average down has mostly resulted in horrendous outcome. I lost even more, let alone trying to break even.

Firstly, if a share drops 5-10% in a short time after buying, it means that I did not wait long enough to buy at a lower price. This implies that I made an impulsive decision to jump in. An impulsive decision is usually an emotional one. Stock market cannot allow emotional decision. This reason alone is good enough to lose money.

Secondly, my attitude of averaging down is horribly wrong. I admit that I carries a sense of gamble (a legacy?) when average down, longing that the more I average down, the easier it will to break even. Additionally, the action inevitably accompanies a feeling of vengeance. This emotional state itself is negative in nature. Negative emotion always resulted in negative outcome. And the market has never failed to give me a lesson on this.

Thirdly, and technically, it may be that the stock is in the down trend. If the share keeps on dropping, cut loss might be a wiser choice than average down.

Interestingly, on the other hand, if the share goes up shortly after I buy, "average up" usually brings even more return. Maybe earning money shortly after buying is a sign that the purchase is a good decision. Nevertheless, the psychological barrier to buy the stock at a higher price is much stronger than average down. This is human nature: if I can buy an item at RM 1.00 today, why would I pay for RM 1.10 in the next week? But my experience proves that this is a better way. So overcoming the psychological barrier to "average up" is an important way to make more money? Yes, I believe so.