Riding The Short Term Wave: Methods & Strategy

A falling stock market is never good news for anyone: the economy, consumers and worst of all Traders. The current situation is horrible for everyone who has put their money into the stock markets and it is unlikely that as good as an investor one is, he or she would have been unable to make a profit. Things are looking good for the Long Term Investor with a keen eye to buy shares of good companies which are trading at ridiculously low prices. However for the short term trader things have reached nightmarish levels. A good strategy for him to follow would be to mimic the actions of a surfer and ride the waves.

A Trader is generally a person who ‘plays’ the market on a daily basis. His general modus operandi is to:

a.)Buy the shares of a company at a particular time of day when its prices are low, wait for it to go up and then sell it the same day at a higher price thus making a profit which he will then reinvest the next day into the market to pursue the same goal.

Or

b.)Borrow shares instead of buying them from someone and pay ‘rent’ as a borrowing fee. He will then sell these shares when their prices reach a high during the day. With the money he gains from the sale of these shares, he waits for the price of the company shares he just sold to fall at which time he buys them back and returns it to the person or agency he borrowed it from. He is therefore left with a profit which he keeps. This tactic is also referred to as ‘shorting’ or ‘short –selling’.

The problem for the trader during this period is the amount of risk he assumes. For a short seller, if the price of a stock goes up instead of down, then he would have made a loss and depending on how much he paid to buy shares, his loss is either big or small.

For a trader on the Sensex, life has been difficult for the past few weeks. The Indian markets are integrated as never before with the global economy and despite liquidity present within our financial system the Sensex is falling.

Therefore, here are a few strategies for the short term trader:

·         Firstly, be prepared to accept smaller profit margins. The Sensex is seeing massive sell-offs by FII’s as a result of which money is going out of the market instead of into it. Very few people are buying shares, therefore whether you buy or sell your profits will be low and your risk will be high.

·         As a trader it is critical to identify a few ‘Safe Haven’ stocks. In this market it’s not fully possible to do that but have a few shares of companies whose history you have tracked and you know well like Infosys, Reliance ,etc. which you can sell at profits to offset your losses.

·         Be a surfer, ride the rallies. Even in this market there are times which are very brief when people start buying, at this time seize your chance as in the case of (a) or (b) above. For eg: In Today’s Sensex chart there were times when the market reached lows, those who sold at that time lost money as compared to those who waited for a few more hours and sold then for a profit.

·         Be open to prolonging your trades over a 1 or 2 week period instead of doing it on a daily basis.