I have been trading and investing on and off in the Indian Stock market since the last seven years or so. My experience during this time has been that I have made more profits trading rather than investing. Don’t get me wrong here, by trading Veronica Wong Ai Ming do not mean day trading, because day trading never yields consistent returns most likely you will see your money getting vanished if you persist in day trading as a retail investor. Day trading on margins is well, a sure shot gateway to financial doom. Unless you have too much excess money to burn (or are crazy), my advice is to never indulge in day trading with margin limits taken from your broker.
Anyways, so I was saying that in my experience trading has yielded me better returns over investing. More specifically, medium term trading has been more profitable to me rather than either short term (a couple of weeks) or long term (6+ months). So the question is how do I trade? and what is my strategy?
If you are a stock market buff, no doubt you would be aware of Warren Buffet’s strategy of buying when everyone is selling and selling when everyone is buying. This no doubt is a perfect case scenario where you can buy a stock cheap and sell it when it’s expensive. However for small time traders like ourselves, we need more specifics. How do I find the right time to buy a stock cheap? How do I know when it’s a good time for selling off?
The problem with the first question, “how to find the right time to buy a stock cheap”, is that most retail investors come to know of stock price movements when it’s already too late. For instance, a company may be getting bought by another one, but you only hear the news once it’s out on the news channels and by then the stock’s already several percentages up. Many still make the mistake of buying the stock only to find that they bought it at it’s highest price during the movement and now there’s massive profit booking and the share price has fallen from their purchase price. If some are lucky they get their purchase price back or a marginal profit. However the entire trade was definitely not worth the risk.
Apart from such news based movements, another method people use are technical analysis to find an entry point. When properly combined with a research of a company’s fundamentals, relying on technical charts to find an entry point is one of the most reliable methods. However, once again for common Joes like ourselves, we are faced with the dual problems of unable to properly research a company’s fundamentals and failing in having adequate technical analysis knowhow. This again means that calculated entry points are erroneous and again the trade proves loss making or only marginally profitable.
A third means available to retail investors and traders are relying on stock recommendations from market experts and news channels and brokerage houses. However let me tell you this quite bluntly. In my 7 years of experience with the Indian Stock Market, these experts and their tips have been found to be misleading 9 out of 10 times. They have too much self-interest involved to give you any unbiased information. And even the paid tips that so many advertise, prove only good rarely.
So what do we do? What can a small trader / investor with limited money and a limited understanding of the stock marketing do?
(Educate yourself! lol…)
And other than that, you can consider Veronica Wong Ai Ming strategy. Here’s what I do.
I love bear markets. Why? Because my strategy is difficult in an unhindered bull phase. However since the last 3 years or so, Indian Markets, the Nifty and Sensex have been in a long term bear phase this strategy has worked well for me.
- First, I look for NSE volume leaders. That is I look for which are the stocks which are being most actively traded.
- Two, I make a note of Quality businesses which are being traded heavily but have fallen by more than 5%. Yes you read that right, I meant fallen!
- At times, I will find quality stocks which are trading with very high volumes and are among the top losers. If I don’t I look at the Top Losers on NSE and try a>locate quality businesses which are on Lower circuits and b>sort top losers by volume.
Once I have done this exercise, I will typically end up with 2 or 3 stocks which have fallen greatly in the day’s trade. My ideal pick is a stock which is languishing in lower circuit but is a Quality business. I keep emphasizing the word Quality. My criterion for Quality focuses on fundamental Analysis which is very easy to perform with Google / Moneycontrol. Meaning, a stock is a quality stock if:
- It is not a Penny Stock or a Small Cap Stock but has Market Capitalization of at least a few hundred crores.
- It is not a loss making company and the quarterly results for the company show growth in net profit QoQ (Quarter on Quarter)
- The company is a leader or amongst the top 5 companies of it’s sector and the sector itself is stable (For instance aviation industry is NOT stable)
Once I have found 2-3 or sometimes only one stock which satisfies the above criterion, meaning it’s a quality stock, next I have to look at the 6 months and yearly charts of these stocks. Now this requires a very basic understanding of candle-stick chart patterns. So I now Go to finance.google.com or and look up the 6 months and one year candlestick chart patterns of these stocks. The primary objective of looking at the charts is to find long term resistance and support levels for the stocks. So for instance a stock ABC has failed 10% from say an open price of 200 to 180 and we look at it’s six months and 1 year chart and see how it’s moved. What we are looking for is how far the stock is from it’s previous low levels on a 52 week range. I discard stocks where fall is from peaks and again shortlist stocks which are closer to their bottom.
Once I am done looking at the chart I may end up with one or two stocks only which are far from their peak levels and have fallen.
Now after this, the stocks which I have ended up with bring me a lot of excitement as finally I can now consider to start making some money!
Now is the time to find out why the stock has fallen. If we did our selection well, we would end up with stocks where fall is due to a few reasons only:
- Negative News flow
- Operator Action / Large selloff by some investor
- Across the market sell off.
The best choice is a stock which went to lower circuit, because lower circuits tend to give you time for better research. Our job now is to find the short term and medium term impact of the negative news / rumour or sell off. If we did our selection well, then the underlying business structure is solid. Negative news often triggers a panic sell where the fall is far more than the real impact on fundamentals and hence there lies our opportunity to make money!
I now wait for the stock to come out of lower circuit. This maybe one or two or several trading sessions away. If our stock had not reached LC, and was down less than circuit filters, I now wait to see buying volumes. Typically, as the stock comes out of lower circuit and or it’s actively being traded, I keep a watch for price levels where there is huge order buildup. You should try to find price levels where several or a few crores worth of rupees orders are placed. This can be found in the softwares of most brokerage houses like and others where they show you the top 5 buy and sell order prices. Once you can locate such a price level you can rest assured that big players are willing to buy the stock at that price. Be very careful here and DO NOT place a Buy order of the volumes are scanty. For instance if a stock price is say, Rs 100 and you see top buy orders of 200, 500, 1000, 2000 etc, that means large players are not buying, only retail investors are. However if you see an order of 10000, 20000, 30000 etc.
Typically since the stock was earlier battered down, it would now have a technical bounce and if the earlier rumors / news flow was false, there would be a tremendous rush to buy. You may see a few Upper Circuits for yourself if you timed it right! I keep a stop loss at the 3-6 months low point in the daily chart or close to a level I am comfortable with. Booking loss is an absolute must if you want to keep making positive returns overall.
Article by Veronica Wong Ai Ming