Get the basics of price behaviour right

A trader or investor is often confused at the time of stock selection and at the price which he needs to enter or exit from a stock. To derive the conclusion trader often uses too many tools in technical analysis.

In the analytical process the trader uses tools like moving averages, Fibonacci theory, parabolic sar (stop and reverse) etc. All technical tools are derivatives of price and they are indicators.

In the process of studying various tools he forgets the basic factor of price behaviour. Understanding of price behaviour is the most important study to be done by the investor.

It is a well-known fact that excess of anything is bad. Trying to use too many tools makes a subject more complex. One can try to master or be proficient in few trading tools rather than trying to study too many tools or indicators.

Disciplined trading system ensures steady profits. Every trader has a different approach to trading. What works for one may not work for another. It is better to stick to a trading system befitting the psychology of a trader.

Every trader faces a situation when the stock he holds keeps falling while other stocks are rising. One often feels when a stock is purchased it starts declining and when we exit from the stock it starts rising.

Sometimes this happens because of over ownership. This simply means that the stock has been purchased by almost everyone and so there is not much movement in the stock.

So, if you want to invest in a stock, invest in a stock which is rising and exit from the stock whose price is falling. Never trade in a stock because it is cheap as it may fall further.

Human psychology compels the trader to exit from profit earning stocks and cling onto stocks which are in a loss. We hold stocks in which there is a loss because we tend to believe that it will increase at any point of time and which does not really happen, and the losses keep on mounting.

Human psychology forces us to enjoy the profits and postpone the pain of loss. By postponing the pain of loss just keeps increasing.

To conclude one needs to be patient while trading and active while investing. Time frame of investment also is very important.

One needs to assess the portfolio on a regular basis and then one should reshuffle the portfolio as and when required by making relevant market study. One should always trade only when you are confident and proficient in the subject.

(The author is a homemaker who dabbles in stock market investments in free time)