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Short Selling - The need & the mechanism

by Admin 6. September 2016 04:27

 A fundamentally sound stock continues to rise as more and more people invest into it. Then the ascent is stalled temporarily as some start booking profits. The stock price comes down slightly as happens. Then suddenly the price of the stock begins to rise once again, and the stock has another big rally. This process repeatedly continues as the stock stalls temporarily and then moves on to another great rally. This is most common for a stock which is fundamentally promising and the market keeps bestowing it's faith into the stock.

But not all stocks are fundamentally sound, and not all companies and sectors grow at the same rate and proportion. What happens to a fundamentally weak stock? They keep making highs only to tank down. The upward move is stopped short, and the downward move seems never to stop.

The most common terms used in the markets to define investor categories are the bulls and the bears. The bulls are the driving forces behind a stock ascent and the bears are the driving forces behind the descent of a stock. In other words, the price of a stock continues to rise if the bulls are in control and continues to fall when the bears take over.

Stocks continue to rally so long as the bulls see a potential in it and once the stock stops exhibiting any further potential, the bulls begin to book profits. The bears take this opportunity to start selling the stock with the bulls and this added selling pressure forces the stock to crumble and the price starts dropping drastically. The bulls are out of the race and defeated and the bears take control of the stock making it drop further and further.

But how do the bears sell the stock when they haven't bought it first? And if they had bought it at lower level to sell it would they not be classified as the bulls who were booking profits?

The concept of short selling is very perplexing to many and requires some understanding. When an investor sells a stock without actually owning it, the mechanism is termed as short selling. The investor simply takes a position with his broker to sell the stock high only to buy it at a lower price later. In other words, he is borrowing the stock from his broker and selling it at a higher price only to buy it when the price comes down and settles the difference with his broker. When the price comes down, the investor buys the shares from the market at that lower price and returns it to the broker thus keeping the profit and allowing the broker to own the stock at that low price. If the price does not come down and rises beyond his selling price, the investor then buys the stock
at the higher price and after settling the loss, returns the stock to his broker at the original sell price. It is a win-win situation for the broker as besides earning huge commissions, he has the advantage of getting the stock at a lower price at a profit or higher price at his cost.

After the introduction of the derivatives segment into the markets, short selling has become a common practice with traders and investors. It allows them to take a position either long or short and take advantage of price movements in both the directions of the market.

The opposing forces of the bears and bulls keep the market in constant motion and allows a certain level of balance to prevail. If there were no short selling, the bulls would constantly dominate and when they finally did decide to book profits the damage done to the stock and the market as a whole would be far more devastating.

Many consider short selling as an evil which destroys the value of investments. But from the above, it becomes very clear how important short selling is. An evil it may be, but an extremely necessary one. It allows democracy to prevail the markets at all times and coherently dismisses any anarchy that might shape up and destroy the very fabric of the market.

Copyright : Pathfinders Trainings / 9022330009

Intraday Trading Method - 190% Profit In Three Months

by Admin 18. November 2015 20:48

 Most people think intraday trading in futures and options is very risky and a sure shot way to lose money - damn right !!

The key word is risk. Most people equate the word risk with loss which is not correct. Risk means uncertainty and in the markets - uncertainty of profits and losses. Most people think that they trade a technique or method for intraday trading but the fact is you trade your own biases, fear and greed. The market is neutral, driven by demand and supply. You have either been trained to trade or you are a novice. Both are driven by greed and hope to be right. This desire to be right causes most of the big losses in intraday trading. In fact with all your technical and fundamental analysis the only thing you get is a probability and you have to trade that probability.

For example you are trained in technical analysis and the price on daily chart closes above the bollinger band in a distribution zone and the last candle is a doji. You immediately have a selling bias that triggers in your mind and you have an urge to buy a put or short a future. Greed replaces fear and loss becomes invisible. You take the trade and are sure that the price will go down as soon as the market opens. The price starts going down. You are euphoric as you have been proved right. A great ego boost. The screen is showing 10k profits in just  30 min and 20k starts showing in your mind's eye. Greed in not allowing you to book profit and emotions have taken over the logic. Then, without warning, the price does a U turn and starts to go up and your finger freezes. You should get out and you can't. Have you experienced this. Then your 10k profit in front of your eyes turns into 10k loss. Now your greed turns into fear and loss increases to 15k. Now you have hope. Then the candle shape turns into an inverted hammer and you remember it as a reversal candle. Price starts going down you are again greedy, then it goes up and you are again scared. The roller coaster continues. Who are you trading - market or yourself ?

After 10 years in this market I have learned that there is a lot of money in this market only if you can control your greed and fear. Risk management is the key. BIG LOSS NOT ALLOWED. Your being right is not important. Understanding your emotions is the key. You never trade a logical market always the emotion. The face value is Rs 2 and market price is Rs 400 - where is the logic. You are partner in the company, but only for Rs 2, rest is the emotion.

I trade everyday in my trading room with my traders and in the last 3 month have been able to make 190% gross profits by being right 75% time. Check the attached photo for trading details. I have no big loss in the system and big profits only 20% of the time. Most of the money is made by small and medium profits by controlling the greed and to get out fast with small loss when market is proving me wrong. This is the only method, rest is commentary. 

Copyright : Pathfinders Trainings / 9022330009

Four Equations of Money & Four Financial Needs

by Admin 4. October 2015 22:03

 There are two kinds of income – Active income and Passive income.

Active income is the income you get by spending your time & skill, like your salary, consultancy or business income.

Passive income is the income that you get without spending your time like rental income, interest and dividends.

To become financially free your passive income should be greater than your active income.

There are four equations of money: 

  1. Income + Loan = Expense
  2. Income = Expense
  3. Income – Expense = Saving
  4. Income – Saving = Expense 

The fourth equation leads you to #financial freedom if you live your life by it, as your regular savings will increase your passive #income. Ask yourself in what equation you are currently in and what is your plan to achieve financial freedom. 

The four financial needs are: 

  1. Safety
  2. Security
  3. Liquidity
  4. Growth 

Safety comes from having your own house. Please remember your first house is your security and your second house is your investment.

Security comes from adequate insurance so that your family would be taken care of in case you are not there. 

Liquidity is enough cash saving for at least six months in case you lose your job, business, or consultancy. 

Growth is the need to make your money grow much faster than inflation, as inflation eats away a part of it regularly. If your money is growing at 10% and inflation is at 8%, the effective growth of your money is 2% only. The effective rate of growth should be around 20% for which equity and real estate are good places to #invest in.

Copyright Pathfinders Trainings / 9022330009

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