Stock Trading is an activity that can allow you to quit your job early and become self-employed. Trading can allow you to make consistent capital gains provided you do your due diligence. But before we get started with the wonders of trading, a fairly simple question at this juncture is: What is Trading?
Simply explained, trading involves looking at people’s behavior in the past and speculating over them acting similarly in the future.
The word ‘speculating’ ought to be given more attention. You cannot ‘predict’ the behaviour of the masses participating in the stock market; you can merely guess that they will do the same thing as last time.
Now that the definition has been made clear, you need to learn a few concepts.
Contents
Concepts for Stock Trading
Support level – as the name suggests, the ‘support level’ is below which the stock price typically does not fall. It however does not imply that the price would never fall below the level.
Like the support level, there is a ‘strong support level’, which, as the name suggests, provides stronger support to the falling stock.
Resistance Level – this suggests the level a stock finds tough to cross. This means that in the past, a stock, after reaching this level, has proceeded to fall.
Like the resistance level, there is also a ‘strong resistance level’ which the stock finds tough(er) to breach.
Stock Trading Technique – The Box Theory
Often called ‘The Darvas Box Theory’ – this simple strategy has made people, or atleast its founder Nicholas Darvas, a lot of money.
The concept is based on inactivity. The theory simply states that stocks do not move randomly but in patterns. (just as support and resistance tell us) All you have to do is find a stock that ‘breaks out’ from a box and buy it.
For example :
Stock: Reliance
As highlighted above, Reliance has moved in a limited range here.
You sit and warm the chair as long as the stock stays inside the box and trades in a limited range. If you see a breakout(like the top right corner), you buy the stock.
- Additional Tips –
- Prefer stocks that break out with high volumes.
- Prefer stocks of stable/good companies.
While this sounds weird for trading – doing this will ensure that even if you have a temporary setback, you can always get back on track by not suffering a capital loss. (in most cases)
- Have a plan and stay consistent and think probabilistically.
4. Allow yourself a limited number of trades.
Example: One trade a week.
Use A Stop Loss
Stop-Loss is so important that it deserves a headline of its own.
When you place an order, you get the option of setting a stop-loss. This means that as soon as the stock price moves to a certain level(that you will input), a trade will be executed, and your shares will automatically be sold.
And yet again, as the name suggests – the stop loss stops your losses 🙂
Think of it this way – a seatbelt protects you in a car accident and a stop-loss protects you in the stock market.
“Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.”
– Bruce Kovner
Putting it all together – A Demo
Using what all has been presented above, provided below is a demonstration of how all this comes into the big picture.
The stock has shown movement in a limited range and is now showing signs of upward movement with consistently rising volumes, therefore, there is a trading opportunity available.
The following information is discretionary.
Buy Price – 33
Selling Price – 45
Stop-loss – 27
I can also add the probability of this being correct.
To check whether stocks are showing signs of improvement, it would be inefficient to go personally over hundreds of stocks. It would be wise to perform a google search for “ Darvas Box Indian Stocks” which would provide you with a bunch of stocks that people believe are showing signs of breaking out from a box. This is their opinion. Do check for yourself and take a decision accordingly. Websites like TradeView are of immense help.
Conclusion
Stock Trading is not limited to this.
There are methods like The Fibonacci retracement and patterns like Head and Shoulder etc. out there. Unfortunately, though, these methods are very complex in nature and most certainly not for beginners.
Do note that doing difficult things does not ensure better results – remember that there are no awards for bravery here, you won’t get an award for making money in a complex manner.
“I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
Warren Buffet
The Box Strategy made its founder, Nicholas Darvas, millions, $2,00,000 to be exact. The strategy is old and has stood the test of time – if you wish to know more about it, reading his book “How I made $2,00,000 in the stock market” will help. Rest assured, if you do this properly in a disciplined manner, you are bound to make money.