May 25, 2014

How to buy stocks like HCL-INSYS or CANARA BANK after they are already up 10-15%?

HCL-INSYS was up 16% Friday and 42% in 3 days.

CANBK was up 13% on Friday and gained 64% this month.

How do you trade these stocks?
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One obvious fact - trend is clearly up... there is no denying this.

But the fear increases.. what if it corrects? or worse, what if it does not correct and doubles from here.

For eg., on Wednesday HCL-INSYS was up 13%. You wait for a dip but the stock gains 13% again next day. Finally the stock gains 16% on Friday and you are still waiting for a dip.

How do deal with this?

Recognise that it is normal and healthy for any stock to correct by 50%.

You need to plan 2 things here - one is your stoploss and second is the money you do not mind losing on a trade.

HCL-INSYS:


Stock has recent swing low at 42 and minor support at recent resistance at 53 levels. Now you can consider either 42 as your SL (very deep) or the 61.8% retracement level at 52.7 (say 52). So you should buy this stock with SL 52. Assuming you are willing to take a risk of Rs.1000/- on this trade, you should buy 1000/(69-52) = 100/17 = 58 or say 60 shares.

Alternatively, since the stock gained 16% in one day, you can consider an SL below the low of this bar (58). In this case, you will buy 1000/(69-58)=1000/11 = 90 shares.

In both the cases, your loss remains the same if the SL is hit.

CANARA BANK:

Here one can keep SL at 50% retracement or 61.8%.. there is no fixed rule though I prefer 61.8% retracement. If there is some other significant level nearby, I will prefer to consider that. 


In the first case, your SL is 350 so assuming a risk per trade of Rs.1000/-, you should buy 1000 / (480-350) = 8 shares. 

But if you study the chart, the stock was consolidating and then broke out on Friday. In this case, one can consider SL at 400 and take the trade. Your quantity = 1000 / (480-400) = 12 shares.

Hope this helps.

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