November 10, 2014

Question on stock selection

Hi sir,

I saw in your post that u have invested in GATI,GDL,Snowman Logistics.May I know how to invest in these kind of stocks which gives an unbelievable return.I have a basic knowledge of reading balance sheet,P&L acct and some basic technical analysis like Elliot wave..After knowing this,I think I can invest in other stocks rather than investing in Nifty 50?I am just 25 years old.Guide me to move to the next level.



There is no intelligence involved here and age is immaterial.... Important thing is to ensure that you are trading in the direction of the trend. Profits is whatever the markets give and you have no control on this. You have control only on your stoploss.

Be happy with the overall returns. As long as beat the index or are generating 20-25% pa consistently, you will be doing excellent.

As an example consider following portfolios which are long open positions based on kplswing indicator (N=20) with a volume filter thrown in.

Note that all these are "system generated" open positions and do not take into account other (previous) positions closed in profit or loss.

50 day average volume - Rs.5 crores

We have 238 open positions giving overall return of 42 percent. Highest return is 470%. There are atleast 30 stocks generating more than 100% return.

BTW it is not possible to invest in 238 stocks.

50 day average volume - Rs.20 crores

Here we have 110 open positions but overall return has dropped to 20%. This is because many of the high fliers in the 5 crore list are not present here.

50 day average volume - Rs.50 crores

Not much difference. Open positions dropped down to 68 with no change in overall return.

Now in above, there are 3 stocks with more than 100% return. If I remove these stocks from the list, then the overall return drops down by 50%!

KPL 30 stocks... if you had invested in these stocks, your open positions would be 23 stocks and overall return at 8%.

So what is the way out or what should be your preferred trading strategy?

Make a list of stocks say NIFTY 50 or NIFTY Jr (preferred) and then trade all breakouts. Limit risk per trade to 1% of your trading capital.

Second strategy - make a list of 100-200 stocks based on liquidity. Then trade long signal wherever a stock gives a breakout above 6 month high or makes a 52 week high etc. The downside of this approach is you will miss stocks which generate a rally from the 52 week low (for eg., RCOM gave a 75% return in one month APRIL 2013 and thereafter did nothing) .

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