February 7, 2015

Sample / test / real MTNL trade

This post and trade is done to demonstrate the importance of entry, risk management and exit strategy for any trade.

Why did I choose MTNL? it is a lousy stock technically. All recent buy signals have failed. And when I thought of this post, this was one of the few stocks which happened to give a buy signal on this day.

Now MTNL just closed above JAN highs. Stock was up 7% and is a buy on 20 day swing indicator.

There is no further information required for a trade. 

This is the MTNL chart... it can be a chart for any stock.

I bought this stock today at 30... my SL is 26 and trade risk is Rs.1000/-. So the quantity I bought was 1000/(30-26)=250. I bought 200 shares. So if my SL is hit, I lose 800/-.

For this trade, the only figure I know with 100% certainty is the loss I can bear. And this loss will not affect me financially or emotionally (otherwise it means I am over trading).

(My typical risk per trade is significantly higher but since this was a test trade for the purposes of this blog, I took a small quantity.)

I have no targets as I do not believe in targets.

Now what will happen from here? I don't know... my SL may get hit and I may lose 800/-. Or the trailing SL may get hit later on giving me a small loss or a small profit. The best case scenario is there is a strong rally and my trailing SL gets hit only after a very good rally.

Note that in the optimistic case, if the stock gives a return of 40-50% or say 100-200%, it should NOT be assumed that I am a genius since all I did was hold the stock with a trailing SL. By same logic, if SL is hit, it does not mean I am a fool. Doing anything else will be foolish (not following SL or exiting early or trading in excess of your means).

The probability of the trade generating a profit or loss is exactly 50% and I have no control over it. It is also not worth asking anyone for their views because no one knows with any degree of certainty what will happen.

All you have to do...  exit if SL is hit and if the trade yields a profit, then hold the trade as long as possible (i.e. till markets give a sell signal).

Now there will lots of similar stocks where you get buy signals... since half the trades are likely to fail (statistically speaking), the only way you can make money is by exiting loss making positions fast and hold to winning positions as long as possible.

If you do not have the discipline to do this, then you should not be trading at all.

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