Here is a variation of the system explained in the preceding chapter.
Here, there will be two separate graphs. One can be called the selling track and the other can be called the buying track. The selling track will be a graph of just four levels. The topmost level will be the last touched high or top. In the buying track too, there will be four levels. The bottommost level will be the last touched low or bottom.
Tatasteel recently touched a high of Rs. 431.95. Suppose we are holding 90 shares of Tatasteel. We will prepare the graph as follows:
HIGH 431.95
-1 417.50 -30
-2 403.10 -30
-3 388.70 -30
If the price falls from Rs. 431.95 to Rs. 417.50, we will sell 30 shares (one third of our holdings) at that level. If the price continues to fall and descends to Rs. 403.10, we shall sell another 30 shares at that level. If the price falls further, and touches Rs. 388.70, we shall sell the remaining 30 shares also.
The first selling stage of Rs. 417.50 is 3.33% below the high of Rs. 431.95. The second stage is 6.66% below the high of Rs. 431.95. The third selling stage is 9.99% below the high of Rs. 431.95.
We shall now prepare a buying track.
Tatasteel recently touched a low of Rs. 406. Let us take Rs. 406 as the base for the buying track.
+3 446.60 +30
+2 433.10 +30
+1 419.60 +30
LOW 406.00
Let us imagine that after touching the low of Rs. 406, the price rises and hits Rs. 419.60. If this happens, we shall buy 30 shares at that level. If the price rises further and hits Rs. 433.10, we shall buy another 30 shares. If the price continues to rise and hits Rs. 446.60, we shall buy another 30 shares at that level.
The first buying level of Rs. 419.60 is 3.33% above the low of Rs. 406. The second buying level of Rs. 433.10 is 6.66% above the low of Rs. 406. The third buying level of Rs. 446.60 is 9.99% above the low of Rs. 406.
Every selling will be done using the selling track while every buying will be done using the buying track.
The basic principles behind the system are listed below:
1) All the buyings will get made within the first 10% of (above) the last formed low or bottom.
2) All the sellings will get made within the first 10% of (below) the last formed top.
The buyings need be made only if we do not have any holdings in the scrip. When we do not hold any shares of the scrip, we shall buy it in three stages as indicated above. Once the three buyings are made in the above mentioned manner, we should not make any further buyings.
When we are holding enough shares of the scrip for three doses of selling, we shall sell those shares away, in three stages as shown above, if and when price falls; all our holdings should get sold away by the time the price falls 10% from the high.
If we hold the scrip, the high should be kept updated all the time. When the price rises above the high or top, the high in our graph should be updated to that extent. When the high changes, the three selling levels also should change to the same extent. This will become easier if we use an Excel sheet (in a computer). If we are not using a computer, we can use a calculator and find out the modified levels. It should be borne in mind that if price crashes more than 10% from the last formed high, all our holdings in the scrip should have, by then, been sold away. We should not hold the scrip if it has crashed 10% from its last formed high.
In the same way, if the price has risen 10% from the last formed bottom, we must have bought as many shares of it as possible, with the funds available to us for that scrip.
If we are not holding any share of the scrip, and if the price falls below the last formed bottom, we must update the low or bottom in our graph also accordingly. Whenever the low is modified, the three buying levels too should be modified to that extent.
If we are using an excel sheet (that is, if we are using a computer), modification of the three levels can be made automatic by using formulae which link the three levels to the respective base price. Whenever the base price (high or low) changes, the three levels will also automatically change.
It must be remembered here that every order, whether a selling order or a buying order, should be stoploss order. Every sell order should be a stoploss sell order; every buy order should be a stoploss buy order. When the price is at the top, three stoploss selling orders, corresponding to the three lower levels should be entered, provided we are holding shares. When the price is at the bottom, three stoploss buying orders, corresponding to the three buying levels should be entered, provided we are yet to create the three long positions.
Advantages of the system
The system will help us to buy the scrip within the first 10% rise from its bottom. Likewise, it will help us to exit the scrip within the first 10% fall from its top.
Another advantage is, when the bottom or high changes favourably, the corresponding advantage becomes available to us through the automatic modification of the related three levels. In other words, this system is likely to generate more profits than the one explained in the preceding chapter.
Disadvantages of the system
This involves more work load. Every time the top rises or bottom falls, the three levels linked to it will have to be changed. If we are handling several scrips at a time, we will need a computer to keep the levels of all the scrips promptly updated.
Risk of Loss
It is quite possible that the price rises 10% from the last formed bottom, and then descends the whole 10%. In this case, each of the three long positions will result in loss. The total loss, excluding brokerage, will be equal to 10% of the funds used for buying the shares. If this happens, there is no other way than to calmly bear the loss. The risk doesn’t end there. Such losses can repeat themselves in stock market. Whenever losses occur while following the system, suffer them, but make sure that you take all the profits which the system would occasionally generate. Over the long term, you will be the gainer, if you follow the system by calmly suffering its losses and earning its profits.
Comparison
In comparison with the single position system, the above described multiple position system has one great advantage. It is the lower per-deal risk of loss. In the single position system of, say, 5% trigger, the risk of loss will be 5% of the total capital invested in the shares. In the three position-system, the risk of loss will be just 3.33% of the capital invested in that position. The following illustration will make this clear:
|
1 |
Single Position system with 5% trigger | |
| Total capital |
10000 |
|
| Risk of loss in one deal – percentage |
5% |
|
| Risk of loss in one deal – amount |
500 |
|
|
2 |
Three position system with 3.33% trigger | |
| Total capital |
10000 |
|
| No. of positions |
3 |
|
| Capital in each position |
3333.33 |
|
| Risk of loss in the deal – percentage |
3.33% |
|
| Risk of loss in the deal – amount |
110.99 |
|
| Total risk of loss in all the three deals |
332.97 |
|
As you can see from the above given figures, the risk of loss in the single positioned system is 5% while the risk of loss per deal in the three positioned system is just 1.11% of the total capital.
Since the risk of loss in the single positioned system is much higher, its profits too are likely to be much higher. Conversely, since the risk of loss in the three positioned system is much less in every deal, the system’s potential for profits also is likely to be less. The more the risk, the more the profit, the less the risk, the less the profit. Which of these two is the best?
Some people take larger risks, while some others play it safe. We will choose whichever system we are comfortable with. We can arrive at a decision only by following both the systems. We can use both the systems at the same time. Divide the capital into two, and allot each part to each system. Then, after knowing each system very well, we can follow the one with which we feel comfortable, and discard the other.
In the 5% single positioned system, the coverage is 5%. Compared to this, the coverage is 10% in the three positioned 3.33% system. Generally, the longer the coverage, the longer the distance one gets to travel in the graph. To put it simply, it is easier for the price to fall 5% than 10%. As a result, the 5% single positioned system is likely to get reversed (leading to loss) more often than the three positioned 3.33% system which has a greater coverage of 10%.
(This series ends with this chapter.)
Investment In Equity 