Beauty of a `provoked' bull By Pradeep Chandrasekaran

Thanks to : http://RacyCases.blogspot.com

Beep, Beep Beep, went the mobile. Chotu wearily picked it up. Monday mornings meant more trading advice from his retinue of trading well-wishers, which included his broker, professional advisors, friends and his driver. But this was no trading message. All that the message said was "Provoked". It was from his former trading buddy Motu. He had grown fatter during the bull market. And why not? Unlike Chotu, his account had been growing. Though he hated to admit it, Chotu knew that the reason why they had drifted apart was the fact that the path of growth taken by their accounts was diametrically opposite.

Chotu was not fond of riddles and puzzles that taxed his overworked brain. Irritated but intrigued that there could be a hidden "insider tip", he called Motu.

"What is this about being provoked?" "Aare yaar, don't you read the papers?" came the reply.

"Provoked is being hailed as Aishwariya's best film. And have you forgotten that she is getting married in a few days? And that is not the only reason why I have been provoked to celebrate," he continued. "In two weeks, the Indian Bull will complete its fourth birthday. Come over and share my joy."

This was rubbing salt into the wounds. Like all traders he felt the loss of pain, but even more painful was the realisation that others were succeeding where he failed. Resigned to the fact that he could not avoid meeting Motu, he agreed to meet him for lunch at his house.

Motu was waiting in his trading room when Chotu reached his house. Ash was keeping an eye on the room from vantage spots on the walls. As his eyes stopped feasting on the eye-catching photos, Chotu noticed that the rest of the free space on the walls was occupied by huge chart papers with graphs on them.

"What are they?" he asked, revealing his ignorance.

Motu's reply was prompt. "Nothing but a graphical representation of the market. You see, I study these charts to tell me what I should do in the market at any given point of time. I do my own analysis and that is what has helped me succeed."

It was then that Chotu realised that there was no television in Motu's trading room. "But don't you need a business channel to update you on the latest developments?" Chotu demanded.

"Most of the so-called latest developments and news are already known and factored into the price. Further, if the news is really going to have an impact, then you cannot come to a conclusion about its impact in five minutes. This is something which most of the traders don't realise."

Chotu was still not convinced. "What about the view of the fund managers and analysts? Are they not important?" "Sure", Motu replied, "but not to you or to me. They are important for the fund or company they represent. What you need to realise is that their outlook, timeframes and objectives are completely different from ours. In fact, they do not tell us what those are, nor do they come and tell us when those factors change. That is one of the main reasons why no one ever succeeds by listening to an otherwise successful fund manager or analyst."

"All right then, tell me what you think of the market now. Let me see whether you are better than them," challenged Chotu.

"I am not here to convince anyone about my views or opinions on the market. My trading record speaks for itself. To use a cricketing term, I let my bat do the talking." Motu's reply was like that of a man who has been there. "I can, however, show you some simple rules which you can apply in your trading," he offered.

Chotu was feeling smaller than usual this morning. But he knew that he needed help in getting on track with his trading. "All right, show me what I should do to succeed."

"The first rule is never to buck the trend. If you look at the chart, you can see that market's long-term trend is up, which means that as a long-term investor you could continue to stay invested."

"But how do I know what the trend is?" asked Chotu, sounding interested.

"Well, there are a number of ways you could do that. You could look at Swing Charts or construct trend-lines from significant bottoms or tops. In fact, the reason why I said the long-term trend is up is because when I construct a long-term trend-line from the May 2004 low, the market has continued to stay above it."

"What else do you learn from this chart?" asked Chotu.

"This bull run can be broken down into three phases. The first phase is from May 2003 to January 2004. The second phase started in May 2004 after the defeat of the NDA Government and culminated in May 2006. The third phase commenced in June 2006 and completed its run in February 2007. So what you need to understand is that the market does not go up or down in a straight line. The main trend is always interrupted by movements against it which are called corrections."

"What else can you teach me?" Chotu asked eagerly.

"Trading involves not only good analytical skills but also those of money and risk management. I do not mean to open a sensitive wound, but you would never listen when I kept telling you not to start off with a big account. Zero to hero is a long journey, but hero to zero takes very little time. One of the reasons for your downfall was because you wanted to impress your broker and your trading friends that you were a `big trader'. Remember that for making big money in the market, you do not need big money but a lot of skill — in knowing when to trade, how much to trade and when to lock in your profits."

"Look at Abhishek. He is a chip off the old block. He did not wait for his father to ask him `Kya Aishwariya ko lock karoon'? Smart traders are like that — they take their profits and run."

Chotu's next question, however, elicited no response from the seasoned Motu. "So, can we say that the Indian cricket team's long-term trend is up and that this is only a correction?"


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