This is my third blog in the 13 series after one on Dhanteras

and another about important stocks last week. You can expect 10 more blogs from me on this series as we make the journey towards the Nifty's 13,000 mark. Jokes aside, let’s get to the point.

Here are some mistakes you should avoid in this market.

1) Don’t bet against the market trend: This is true most times, however, it is very important to keep hammering this point home. You do not bet against the trend. The trend is up and has been for some time. This is no time to be cute and try an aggressive short. The market will give you an indication of a reversal and till then, the only trade is to “Buy the dips”

2) Do not let your bias come in your trading action: I have heard many people say “This is a fake rally” or “This rally isn’t backed by fundamentals” or “How can the economy continue to slow down and market be at a fresh high”. Let me borrow a nice tweet I read on a legendary trader’s twitter timeline.

What do we want is 1+1+1+1+1+1+1=7. What the market delivers is 3+5-9+2+3-6+9=7. So, either the market is pencilling in a sharp recovery or the market is horribly wrong. There is a good chance it’s the former and even if it’s the latter, what is the guarantee that the market rally punctures at 12,000 or 13,000 or 14,000? Remember the saying “Market can remain irrational longer than you can remain solvent”

3) Betting on the number 2 or 3 player as a value bet: This can be a fatal mistake. There was a time I thought Jet Airways is a very nice bet considering its huge valuation gap compared to Indigo and while for the first 2-3 months, that trade did work beautifully, we all know where it ended. It is important in this kind of narrow market to stay with the leader. Whether it is TCS or Bajaj Finance or HUL or HDFC Bank, what we have observed in our market is the biggest keeps getting bigger. There are exceptions like Berger Paints, which tells you that you can bet on the number 2 player only if it is reasonably big itself and has a moat of its own.

Also Read: As market soars to new highs and economy sinks to fresh lows, what should investors do?

4) Stay away from trading on “Whatsapp groups” “Media headlines” or “Twitter timeline”: Trust me, you are better off not believing any of these, especially unconfirmed or “source based” reports. While some of those will be right but there is a good chance that in many cases, it’s a case of monkey selling.

5) Cut down on the temptation of making easy money via stock options: I have one simple rule for retail: “Never sell naked options”. Trust me, those who make millions selling naked options do it because they know how to manage their risk and even then, once in a year, they do make huge losses. This is a game only left to professionals and frankly speaking, it doesn’t make any sense to risk Rs 2 lakh on a trade that will give you a maximum of Rs 5,000. Just not worth it.

6) Don’t chase momentum: While this is a bull market, one trait it has shown is that it is collapsing for no reason intraday and at many times. So unless you are a positional trader who can add on that decline with a strict and logical stop loss, buy this market only on dips. That way, you get more bang for the buck on your trade. Remember, dips will come and this market isn’t running away. After the corporate tax rate cut, the market rallied big and then gave up more than half of those gains before reclaiming those gains.

Also Read: 13 stocks in focus as Nifty begins a journey towards 13,000

7) Don’t get out of a winning trade too early: The best examples are HDFC AMC and ICICI Bank. Once you get into a winning trade, all you need to do is to keep trailing your stop. More so for pedigreed, large-cap stocks. Because in these stocks, it’s tough to get back in after you have exited. In a bull market, identifying a trend early and sitting on it makes maximum moolah.

8) Don’t ignore your stop losses, especially in midcaps: While this is a bull market, the market is not as forgiving as 2017. That was the year in which you could buy at any price with a knowledge that the market will eventually bail you out even in bad stocks. This is a tough market. It will punish you severely if you don’t respect the risk management

9) Don’t bet big on hope trade: Remember, hope is not a data point. I have seen some brokerage houses come out with reports like “Can XYZ be a big retail player”? etc. I tell you what, you don’t trade on hope of that answer being yes. That’s a dangerous game. In most cases, hope trades end pretty badly.

10) Don’t overleverage: Actually, this is true at most times, even in the most raging bull markets but still, the urge to make the quick buck in futures will be high in the current market scenario. Avoid it. Also, what happens when you take larger positions than your networth allows, you tend to put monetary stop losses instead of logical stop losses. And in most cases, you will notice your monetary stop will trigger and the logical stop will hold. Cutting down on position sizing can be a powerful tool in F&O to get the confidence back.

11) Don’t dabble into too many stocks, either as a trader or as an investor: Not every stock suits everyone. Some of the most successful traders and investors I know trade the same stock/index, day in and day out. Remember, you want to make money and not just feel good about getting many calls right.

12) Please stop coat tail investment: Because a legendary investor has bought a banking stock in trouble, that doesn’t mean it will double. He has a different networth, a different risk-taking capacity, a different holding period than you. If this was the surest way of making money, every portfolio has to just resemble Warren Buffet or Rakesh Jhunjhunwala. Things don’t work that simply in the market.

13) And last but not least, a bit of personal advice. Don’t let market ups and downs impact your health. I have seen many people anxiously awake at night seeing what the Dow is doing or the ADRs are doing as that may impact their positions the next day. Well, trust me, staying awake at 1 am is not helping your positions. The market will react the next morning. It’s important to sleep in time, wake up in time, exercise and have a fresh mind as you start your trading day.

First Published:Nov 18, 2019 1:16 PM IST