How to develop a trading strategy for every occasion

Doubled the investors' wealth

Vikas Singhania

An investing strategy for every occasion -- it helps to think ahead of the curve. Thus, in case of a bad monsoon, the list of stocks that will be affected from it or benefited from it should be kept in handy. Similarly, it helps in keeping the laundry list ready for a change in interest rates or a strong dollar, a strong China or a weak China strategy. Rather than reacting to an event and searching for stocks that might be impacted it helps to be ready upfront. That is all that is needed for successful investing, a simple and logical reason to invest and the basic knowledge of knowing the difference between price and value.

General phobia among retail investors is that in order to make big money in the equity markets one needs to be an expert in finance and economics. Experts, they feel, are people who can scan through a financial statement in a matter of minutes and buy at the bottom and sell at the top. Nothing could be further than the truth. Legendary investor and fund manager Peter Lynch said that everyone has the brainpower to follow the stock market. If you made it through fifth grade math, you can do it. Lynch’s mantra of investing is ‘the simpler it is, the better I like it. The basic story should be simple.’

One way of having a logical approach to investing is that one should think ahead of the curve. While most retail investors react to news or a development, the smart investor pre-empts the events and positions himself to take advantage as the situation unravels. Even if the events may not fructify as envisaged, the loss would be limited either through putting in stop losses or by selecting stocks in such a way that there is enough room for safety.

A logical approach to investing is also known as theme investing. Here a theme is picked up, as say stocks that will be impacted or benefited if RBI governor decides to reduce interest rates.

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Vikas Singhania

Executive Director|Trade Smart Online

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Thankfully for an investor the entire year is lined up with such events. This gives them an opportunity to trade as well as invest in theme based stocks. An investor, however, needs a basic idea of finance, technical analysis and common sense. Let us now look at some of the themes as they play out during the year.

Earnings

This event occurs every quarter throughout the year, every year. Companies announce their quarterly results every quarter and in the month of March (in most of the cases) they announce their annual result. To play this theme, there is some ground work required. First is to look for companies that had posted mediocre numbers in the same quarter of previous year and then to check if their performance has improved in the previous quarter. If these companies are not seasonal (agriculture or other seasonal sectors) then chances are that the company will do well in the results that are likely to be announced. A search on news items of interviews or research reports will give clarity on the reasons behind the turnaround. One will be surprised by the number of companies that appears in this simple search every quarter.

There are two more things that will be needed after the investor spots the company. First is a look at delivery data. Generally, such stocks are picked up by smart investors or insiders just ahead of the results, which can be captured in the increasing deliveries that are marked against these companies. Both stock exchanges give delivery data of every company daily. Second is to look at technical support levels which can act as good area to buy these stocks.

RBI policy and budgets

Government policies and budgets offer a good opportunity to trade. But the trick here is not to wait for the decision to be announced, as the move can be sharp and if unfavorable can lead to a loss. However, one can trade on the build-up to the event. Even when the general consensus is that there will be a status quo in the policy announcement, investors are seen piling on to banking stocks, hoping against hope that the RBI governor might prove the majority wrong. It’s better to play the strongest stock in the sector as it moves the most and falls the least.

For budget session, the safest bet is on agriculture stocks and consumption stocks. In every budget there is some sop or the other for agriculture sector, more as a political appeasement policy rather than economic one. The short spurt during Budget speech can give a good short term profit. Similarly, consumption stocks run up on hopes that the finance minister will either cut tax rates or increase the exemption limit. Whether he does it or not the run up to the budget gives a nice trade to profit from.

Monsoon

About 70 percent of the population dependent on agriculture monsoon plays an important part on the perception, rather than the economy. A look at agriculture and economy growth during years of scanty rains gives an idea that the impact of monsoon on the economy is diminishing on account of technological advancement and availability of alternate crops plus insurance scheme by the government and double cropping in most part of the country.

Initial estimates of good monsoon helps consumption, automobile and agriculture related stocks. One needs to position in some of the better known names here as they would give a better chance of an exit.

As the monsoon season in India is normally stretched for 2-3 months and fluctuations in rain gives ample opportunity for trades in the stocks repeatedly.

International Events

Over the last decade global markets have integrated both in terms of economic activity as well as market movement. With flow of money becoming seamless, Indian markets are getting impacted even if there is a small untoward incident in some other country. With markets of global players interlinked, a flood in Thailand or a draught in Brazil has an impact on sugar stocks and currency markets. China slowing down pushes commodity prices in a down fall along with all markets. Oil prices and currency fluctuations have a story of their own. Almost all these events have an impact on Indian markets, though the exact impact would be miniscule. But perception is what gives a trader an opportunity to capitalize.

While there are many stocks and sectors that will be impacted, the best money will be made in understanding the sensitivity of the event of sectors or companies.

Say, for example, oil prices. While the general perception would be that it will impact oil refining companies and the currency, the highest sensitivity on the profitability is on airline companies. As fuel accounts for nearly half the expenses of airline companies, oil prices fluctuation can impact the profitability of airline companies the most.

Similarly, a financial crisis in China would first be seen in currency markets globally, but the real impact will be in commodities. China, like countries in the developed world is fuelling its economy by flooding it with liquidity. If there is a banking crisis it would directly impact the real estate sector and job market, which, in turn, would affect consumption. As China is a consumer of 50 percent of nearly all traded commodity, the safest trade and one which will be trending for a long time is to play on the other side of the commodities. There are other similar themes that one can play on like US and Indian elections, which normally lead to higher consumption of paper and liquor. Other themes being commodity prices movement, a colder than normal winter impact on oil market, EL Nino effect and so on.

(The writer is founder and director of TradeSmartOnline)