Before deciding on the strategies that one should incorporate while determining the stocks that they want in their portfolio, we should first know a little about how to analyse the market and what market trends indicate in order to come up with an adequate strategy for deciding your portfolio.
History shows that 3 out of 4 stocks move in the same direction as the overall market. So when you purchase a stock while the market is going up, you have a 75% chance of being right. The stock market is really volatile and hence risky. However, there are always turnarounds. If you are new to investing, you should probably focus on the NIFTY 50 and BSE Index.
The stock market is always in one of the four possible conditions:
Confirmed Uptrend: This is the best time to invest in a fundamentally strong stock.
Uptrend Under Pressure: This is the time when an investor should be cautious and should be well prepared to take defensive actions as the market may run out at any time.
Market in a downtrend: As we talked earlier, 75% of the stocks move with the market; hence it is advised not to invest as the market is going in a downtrend. When in such a situation, you should sell your weaker stocks, the ones that may significantly go down with the market and keep a close watch on your more reliable stocks.
Market in Rally attempt: The market is rallying its way back, and at this point, you should wait and look out for stocks that may rise with significant value.
Now coming on what strategies one should keep in mind while picking up stocks.
Focus on fundamentally strong stocks coming out of strong chart patterns. Make sure it has CANSLIM traits and is breaking out of a proper base pattern. Get in gradually after a follow-through day. Not all follow-through days lead to a sustained climb. Sometimes the market will reverse and slip right back into a Downtrend. So when the Market Pulse shifts to “Confirmed Uptrend”, get in gradually. If the general market and your stocks continue to show strength, you can buy more aggressively. But if the market and your stocks begin to weaken, you can move safely to the sidelines without risking too much of your money.
Stick to sound buy and avoid risks. Patience is the key. Not every trade will work out for you. Sit tight.
There are various base patterns that you can look for while making investments. Each base is important to watch for since it’s where the stock typically takes a “breather” before resuming its climb, using the base as a springboard to climb higher as it resumes its journey up the chart.
Bases are precursors to a winning stock’s next big move. Use bases to Reduce risk. Bases and the associated buy points will help you find the appropriate entry points.
Left side of base: The sell-off.
Bases begin when the stock has been going up for a while and then starts to decline. That usually means some fund managers and other institutional investors are cashing in the profits they made in the prior run-up. It often happens as the general market starts to slip into a downtrend. The sell-off creates the left side of the pattern.
Bottom of a Base:
Bottom forms when the investors stop selling in huge amounts and again start buying the stocks. However, it is still too early if the stock will go uphill or again go downhill. So this is not the right time to buy.
Right side of base: Institutional Buying Returns.
This happens when investors start buying shares again, this pushes the stock higher. Be patient and let the stock break past it’s buy point on heavy volume.
The ideal buy point in a chart pattern is based on the prior area of resistance. Make sure the stock can punch through that ceiling on the heavy volume before you invest. That significantly reduces your risk and still leaves plenty of opportunity for big gains.
Three most common visible patterns are
Cup with handle and Cup without handle
You can read more about these patterns and what they indicate on MarketSmith India’s website.