by Dheer Kothari

Created on: June 07, 2009

Success in share trading is measured by the returns you generate on your investments. Even the best portfolio managers struggle to invest cash in uncertain, bearish markets. It is a choice between minimising erosion in investment value and keeping high cash levels. Maintaining high cash levels in such difficult situations means you expect share values to fall further.

Between September 2008 and March 2009, the stock markets had only one way to go- down, down and down. I found that in the Indian stock market, the price of several stocks in the futures market was quoting at hefty discounts ranging from 40-100 per cent, and in some cases, even more to their level in the cash market. This clearly suggested that the undertone was extremely bearish and people were leveraging positions in the futures market in anticipation of a sharp correction in the cash market. Between January 2009 and April 2009, some of these stock hit absurd levels of 5-10 per cent of their 52-week highs!

A successful trader spots opportunities in markets. It does not matter whether the market is bearish or bullish. He shuffles his positions quickly and swiftly to cash in on a trend. Here are some ways to ensure profitable trades on the market:

1. In bearish markets, keep your positions light in the cash market. Use your idle cash to leverage trades in the F & O segment. Ideally, you should be selling the index at the previous day's high.

2. In bullish markets, invest aggressively in the cash market. Allocate resources to a maximum of 10 stocks in mid-cap and small-cap space. Book partial profits whenever you make 100 per cent or more gains. If you are investing in large caps, go for momentum stocks which move either in proportion to the index or at a faster rate. If you are leveraging trades in F & O segment maintain a bullish stance.

3. A profitable trader is always quick to cut losses. He allows his profits to run and augments his holdings every time a stock surges. In this manner, he multiplies his profit potential.

If you have sizable holdings in a stock, you have the leeway to sell stocks around saturation levels- when stocks show signs of fatigue and move sideways before going down. If you are lucky, you can pick up these stocks at deep discounts to your selling price in a couple of days. In this process, you also improve your liquidity which can be deployed for quick short-term bear market rallies.

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