Thursday, February 28, 2008

Buy low, sell high to make money in stocks


I believe there is only one way to make money in the market. That is 'buy low and sell high'.
Sounds simple, doesn't it? But the execution is not very easy. However, if you are disciplined and patient you can master this art and make money.
After a lot of experiment I have found one strategy that works.
There are 4 rules you need to adhere, though, come what may, to achieve success using this plan:
~ Decide the quantum of investment you will make on every fall (say Rs 5,000)
~ Buy units/shares on any day when the market comes down by more than four per cent
~ Sell the same amount of units/shares that you would buy when the market goes up by more than five per cent on a given day
~ And, of course, keep doing it regularly
Now don't take my word for it. For all you want let's validate this data on the Sensex and let's do it for a very long period of time, say from 1980.
The trick here is you will buy shares/units worth Rs 5,000 on every buy opportunity and sell shares/units worth Rs 5,000 on every sell opportunity as per the rules decided above.
On June 6, 1980, the Sensex was at 122.55 levels (for simplicity let's assume that one unit of Sensex could be bought as a share/unit at Rs 122.55). On this day the Sensex had come down by more than four percent. Let's consider the closing prices as your buy price; therefore you could purchase 40.8 units of the Sensex with Rs 5,000 (Rs 5,000/122.55 = 40.8).
Similarly, when on August 5, 1980 when the Sensex reached 135.5 levels (a gain of more than 5 per cent on that day), you could have sold 36.89 shares/units worth Rs 5,000. This will leave you with nearly four units (3.91 to be precise � 40.8 less 36.89) of the Sensex and that too free of cost. In money terms, your gain would have been Rs 527.91 (Rs 135.52*3.9 units).
Now you need to keep in mind that there could be more than one buying opportunity in a year. This is what happened in the year 1981. You had two days when our rule told us to buy (ie a fall of more than four per cent on a single trading day). On May 4, 1981 and on July 17, 1981 the Sensex fell by 4.17 per cent and 4.36 per cent respectively. Therefore we bought the Sensex at Rs 178.5 and Rs 197.1. The average price at which we bought the Sensex was Rs 187.8 and we made a purchase of (28+25= 53 units).

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