Avoiding Mistakes In A Volatile Market

By Author: MarketSmith India
Total Articles: 65
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Buying every possible Breakout :

Bullish stock charts tempt investors all the time during down markets. Some growth names will hang in there with compelling charts. A Breakout may work for a while, but it will likely be short-lived. While stocks that hold up the best during down markets can go on to be the next leaders, they still should not be bought in volatile markets.

Keep holding a stock or even averaging down :

A stock trades at Rs 100 a share. Your cost basis is Rs 100. The stock heads lower, and you buy an equal amount of shares at Rs 80, lowering your cost basis to Rs 90. Then you add further at Rs 75 after it breaches its 50-and [200- DMA]. The problem is that you're averaging down in a former leader that#39;s under tremendous institutional selling pressure. You will be doing some serious damage to your portfolio. It rarely makes sense to buy a stock that has the potential to spiral lower before finally hitting its bottom.

Buying low P/E stocks :

The price-to-earnings ratio is a common valuation tool. But buying/selling decisions based on P/E is not a prudent move. Expensive stocks ...
... can become cheap, but cheap stocks become cheaper in a down market. Trying to catch a stock "on sale" is fraught with risk. In many cases, stocks with low P/E ratios are suffering from weak fundamentals, where shrinking market share results in lower earnings growth. That&#39’s not something you want to see in a stock. Remember, some of the best merchandise in the stock market often sells at a pricey valuation due to strong fundamentals and bullish growth prospects.

Stop paying attention :

It is easy to lose interest when stocks are selling off, but market downtrends let high-quality names take a breather and eventually build new bases. During a market pullback, try hard to make a list of stocks that held up the best. A few will show limited signs of distribution (heavy-volume selling) on the way down and accumulation (high-volume buying) on the way up. Focus on the most resilient names with the least amount of technical damage. They will generally be your best prospects.
Source : MarketSmith India Team