the martial art of catching a falling knife

"never try to catch a falling knife"
has become a cliche'.

it has seemingly become
such an old fashioned statement
that
actually catching a falling knife
has now become a fashion statement.

only that everytime
this daring catwalk turns out to be
a robe malfunction!

the knives that fall by mistake
or because of some serious misunderstanding
are the ones that do rise back.

but such accidents are rare.

rarely do the knives fall
for no reason!

either there is some earthquake outside
or some butcher inside
the trading house.

and till that reason is there

they will keep falling

while dodging on the way!

knives of butchers (read operators)
move up and down;
in which case
both rising as well as falling knives
can be deadly.

still,
a knife is a knife.

always better to be picked
from the table.

if, however, you are a samurai
there is
one safe way to catch a falling knife -

and that is
to move your hand down
equal to the speed of its fall.

i.e. buying the crashing stock
expecting it to keep falling
and hence be mentally, spiritually and physically
ready to let it go
if it doesn't seem to be stopping.
and repeating the process
again and again
till its handle
is firmly in your grip!

trading is the only martial art
where a loose grip is a must! 

understanding short selling, again

here is another example

to understand short selling!

a rich man

puts his 100 abc shares

in the locker

locks it

gives the keys to his servant

and takes the next flight

to germany

for a vacation of 1 month.



while he is away

his servant

who had fair bit of knowledge

of shares

realised from his chart reading

that the abc share

is going to drop

from current 2,000

to 1,000

in 1month!



he has the key

and has the guts!



he picks the key

opens the locker

picks the 100 abc shares

sells them for 100x2,000=2,00,000

keeps the account

waits for 1 month

sees the share price

drop from 2,000 to 1,000

then buys back

100 shares

for 100 x 1,000=1,00,000 bucks out of 2,00,000 he is having

puts them back in the locker

hands over the keys

to his master who returns the next morning.



the master is happy to find the 100 shares intact!

and the servant has made cool 1,00,000

by using the

stagnant shares

for encashing an opportunity!

that's short selling or shorting!

--

now, lets see the other side of the trade!

this time

the rich man

doesn't have abc shares

but cash!

he puts in

1,00,000 bucks

in the locker

locks it

gives the keys to his servant

and takes the next flight

to germany

for a vacation of 1 month.



while he is away

his servant

realises from his chart reading

that the abc share

is going to rise

from current 1,000

to 2,000

in 1month!



he has the key

and has the guts!



he picks the key

opens the locker

picks 1,00,000 bucks

buys 1,00,000/1,000 = 100 shares of abc

waits for 1 month

sees the share price

rise from 1,000 to 2,000

then sells back

100 shares

for 100 x 2,000=2,00,000 bucks

keeps 1,00,000 for himself

and puts the 1,00,000

back in the locker

hands over the keys

to his master who returns the next morning.


the master is happy to find 1,00,000 bucks intact!

and the servant has made cool 1,00,000

by using the

stagnant money

for encashing an opportunity!

--

in the above example

it is assumed

that the servant had the master's permission

to use his valuables

with the sole condition

that the servant will return

the money or the shares

when the master asks for it

or

on the date of his return

whichever is earlier

irrespective

of whether

the servant is making money or losing money

by that time!

overcoming fear of shorting

my friend

madhu

shared with me his

discomfort with shorting!

--

i had heard this dilemma

numerous times before

besides experiencing it myself!

--

because of sheer habit

everyone is used to

only buying

and not selling!

you might have bought

100000 things in your lifetime

and sold only a few!

so selling, obviously,

is out of your comfort zone!

so,

when i heard him utter those words

it was natural

that something in me

wanted to help!

--

given below are two tricks

that i shared with him

which should help

rather anyone

to strike peace

with shorting!

--

1) trade in options -

that way

you need to only buy

even when

you think the price is going to go down!

when bullish, buy call option

when bearish, buy put option!

(see, no selling)

--

2) turn the vertical graph by 90 degrees

to horizontal!

this way

there is no up and down

only

left or right!

so, there is no pschological fear of shorting!

--

here is a bonus method

which didn't strike me

when i was talking to madhu!


i recalled this

when i was pondering later

as to how i had managed to overcome

my fear of shorting!


i overcame my fear of

going short

by learning the indicators

deep and thorough!


broad movement of the market

is logic

not magic!


when the markets fall

they are not going nuts!

they are just flowing

like the river

trying to find further path of movement!


light

of technical knowledge

just dispels

the dark shadows

of fear of shorting!