Follow the Traders

An extremely curious person who tries to find reasons behind every movement behind stocks often clouds his/her mind with non-essential information, thereby either taking wrong decisions.

Livermore reveals that he was one of them too. In this chapter, he lists out two of the common mistakes that many other novice trades make:

1. Interest in too many stocks

One should remain focused on just a few stocks which he or she can understand and should not trade a large number of stocks. It is much easier to track a few than many.

2. Be completely bullish or bearish on the entire market based on movement of one stock.

This is a commonly noticed issue with retail traders. In the context of India, people view heavyweights such as Reliance Industries as the market and hence if Reliance shows a downtrend, they extrapolate it as a downtrend in Nifty. This is rarely the scenario.

Livermore advises to rather look at a group of stocks preferably from different sectors and then make a perception about the market.

The author now shifts his focus to tell us about the study of movements. Remember record keeping? Here, he states that one should confine his studies of the market to just the leaders/ prominent stocks. Also, it is important to note that leaders keep on changing with time. This was seen in the Indian context as well when SBI and other PSU used to be the market leaders in the 1990s whereas now it’s the private sector leading the wagon.

Therefore, always try to trade in leaders or high market cap stocks, which not only are the most active but also provide you with ample liquidity in case of a trend reversal.