Avoiding mistakes in a volatile market

Mistakes are plentiful during volatile markets. Avoiding mistakes in a volatile market is essential to ensure to ensure one keeps their hard-earned cash intact.

Buying before a base completes

During the recent volatility, many stocks breached, some pulled back to their respective 50-DMA or 200-DMA. To some traders, long-term support was a buying opportunity. The key to making money in the market, though, is waiting until a base completes before buying. In most cases, stocks that pull back to their 50-DMA or 200-DMA do so amid signs of institutional selling. Wait for the stock to prove itself, and look for signs of institutional buying as the stock builds the right side of the base. Then you have a legitimate base.

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'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'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.

In conclusion, avoiding these mistakes in a volatile market would give you an edge over other investors and also help book healthy profits.