Common sense do’s and don’ts when the markets are volatile.
By Vijay Bhambwani
The recent crash in the markets has left players dumb founded. Most of the participants I talked to were shell shocked beyond the point of normal reactions. Obviously, nobody had a chance to offload long positions since markets opened “gap down”. There are lessons in it for us, so we do not relive history in the near future.
There are three aspects to a trade – identification of a trade, initiation of a trade and management of trade. Initiating a trade is the easiest part, you just call your broker and execute. The identification is slightly difficult. The management of a trade is the most difficult. Most traders shut their eyes after initiating a trade and leave things to fate – this is especially true in case the trade goes against them. The commonest mistake is to let a bleeding trade run till your margin account dries up and your broker squares up your trade. Money management is invariably the most important aspect of your trading strategy. Handling risk, threat to capital is where most traders are lacking.
The mantra to profitable trading was aptly put forward by commodity trader and best-selling author William F Eng, “Successful traders control risk, and when they cannot control it, they manage it”. Most of the players resort to leveraging of capital. While we initiate our trades with the concept of “going concern” assuming that we will make profits and continue to trade perennially, it makes sense to assess the downside potential first. Remember, in leveraged trades, profits and losses are magnified to the extent of leveraging. Most of the traders who lost money recently were those who built up excessive large trading positions. While “big” is a relative term, we must honestly assess our comfort level and trade within our own limits where we can trade in lots where the positions do not overwhelm us.
Continue reading “The crash: picking up the pieces”