The Hindu Business Line : Trader's Corner

Markets globally have been in a spectacular bull run for the last three years. Trading in the markets in this period has been a pleasant experience for most. But, this unrelenting rise has led some market players to believe that it is always okay to buy on dips and that stocks that fall will always manage to rise.

It is such misplaced faith that makes traders hold on to their losses till they attain mammoth proportions. Losses should not be allowed to grow, especially if you are a trader. Old timers will tell you that there was a time when Himachal Futuristic was quoting at Rs 2,500 and Pentamedia Graphics was quoting at Rs 2,000. If a trader held on to these stocks purchased near the peaks, then he will have wiped out all his savings by this time.

Have you ever wondered if there are two sets of people in the stock markets, one who make money when the market is moving up and another set who lose money when the market moves down? The answer is a clear no. The same set of people who make money in the bull market lose it when the prices start falling.

This happens because most investors who have made money plough it all back in to the stock market and are mostly fully invested at market peaks. The net profit or loss that an investor makes is proportional to the time of the entry. Investors who entered early in the bull phase have net profit. Those who entered late have net loss. And there are some who breakeven. It is all the more tortuous to breakeven as there is nothing to show for all those hours of watching the computer terminals or stock market tickers.

The way to outsmart the market and to retain all the profits that was made in the bull run is to exit a loss early. There are so many factors influencing the stock markets at any given point that it is easy to go wrong with your investment. There is no shame in being wrong, only in staying wrong. Booking a loss should not be construed a failure. It is, in fact, a sign of maturity. Most successful traders have three losses to every profitable trade. The reason they are successful is because they let their profitable trade run and cut losses early.

By exiting early, you free up the money that is locked in and stop it from losing further value. You can always re-enter at a later stage if you still believe in the stock.

Lokeshwarri S.K.

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