Page 37 - Banking Finance October 2022

ARTICLE

Averaging and
Leveraging are

weapon of Mass
destruction:
Averaging the stock
going down is a strategy
of buying more of that
stock to bring down the
average price of stock.
Same way people tend
to sell stocks that have
gone up to buy the same
stock again in future
when it comes down.
This strategy affects most traders, and they should be doing
Reference: BSE index dated 04/01/2022
the opposite- Cut the losers and ride the winners. The
phrase-"Trend is your best friend" actually works in the
2021 witnessed record number of new traders and investors.
stock market. The ride of hope that everything will go as
Despite some recent corrections in Stock Market indexes,
we expect, is more of hope trading than stock trading. Hope
the market is still showing bullish trends. In the history of
trading isn't really a trading strategy. Buying more as a stock
stock market, many things changed except one thing that
price falls drastically might work once a while but is
never changed is Greed. Stock Market, which is probably
generally a losing strategy in long run.
the toughest place to make easy money, countless people
are lured into the markets and have a rosy view of trading.
Averaging is weapon of wealth destruction and is like trying
As per article written by Nitin Kamath, CEO Zerodha in The
to fix a trading mistake which could have been avoided by
economic times of 3rd Jan 2021, less than 1% of active
using stop loss function. Leveraging goes one step further
traders earned more money than a bank fixed deposit over
a 3-Years period. Rest 99% either lost money or made towards wealth loss. Leveraging is investment of Borrowed
marginal profits. money into stock market to gain huge profits. While it is
easy to get lured by promise of making outsized gain using
Myth of Entry and Exit: leverage, all it takes to blow up the whole account is one
bad trade. This is the biggest reason for people going
A very common strategy among beginners is to buy stocks
bankrupt in stock market. Leverage should be used only
which are going down or at their 52 weeks low. The mindset
when there is a very strong conviction in trade and should
while investing is that the stock has already gone down and
be used with a stop loss.
it will bounce back soon. But many times, the stocks follow
the trend and either goes down or hold the position for a
long time. New traders mostly either do not show required Rapid Loss recovery is Rapid Loss
patience or sometimes do not know when to exit. The smart
Strategy:
trader always knows when to quit. Hope of stock getting
The common problem among a lot of traders is when they
up again keeps on widening their loss. Traders must make
sure to define and stick to a sensible stop loss, an amount incur a loss, they try to overtrade aggressively to recover
he/she can afford to lose. Traders also need to define the from the loss. This leads to more losses. When there is a
time period he/she will wait for a stock to turn profitable. loss in a trade, it means it was a wrong trade. When to
There is a famous quote of Jack Schwager saying, "You should recover loss, more aggressive investment is done in that
make sure that you don't lose more than 1% of your trading trade is just being wrong twice. Losses are the part of
capacity on any trade". The larger the losses get on a trade, trading process and that is why limits are set and adhered
The higher the chances of trader acting irrationally. to judiciously.

BANKING FINANCE | OCTOBER | 2022 | 37