Under the present circumstances,
there are two ways forward - a) trading approach & b) portfolio
approach.
We go through the details -
a) Traders approach - the markets are falling,
that's all you need to know.
Dump your emotions and your positions,
go with the flow and short the markets.
Whether you choose to play the same stock that you are / were holding
long
or hedge against some other securities, that is immaterial.
You are committed to recoup your losses and take a fresh view on the
situation when clarity emerges. While this approach is likely to
yield superior
results in the absolute near term, we feel, it will force you to
digress from your medium / long term view and catch you unawares
whenever the turnaround occurs. You could salvage the situation now
and take a hit later. The risk involved in this approach is high.
b) Investors approach - this approach is a mature and patient
approach to handling the current situation and is likely to exert
stress in the immediate future but will ease matters in the medium
term.
We have seen with past experience that after taking a significant
hit on their investments, traders / investors get dis-oriented and
undergo a sense of shock / trauma. Logical decisions
no matter how sanguine they maybe, seem impractical.
A sense of withdrawal from the markets is a direct result.
That is a situation that all seasoned players know how to
avoid in adverse circumstances. In case a temporary setback has
occurred,
you have the avenues open like writing options, buying puts / calls,
resorting to exotic / synthetic strategies to salvage the situation.
Booking losses too often will mean that you are struggling too often
to get your capital back to where you started from ! However,
there are situations where you need to cut your losses and run,
and you need to determine whether you are in that situation.
A practical understanding of your current situation is a pre -
requisite.
The capital involved in this approach is high.
A few words of advice -
if you are invested / have leveraged long positions in scrips
where the long & medium term charts are still bullish / intact
and the relative strength comparative vis-a-vis the indices is high.
you should witness a revival in your stocks rapidly.
It's only the short term waves that are turning negative,
which tend to correct more rapidly. Watching the open interest
( O.I. ) and the traded volumes on these counters will be another
worthwhile proposition. It is essential that you must
hold a fixed portion of your trading / investment pool amount
in ready cash to meet contingencies like the present scenario.
In case your personal finance allow it, average the high RSC / low
beta counters,
but in a pyramid fashion. Just as a pyramid gets broader near the
base,
your averaging should get more aggressive as your scrips near
significant threshold levels.
For example - buy 100 shares @ 500, buy 200 shares @ 490, buy 400
shares @ 480 etc.
This way, your acquisition cost tends to be near the current market
price ( CMP ).
there are two ways forward - a) trading approach & b) portfolio
approach.
We go through the details -
a) Traders approach - the markets are falling,
that's all you need to know.
Dump your emotions and your positions,
go with the flow and short the markets.
Whether you choose to play the same stock that you are / were holding
long
or hedge against some other securities, that is immaterial.
You are committed to recoup your losses and take a fresh view on the
situation when clarity emerges. While this approach is likely to
yield superior
results in the absolute near term, we feel, it will force you to
digress from your medium / long term view and catch you unawares
whenever the turnaround occurs. You could salvage the situation now
and take a hit later. The risk involved in this approach is high.
b) Investors approach - this approach is a mature and patient
approach to handling the current situation and is likely to exert
stress in the immediate future but will ease matters in the medium
term.
We have seen with past experience that after taking a significant
hit on their investments, traders / investors get dis-oriented and
undergo a sense of shock / trauma. Logical decisions
no matter how sanguine they maybe, seem impractical.
A sense of withdrawal from the markets is a direct result.
That is a situation that all seasoned players know how to
avoid in adverse circumstances. In case a temporary setback has
occurred,
you have the avenues open like writing options, buying puts / calls,
resorting to exotic / synthetic strategies to salvage the situation.
Booking losses too often will mean that you are struggling too often
to get your capital back to where you started from ! However,
there are situations where you need to cut your losses and run,
and you need to determine whether you are in that situation.
A practical understanding of your current situation is a pre -
requisite.
The capital involved in this approach is high.
A few words of advice -
if you are invested / have leveraged long positions in scrips
where the long & medium term charts are still bullish / intact
and the relative strength comparative vis-a-vis the indices is high.
you should witness a revival in your stocks rapidly.
It's only the short term waves that are turning negative,
which tend to correct more rapidly. Watching the open interest
( O.I. ) and the traded volumes on these counters will be another
worthwhile proposition. It is essential that you must
hold a fixed portion of your trading / investment pool amount
in ready cash to meet contingencies like the present scenario.
In case your personal finance allow it, average the high RSC / low
beta counters,
but in a pyramid fashion. Just as a pyramid gets broader near the
base,
your averaging should get more aggressive as your scrips near
significant threshold levels.
For example - buy 100 shares @ 500, buy 200 shares @ 490, buy 400
shares @ 480 etc.
This way, your acquisition cost tends to be near the current market
price ( CMP ).
by Nazim
From Chandigarh to Chennai - find friends all over India. Click here.
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