Life is stranger, murkier and more irrational than fiction. This is the conclusion I made after hearing of the suicides by a few who lost money in the markets. For all the markets may be worth they definitely are not worth losing one’s sanity or life. Markets play on one’s emotions all right, but to let it affect so much as to make one take his life is alarming. My heart goes out for the family of the victims. May God give them the fortitude to bear this tragic loss.

Suicidal Crash

Suicide is essentially an irrational response to an unpleasant life situation brought about by one or more extremely adverse circumstances. In the present case, that circumstance was the market crash and specifically the bankruptcy due to adverse movement of the leveraged positions. Many smalltime traders flock thousands of single terminal dealing rooms across the country; it may be worthwhile to examine the genesis and perpetuation of this situation and see what can be done to avoid it happening to one of our near and dear ones or us.

Villainous Money
The first object of consternation is money itself. It is often said that money makes the world go round, but a little objective thinking is all it takes to realize that this is not true. Unfortunately, much is made of the power of money. We have to understand that money only has utilitarian power much like electricity. Electricity by itself is not important but it makes those things run that are important – like the washing machine, the refrigerator and the computer. However, that does not mean that if there were no electricity, life would stand still. Clothes will still be clean and food will still be consumed.

Having said that money has only utilitarian value, I must concede that money is a desirable thing and earning it is the primary occupation of most people in this world. Therefore, it is no surprise that markets attract wannabes by the score. These people invest or trade in the markets and sometimes make money and at other times lose it. What keeps these people in the market is the hope of winning.

Keeping Hope Alive
It is of utmost importance that this hope of winning is alive and for that to happen one’s capital should be safe. This can only happen if one is ready to cut losses quickly and move on. In my view, one should not wager more than 2% of one’s capital in any one trade. This will ensure that bankruptcy would require 50 straight and continuous wrong calls. If that happens one must pack up and banish the markets from one’s mind forever.

The Credit Noose
Over extension of lines of credit is another reason for despair. If a trader or investor borrows money to invest or to pay margins for a stock, he or she is under tremendous pressure to win. This pressure is bound to cloud one’s judgement. In nine cases out of ten, one will see extraordinary merit in a stock for some not very important reason and follow that stock to disasterdom. This pitfall is prevalent even in portfolio investment because of which the portfolio holder holds on to an obvious sell. A case in point is Zee Telefilms – Many investors ignored everything negative about the stock because it was seen as the ultimate convergence play. The stock is down from 1600 to around 100 in one year. Those people who borrowed money to bet on Zee are the hardest hit. Do not borrow to buy stocks and NEVER to cough up margins.

‘Know-allism’
Overconfidence ranks third in my grief list. Nobody knows where the market is headed. Anybody who tells you otherwise is talking through his hat. Repeat ten times every day “I don’t have the vaguest idea where the sensex or any other stock is going today”. Trading is a game of probabilities and there is an equal chance of the trade going against as it has a chance of going in favour. Use any technique in the world including guesswork to take a position but do not have even an iota of confidence in your punt. Be suspicious of your own punting capabilities and you will survive and with a little luck win too.

Averaging Cost = Multiplying Despair
The next dangerous virus in the market is ‘cost averaging’. This is a dangerous thing as it is a sign of overconfidence. In those rare occasions that it may be justified, cost averaging should be premeditated. Impulsive and loss-cutting cost averaging lands you in more trouble than you were originally in. HFCL recently fell 16% each on four straight days and those who cost-averaged must have seen considerable avoidable damage to their capital.

Convicting Thyself?
After stupidity and greed the third most potent enemy of the trader is ‘conviction’. Any trader who has any convictions about the market or a stock is doomed. The only bottom that is theoretically predictable is zero as no stock can sell at a negative value. So, markets can be bearish even when the BSE index is 2000, 1000, 500 or for that matter 100. Do not attempt to foretell, anticipate or predict. Trend is the king. Leave bottom fishing for investors and institutions.

Conclusion
Last but not the least, every trader must understand that trading may be a profession, a hobby, a thrill or an interesting game but it sure is not life itself. As they say in urdu “aur bhi gum hain zamane mein, ek market (ki muhabbat) ke siwae?”. Do not let the market dictate your life – or death. In the same breath, I must add that if one crossed the street without looking around there is a great probability of getting hurt but that does not mean one must stop venturing out.

To begin with trading, it’s good to have good stocks to bet on and all the right strategies to succeed. But, despite all the good things to bank on, traders lose money simply because they are not able to control losses. More than gains, a trader’s focus should be on controlling losses. As the more limited the losses, the better the return would be eventually. Excitement should never creep in so overwhelmingly that it takes away your hard earned money and leave you nowhere. If you are a beginner, you should be more cautious towards your dealings. Make sure you are well-prepared before you hit the trade. When you open an account and begin to purchase stocks, making little gains is easy. A trader thinks that he can relax, not knowing that the tide may turn any day. Your stock can fall unexpectedly. Sometimes, the price starts to dip as soon as the stock is bought. When the stocks fall for a prolonged period, a trader loses composure and gets confused; this leads him to more losses.

There are a lot of things that cross your mind when you begin to lose. Like you could have stopped earlier or you should wait and watch. First and foremost, keep this in mind that every trader loses at some point or the other. So, losing isn’t strange in trading. You can’t have all the good days. The bottom-line is that you know what you are doing and you know the way to manage your losses and move ahead. Don’t be a fluke by making pots of money in a day and then losing everything on other days.

Well, you can follow a few simple things to handle losses, which will determine a smooth day trading for you. Read on.

Making a note of everything will help you a great deal. Write down about every trade, its profit and loss. Analyze your decisions and how it affected your business. Maintain notes of every trade to go along with your diary. Study the journal from time to time and see what you missed out on and what you could have done.

Trading isn’t an independent business. So, don’t be lonely by doing everything on your own. It’s important to interact with other traders and know their views also. Don’t just rely on your own knowledge or expertise; rather take from other traders what they have been doing to improve their trades. You don’t achieve anything on a silver platter here so learn to be patient. To achieve bigger success, one needs to work harder.

Besides, a trader should never think about trading without a well-defined strategy. Discipline should help you reach longer miles. A good day trader can’t afford to go by his whim. A smart trading tactic tells you to take decisions according to the time. It’s the right decisions at the right time that gives you what you want eventually.

So, keep record of everything that you do in trade and learn from your mistakes. Remain disciplined and focused. As long as you can adapt to the above basic rules of controlling losses, you can trade to gain.