Trading is an activity that all of us love. Who doesn’t like the sound of cash, after all? However, there are times when even the best of us can make guesses that land wide of the mark. We are passing through one such time at present. However, seasoned investors have a defense mechanism to shield themselves during such events. It enables them to protect their portfolio by countering volatility. Here are some of the attributes of this defensive approach:
i. Respect Market’s Direction: First and foremost, every trader needs to respect the direction of the market. There are a couple of famous axioms doing rounds in the market such as “Bhav Bhagwan Hai” and “Trend is Friend”. They signify that every trader must respect the market’s direction without being stubborn. We all use different variations of moving average to assess the trend direction anyway.
ii. Financial Discipline: This is the most intuitive response for anyone. However, traders tend to become counterintuitive when the market becomes volatile. It could be because of the human biases driven by the sentiments of both fear and greed. However, risk management is always a key aspect of your investment. You need to follow strict stop losses to minimize your risk exposure. After all, every penny saved is as good as every penny earned.
iii. Avoid Leveraged Trading: Leveraged trading gives you a high return if you place your bets right. And if you don’t, you can end up losing your entire invested sum. The market keeps on swinging between highs and lows during volatility. Sometimes a stock might even buck the general trend without giving any clue. So, leveraged trading only exposes you to higher risks and hence, must be avoided.
iv. Avoid Catching a Falling Knife: If you try to catch a falling knife, the chances of you getting hurt are fairly high. During times like these, you should avoid certain practices including ’averaging’ existing trades. They do not reveal the undercurrents of the market. You must let things get stabilized first and then start venturing into quality propositions.
v. Avoid buying penny stocks/low-ticket-size stocks: During such a crisis, some of the weak stocks become penny stocks or can enter two-digit territory. Since ‘buy low, sell high’ is a famous market adage, traders feel inclined to buy them. Generally, such penny stocks do not rise thereafter. Few exceptions are always there but they are not worth the risk involved.
These are some of the qualities that every investor must adopt when financial uncertainty prevails. They go a long way in shielding your portfolio from associated risks during such periods. Godspeed!
Sameet Chavan is a guest contributor. Views expressed are personal.