Many people who trade and lose a lot of money do not understand many risks..some of them are:
1. Running out of money! If you have no ability to take delivery – which means you have to cut position, your bank balance and your stomach balance both are important. If you lack either one of them, cut your position by half at 3pm and full by 3.15pm. Technology nightmare stories are true even if they are difficult to believe.
2. Upside Risk is Much worse than Downward Risk: Silverline went from Rs. 25-30 to Rs. 300 to Rs. 1300. At any point in time its value was only Rs. 30. It was yester year’s Satyam. Nobody believed its balance sheet. If you had bought it at Rs. 1300, your loss would have been Rs. 1300. However, if you had short it at Rs. 300 your BROKER would have forced you to cut losses at say 1200 (assuming you paid the MTM, or it would have been sold off long back). Sadly the UPSIDE risk in a short sale is INFINITE..technically you can go bankrupt.
3. Trading costs: The speed at which people cut positions, do a ‘double’ buy – normally of say ‘200 or 300 Nifty’ – ensures tremendous speed of trading. Add to this margins to be paid, and other costs, this churn hurts, and hurts badly :).
4. The FII behaviour: First of all there is no single animal called the ‘FII’ – remember they have ZERO expectation from equity markets if they can make 3-4% p.a. in the currency markets. This is because most of them are getting money int eh US markets at about 1-2% p.a. (in about 72 years you will double your money). Competing with this animal is impossible. It is like saying ‘I need to make 60 runs in 60 overs – frankly it does not matter whether Rahul Dravid or even Geoff Boycott opens the innings.
5. The impact of the media: When one channel talks about one company, the speed at which the market behaves is stunning. The movement can be up or down. Also if the MD /Chairman is not a good communicator, the anchor makes you feel he cannot manage the company also!
so as a trader know all this, understand all this and please remember all this…AND MUCH MORE!
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