Know 3-Rule to Save Capital During Stock Market Volatility

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Stock Market Volatility Raises Risk of Capital Erosion

By S Jha

New Delhi, November 11: The stock market volatility is fretting traders for past three months. The global cues are becoming hard to comprehend even for seasoned traders.

Stock market volatility is known to be top risk to capital of traders. The market participants with short-term stakes lose capital fast during heightened volatility.

The outflow of capital on account of the foreign portfolio managers readjusting their investment decision is topping the reason for correction in the Indian equity markets. The US President Elections also brought enhanced volatility.

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Besides, the dollar index and the bond yields impact the stock market movements. Rising bond yields and strengthening dollar are big negative cues for the Indian equity markets.

Traders can practice following three rules to save their capital. They have been known among seasoned traders and require a high degree of discipline.

Overleveraging Can Be Suicidal

Traders most often overleverage. Availability of loan without collaterals entices traders to take the bets. While personal loans are not given for investment in the stock market, lack of checks allows traders to divert the money for a quick ride in the stock market.

But the traders end up in debt trap after running into losses and also paying EMIs for the personal loans. The simple mantra to avoid this self-harming behaviour is to say a big NO to overleveraging.

Overtrading is making money for brokerages

The stock market trades work on principles of probability. Decisions of traders may come true or wrong. This is decided by the market. Wrong decisions can send traders into overtrade to minimise losses.

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This only compounds the woes of traders. The brokerages add on with the trades while traders count losses. Traders per veteran market participants should practice limiting to three trades a day.

Go Underwater When Volatility Spikes

Even seasoned traders hit stop losses when the stock market is in the midst of high volatility. Seasoned traders keep stop loses at about 20-30 per cent of the premiums paid in option trades. The stop loss in delivery could be in the range of 2-5 per cent.

Traders often adhere to stop losses. They know that if the stop loss is not respected, the market will kick them out. This is understood as traders losing all the capitals that there is nothing left to trade in future.

The stock market’s veterans advice that new traders should stay away from stock markets during high volatility. Even others should stay on the sidelines and watch the actions as spectators.

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