On a bright sunny day, a master took all his pupils to a forest famous for wild monkeys. There he took a hollow gourd and inserted sweetened rice in it. Sweetened rice is supposed to be favorite food of monkeys. Then the master chained the gourd to a stake and waited at some distance.
As the fragrance of sweetened rice mixed with the air and started flowing, a huge monkey sniffed it and came near the gourd. He put his paw inside the gourd just to find that he was unable to withdraw it. Monkey screeched in frustration and hearing his screech there came a leopard and decided to make him his dinner.
Pupils screamed to the monkey and said, let go off the rice and run! But monkey in his hunger for rice refused to let go and was as a consequence caught and eaten by the leopard.
What was the trap, asked the master to his pupils? One said rice, another said gourd. To this master replied with a NO. The trap was GREED.
Dictionary meaning of greed is an intense and selfish desire for something, especially wealth, power, or food. We will restrict our discussion here to wealth.
Most of the traders seem to be leopard but they turn out to be the monkey. Let us relate this with an example of our own trading:
Mr Lalach Kumar is into stock market trading for 5 years now and this is what happened with him on one fine day:
Mr lalach kumar analysed nifty on the weekly timeframe and found it to be very bullish. He then analyzed nifty 50 stocks and found VEDL to be super bullish. It was a weekend and so he had time to plan his trade. By Sunday evening he was ready with his buy levels and stop loss. He was not sure of the target and hence kept it open.
Next day market opened and started making high. VEDL also as expected by Mr Lalach Kumar was making up move. Mr Lalach kumar placed buy order as per the levels worked out by him over the weekend. Order got filled and Mr Lalach Kumar was in trade. It was a trending day, nifty and all quality stocks kept making higher highs. Nifty closed near days high so as VEDL. Mr Lalach kumar was in deep green profits. He decided to carry the position as the market still look great.
Mr Lalach Kumar carried the position for entire week and did not book profits at all. He did not book part profits too and decided to carry entire position to next week. In 5 sessions, Mr Lalach Kumar was making good 10% on VEDL position. Part booking was necessary but Mr lalach Kumar thought why to reduce the position when the position is in profit and more upside is left.
Mr Santosh, a very good friend had also taken position in VEDL with Mr Lalach Kumar. He on Friday decided to offload 50% of his position as he felt 10% move is good enough to take some profits home.
On weekend, Mr Donald Trump, president of United States of America initiated a trade war with China. Levied some duties on them and made the global scenario look gloomy.
On Monday Asian markets reacted and were in deep red. Indian markets also opened gap down as market participants were not happy with the duties levied. Steel sector was most affected. Mr Lalach Kumar who was in good profit had now lost some part of his profit but was not in loss as market and VEDL had good run last week. By the end of day, market had not filled the gap and displayed weakness.
Mr Santosh, lost part of his profit for the part quantity he was holding. He was Ok with it as ups and downs are part of stock market business. He went and offloaded 25% of his initial quantity and decided to hold the balance quantity.
On Tuesday again, market was in red and Mr Lalach Kumar had lost some more profits and was close to his entry price. By the end of day, Mr Lalach Kumar’s position was in loss. It just took 2 sessions to wipe off the profit made in 5 sessions. Anyways, Mr Lalach decided to carry the position.
On Wednesday, market went further down but and touched Mr Lalach Kumar stop loss for VEDL position. He thought that now the downfall is over and it would be wise to not respect the stop loss, and add on to the existing position as the average would bring the price lower.
On the other hand, Mr Santosh was stopped out and he exited his VEDL position completely.
Thursday market bounced a bit and so did the VEDL share but not enough to make Mr Lalach Kumar’s VEDL position profitable.
Friday market continued the pull back and Mr Lalch Kumar’s position in VEDL was in 1% profit. Mr Santosh advised Mr Lalach to book profits as he has increased the quantity and major part of his capital was stuck in just one scrip. Mr Lalach declined the advice and he did not even consider selling part of his position. Mr Lalach thought that now he is on right track and his quantity has also increased and position has also become profitable. Mr Lalach decided to carry entire position over the weekend.
Again, on weekend, Mr Trump levied some duties to which china reacted and Trade war took bigger shape and it was worse than the earlier time.
Monday, market opened with a huge gap down with steel sector being affected largely. VEDL was 5% down at the opening itself. Same day it was down 10% and more. Ultimately the margin call was received by Mr Lalach and since he was not in position to pay the margin amount, he had to square off his VEDL position with 12% loss.
What do you think could be the reason for loss that Mr Lalach Kumar had to face?
Was it Donald trumps tweet that gave sleepless night to positional traders or was it the trade war.
The answer to the above question is one and only GREED.
There were 2 chances given by market to book profits and stay profitable. Exactly at that point in time, greed overtook the analytical brain of Mr Lalach Kumar and had to end up with loss. When entire position was in 10% profit, it was highly advisable to book part profits like Mr Santosh did and reduce the risk but greed engulfed Mr Lalach Kumar did not listen to any one and held on to the entire position.
Mr Lalach Kumar ignored the market signal and did blunder of averaging the losing position and not respecting stop loss. Still, markets gave second chance to Mr Lalach to exit when entire position was again profitable and showed 1% profit. From being in Deep green to Red and back in green is always a sign to exit.
Ultimately the 10% profitable position ended with 12% loss
Our question to you is:
- Has similar kind of thing happened to you?
- Do you believe in part profit booking?
- Do you diversify risk?
- Do you adjust stop losses so that it does not get hit?
- Do you still average losing positions?
- Do you carry losing position’s overnight?
- Do you square off position which was in green but went red and then again green?
Try and answer the above questions it shall surely make you psychologically strong.
Mr Santosh has a great habit of taking profit at 1.2% from intraday trade. Several times it happens so that the stock runs way high above his exit price but Mr Santosh does not regret it, because on some days when Mr Santosh takes exit at 1.2% profit target and the price reverses. Mr Santosh has traded the Greed with Discipline. Given up on Greed and hanged on to Discipline.
– Dimesh Patel