📊 Loss in Trading

Unravelling the nuances in the game of trading and making efforts to understand the 2 main losses in trading and trying to minimize them.

You need to accept the fact that the stock market is a nuanced game and you can enter the stock market if and only if you can digest the volatility.

The stock market is more volatile than most of the romantic relationships!

😟 The 2 losses

So, when you start to trade, the probability of you making a loss is greater than you making a profit. Hence it is imperative to understand the type of losses.

Basically, there are two losses - Notion loss and Real loss.

Let's assume you buy 'Tata Elxsi stock' at 6300 INR and now it might be trading at 6000 INR, so your notional loss is Rs. 300. Then when does it become a real loss? When you decide to sell Tata Elxsi at a loss and that is when it becomes a real loss. So the important point to note here is you should not worry about the notional losses and you should be more concerned about the real losses. This is because the stock market is not a linear graph and you guys know what I mean by a linear graph.

🔄 When to convert the notional losses to real losses?

If stocks are down 30-40%+, it could be that something has fundamentally changed within the company, even if there is no news about it out there. Markets are super-efficient in the world we live in today, if something seems too good to be true, it usually is.

While trading, the idea is to buy a stock that is strong and not which is weak. Assume there are two stocks, A & B both at Rs 100. Say A drops to Rs. 50 & B remains at Rs. 100, and the odds of B going up are much higher. Sounds counterintuitive, but that is how the markets work.

Another rookie mistake that we all make is we sell winners (companies that gave us profit) and average down on losers — this is called Disposition Bias. This strategy can go horribly wrong. Ask the lakhs of investors who kept buying 'Yes Bank' on its way down from Rs. 400 to Rs. 10 by exiting all their profitable investments.

“Investing is both an art & science. While most of the things around investing can be explained with numbers, there will always be some aspects which are qualitative in nature and need to be looked at from a different angle.”

- Naveen K R, Senior Director, Windmill Capital

So the good takeaway is to sell your losers and hold your winners. Selling losers mean that the stocks that are fundamentally weak like Yes Bank or Paytm which been making losses for the past few fiscals. Losing positions tend to lose additional funds in the future, and there are tax advantages for doing so. Don't let regret and pride get the best of you.

🧠 Some brainstorming soundbites:

• Avoid high-debt companies. High debt means high borrowing. High borrowing means high losses.

• Sell loss-making companies (even if you make real losses) and hold on to good companies even if the price of the stock is not increasing. I had a personal experience with this. I bought a stock for Rs.1500 (I don't wanna say the name of the company). The stock started making a loss of Rs. 500 and I was holding it for 3 months. Then I decided to sell it at 900. I had to bear a loss of Rs. 600. But I diverted that Rs. 900 and bought a profit-making company’s stock which gave me around 55% return in just a week. So the lesson I learnt is that - sell the loss-making companies even if you make losses by selling them and divert that money into a good profit-making company.

• Don't trade in the market. Invest in the long term. Nithin Kamath, Founder of Zerodha said in one of the posts that 99% of traders make returns lower than FD returns and the only reason is because of human’s greed to earn money in the short term. The irony is that this statement is coming from a stockbroker who makes a profit with traders.

• Even if you want to trade in the market, be very cautious and try to minimize your losses and use the limit order feature to buy and sell stocks. I have done trading (not actively anymore) and I have failed miserably, trust me there is no particular strategy that you can follow in intraday trading.