Extra greed is always fatal and this is true for stock market as well. Because of greed people lose the hard earned money many times. Many people put their capital to risk by investing again the profits they have made from their trades. I am really disturbed by some people marketing themselves on incremental trading without knowing repercussions of it.
What is incremental trading?
In simple words incremental trading is the trade done from the money earned as profits from the previous trades. It is putting back your profit in next trade by increasing size of trade. Let me explain it with my own personal experience.
In the year 1998 in the month of November I was looking at charts and found great opportunity for the next 12 months I prepared a plan to make my money grow 100 to 1000 times in an year without any pitfalls, my steps were.
1. Invest 50% capital in one good long term stock and trade in 4 stocks in badla system( now replaced with F&O) which required payment of 10% margin. My target was 3 to 4 times growth in portfolio in 2 month. So invested 50% in bharat electronics ltd at the rate of 14 and decided to trade 4 stocks named supreme ind,excel ind,satyam comp and colgate in the badla system. My money X became 4 X by 1st week of January 1999 in those four stocks.
2. Next step was to create position in 2 stocks digital equipment and bpl near 154 and my target in both the stocks was 400+ in 30 to 45 days. I invested 95% amount in badla system by paying 10% margin..Calculation was very simple rs 15 will become 250/275, means 17/18 times gross expectation was 4x multiplied by 17 was 68 times.
Now comes mistake, while digital/bpl of 154 became 178 I took incremental exposure on 11/12th January 1999. Both stocks crashed to 154 on 15-01-1999. I lost all deposit and position was squared off. I had no worries because my investment was rs 1 lac, so loss too was that only.
Depression came in next 21 days both bpl/digital touched 432 in early February 1999. I lost huge opportunity to multiply my money to 70 times in just 3 months. It was incremental trading which was responsible for my down fall, not in capital terms but in terms of opportunity which I lost.
Effect that day,I stopped trading myself not for wrong view but wrong style. The right strategy is always to book profit and to invest the profit earned in some fixed income options so that your profit gets locked. Hope it will make people learn bad effects of incremental trading. wish well to all of you.
Devendra Chaturvadi is an Astrologer and Technical Analyst from Mumbai . He is a chartered accountant by profession and is been active in the stock market since 1987. He applies technical analysis with the principles of Argha Martand in his market analysis