InvestorQ : What is Escape from stock positions and why is it so important?
shivangi Arora made post

What is Escape from stock positions and why is it so important?

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3 years ago
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There is a popular saying in the market that there are times you should be long and there are times you should be short. But more importantly there are times when you should keep your mouth shut. What is means is to just stay out of the market. That is called escape. An escape could either refer to staying out of the market or taking a larger decision to exit all positions in the market and sit on cash or debt temporarily.

When do you escape from a stock? Remember, entry and exits are already well known to you. Assume that you purchased a high beta stock and there were news flows confirming that the macros are deteriorating. For example, the inflation may have shot up or the RBI may have hiked rates or oil prices may have gone up or the rupee may have cracked. When such substantive announcements are made, you should look for an escape route. Losses and potential of the stock do not matter. At times it is more important to stay out of the market rather than try and outsmart the market.

Volatility is the enemy of stock prices because it destroys value. When the markets become more volatile than you can handle, it is time for you to look for an escape route. Volatility is never a great friend of the trader because the market becomes less predictable and there is a very high probability of the stop losses getting triggered. When volatility gets too hot to handle, it is always advisable for you to look for an escape route from the trade.

Then there are company specific factors that can be quite disconcerting. What happens when the company you are trading suddenly sees a major churn at the top? Obviously, something is structurally wrong with the company otherwise such a large management exodus is not justified. Even though you are a short term trader, you must take the cue and look for an escape route.

What happens when the market is trying to tell you something very subtle? You may be going wrong on the long side and the short side of your trades. The message is that the market is just too confusing and hence it is best to avoid trading and stay out of the market. Just listen to the market and look for an escape route. Something may be going wrong somewhere in the trade and you are not able to pinpoint the exact reason. It only means that the market is perhaps outside your trading scope for now. When in doubt just avoid the markets. Look for an escape route from the trade and wait on the sidelines.

If losses are getting to be more than you can handle, it is time to look for an escape route. You have already lost 50% of your monthly capital loss quota. This is a slightly ticklish situation. If you exit the positions then your chances of recovering the losses goes for a toss. That is actually the point. Never try to recover losses through overtrading. If you find that the loss is more than you can bear just find an escape route and use the best possible levels to just get away from your positions and start afresh. Staying in the market in the hope that you will recover losses is quite a foolish decision. It never works that way. In fact, things will only worsen. What you need to do is to go back to the drawing board and rethink your entire strategy.

There are times when the technicals and the news flows are giving very diverse and confusing signals. Obviously, there is something in the stock which even the markets are not able to decipher. The only answer in such situations is to find an escape route from the trade and stay out.

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