Why My Friend's Stock Broker Loves Notebandi

Apurva Sheth

Christmas is a great time to get together family and have fun with friends. Last week, I caught up with a friend who I've actually written about here before (Chai Pe Charcha). That was back in January 2015 when the markets were steaming ahead but his portfolio wasn't moving at all.

But he's picked up the tricks of trade (no pun intended) and got much better over the last two years. The problem now is that it's very easy to deviate from the right path if you are not disciplined enough.

Demonetisation, or Notebandi, has affected our lives in many ways and my friend is no exception. He is a distributor and retailer of branded undergarments. Both retail and wholesale sales have dropped substantially since 8 November. Footfalls are down bigtime too.

The lack of action at work has diverted his attention from business to the markets, and he's started trading on an intraday basis. There is nothing wrong with that, of course...if one has a proper process and clear objective.

Unfortunately, my friend has neither. I asked five simple questions to find out if he was trading correctly...

  1. How do you determine what to buy or sell?

  2. How do you determine how much to buy or sell?

  3. How do you determine when you buy or sell?

  4. How do you determine when you get out of a losing position?

  5. How do you determine when you get out of a wining position?

His reply?

'I trade whatever catches my eye when I am at my broker's office. Any stock that is in the news or moving fast is on my list. If I am making a profit, I sell it on the same day, or I hold it overnight and sell it by Friday (when the payment is due) irrespective of profit or loss.'

My friend uses his broker's margin facility. He gets a five-day credit period before he has to pay for the stocks he trades. This is essentially trading on borrowed money, which is very dangerous.

Regular readers probably noticed another big problem. Which is that my friend doesn't have a proper process to decide what and when to buy. Nor does he have a proper exit strategy.

I immediately pointed out that what he was doing was wrong, but he dismissed my warning, saying he's made good money from the markets recently. And besides, it's better than sitting idle in the shop.

His broker, noticing my friend's recent success and increased appetite for risk, has allowed him to take on more exposure without putting up any extra collateral. It seems like a win-win for both. My friend gets to trade bigger positions. And his broker gets higher commissions.

This is all fine. Until it's not. When my friend hits a losing streak (and he will hit a losing streak), his loses will be big...probably more than he can afford, especially during a business slowdown. But the broker will still earn a commission.

No doubt brokers love compulsive traders. In this broker's case, demonetisation is a boon since my friend uses it as an excuse to trade.

I know that's not the case with all the brokers. Overall market volumes have been extremely dull this month, which means most brokers are not getting as much business. But that's not the point.

The point is that it's hard to stay disciplined.

The new year is almost here. And once again, we will make resolutions...and break them. Hitting the snooze button is easier than putting on jogging shoes and going for an early morning walk in this freezing winter. Smoking an extra cigarette is easier than fulfilling the promise you made to your daughter (especially when she's not around). Eating a piece of cake is easier than sipping a cup of green tea.

(Doesn't this happen to all of us?)

And giving in to the lure of instant profits from day trading is easier than waiting days, weeks, or months. It is easier to give up your tried and tested process as soon as you go through a losing streak or see someone with no process make money.

But this is the difference between consistent winners and ultimate losers: Consistent winners have a tried and tested process and the discipline to stick to it irrespective of the circumstances.

On the other hand, most retail investors do not have a process. And even if they do, they don't stick to it long term. Rather, they keep jumping ships, which ultimately gets them nowhere.

At Daily Profit Hunter, we avoid this by defining a process beforehand for all the services we offer. We stick to it with discipline while retaining moderate flexibility to modify it if it isn't working as per our expectations.

Take Swing Trader for example. We didn't start on a very positive note in March 2015. We had to overhaul our process a couple of times. The last major change was in November 2015. And since then, we have had an amazing ride.

Off course, the ride has had its own ups and downs. But we have enjoyed it and are ending the year on a decent note. All thanks to the process...which we will certainly continue to follow should we develop any new services in the coming year.

What is the difference between consistent winners and ultimate losers? Share your views in the Club or share your comments here.

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2 Responses to "Why My Friend's Stock Broker Loves Notebandi"
Jos
30 Dec, 2016
Thanks Apurva for the reassurance at this critical juncture.. it is going to be a testing time for traders.. better be careful that take risks.. the advices are ideal for all traders.. hope all in our group strictly follows the same to be happy tomorow too.. thanks.. Wishing all a Happy & Prosperous 2017Like 
RAJKUMAR S D
28 Dec, 2016
I am afraid that notebandi should or will not become tradebandhi for your friend. He is not consistent winner but ultimate loser so is his broker. Trading done without systematic process and risk management is very risky and my put your friend in tradebanhi for which most of the anaylyist are advising. I conclude that proper process in trading with risk management is a must even for short term or medium term trader, without this one can invite his coffin. Thanks with regards RAJKUMAR S D Like 
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