Average VS Stop-loss

Bhaiya(s) and Aapu(s), Allah-r Rahamatey asha korchi aponara sobai valo achen. Today, we will discuss – In downtrend market what is more effective? Average naki Stop-loss.

Say, Investor A has 100 taka and Investor B has also 100 taka. As per their policy both will keep 30 taka as cash and 70 taka will invest. But they have one different policy. Investor A follows Average policy and B follows Stop-loss policy. We assume that both have invested their 70 taka at same day and buy same share. Let’s see through some possibility how Average/Stop-loss helps them to make profit or keep safe their investment.

Possibility 1 : Stock goes to rise.
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Investor A (Average) || Investor B (Stop-loss)
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Profit                          ||  Profit.
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Remarks : Both are at profit stage.

Possibility 2 : Stock falls 10%. i.e. Present price of the stock is Tk. 63.
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Investor A (Average) || Investor B (Stop-loss)
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Carrying loss                || Sold the stock with loss of Tk. 7.
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Remarks : Investor A is thinking that if price goes to further fall, he will use his remaining amount to make average. Investor B : as his loss bearing ability is 10%. That is why he sold his stock and waiting for a suitable time with cash Tk. (63+30) = Tk. 93. If the stock rebound/ghurey daray, he will buy it again.

Possibility 3 : Unfortunately Stock falls 30%. i.e. Present price of the stock is Tk. 49.
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Investor A (Average)              || Investor B (Stop-loss)
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Carrying loss + using avg policy || waiting for suitable time with Tk. 93
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Remarks : Investor A: Buy stock using his remaining cash. Now his total capital is (49+30)=79. Investor B : Waiting for a suitable time with cash Tk. (63+30) = Tk. 93. If the stock rebound/ghurey daray, he will buy it again.

Possibility 4 : What a disaster !!! Stock falls 50%. i.e. Present price of the stock is Tk. 35.
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Investor A (Average)                  || Investor B (Stop-loss)
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Waiting for suitable time with share || waiting for suitable time with cash
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Remarks : Investor A: Needless to say. Capital is Tk. (35+24) = approx.Tk. 59. Investor B : Waiting for a suitable time with cash Tk. (63+30) = Tk. 93. If the stock rebound/ghurey daray, he will buy it again.

I know some of the Average lover and smart have started to thinking - if after Possibility 2, stock starts to go up then ……………???? My ans is simple. If Investor B finds the signal to buy, definitely he will buy it again. Option is yours. Your money, your decision. I’ve just tried to show you some fact. If you happy with the Average policy, don’t need to change your policy. If you are not happy with Average policy and found yourself at the present market in the one of the possibility from 3 to 4, you may think about Stop-Loss. by JC