Friday, August 17, 2007

Havoc caused by the hedge funds

When an investor has a certain position in the market, he puts a stop loss order to protect that position, in case the market moves against him.

During a period of market weakness, most of the buyers stay away from the market. Those holding stop orders are "exposed" in a thin market.

The hedge funds goes around to knock down the stop loss orders, even though they are placed at a large distance from the current market level. This caused the market to swing widely. This caused the extreme volatility.

Somehow, the hedge funds are able to make a lot of profit through the high volality in the market. They know how to trade in this thin market, to their advantage.

Lesson: If you have a sound position and you are not leveraged or on margin, you should hold the position. Do not place any stop loss orders. Do not panic when the market swings wildly. Stay calm. Stay invested.

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