Why You Should Steer Clear of Stocks with Poor Volume During a Breakout
When a stock is on the verge of a breakout with poor trading volume, it can be a warning sign. Such situations often indicate market manipulation, which can lead to significant financial losses. This article delves into the risks associated with buying low-volume breakout stocks and suggests safer alternatives.
The Risk of Poor Volume Breakouts
Poor volume during a stock’s breakout is often a red flag, suggesting that the market is being manipulated. When a stock experiences a significant price movement without substantial trading volume, it’s often the work of individuals or entities looking to control the price movement for their benefit. This can result in sharp and potentially dangerous price swings, as genuine buyers and sellers are overwhelmed by the manipulated volume.
The Psychology Behind Low Volume Breakouts
Low volume often indicates that investors are less interested in the stock. There must be a fundamental reason behind this lack of interest, which typically relates to the company’s financial health and performance. If a company is performing well, its net profit will likely increase, leading to an increase in the company’s book value. Investors are primarily interested in two factors: net profit and book value. However, if these factors are not present, it may signal potential issues with the company or the stock itself.
The Dangers of BTST Trading
BTST (Buy Today, Sell Tomorrow) trading poses significant risks, especially when dealing with stocks of poor volume. In this type of trading, you buy a stock today and sell it tomorrow, potentially avoiding the call auction on the second day. However, if the stock price declines, you might have to pay substantial penalties.
Brokerage Charges: You only pay brokerage charges for the first day.
Call Auction Penalty: If the stock price falls, the second-day sell may trigger a call auction, resulting in significant penalties.
For Large Cap Stocks: In the case of large-cap stocks, you only pay a nominal DP (Demat) charge of Rs. 13.50 per share on the second day.
These penalties can be particularly severe if the stock price drops, as the market can move quickly in the opposite direction.
Indecisive Market Sentiment with Poor Volume
When a stock is moving with poor volume, it can create an indecisive market sentiment. Traders cannot easily predict whether the stock will move up or down. A high volume of buyers indicates that they are capable of outbidding sellers, pushing the stock higher. Conversely, a high volume of sellers suggests that the stock is likely to decline soon. Therefore, it’s crucial to monitor the current volume to determine the safety and stability of the stock.
Market Manipulation and Common Examples
Manipulators often stage a false breakout to push the stock price down before a comeback. They initiate a downward price movement to trigger stop-loss orders from investors, who may sell their stocks at a lower price thinking they are protecting their losses. This is a common tactic used to draw out other investors and then drive the stock price back up, creating a skewed market trend.
Some common examples of such manipulations include Laxmi Chemicals, Eicher Motors, Lupin, Grasim, and Adani Transport. These stocks have shown signs of manipulation, and buying them with a stop-loss order can be particularly risky as the broker may first initiate a downward movement of the stock to hit the stop-loss.
Safeguarding Your Investments
To mitigate the risks associated with poor volume breakouts, traders should opt for delivery trading. Delivery trading involves buying stocks with the intent to hold them rather than selling them for quick profit. This approach can help prevent losses caused by last-minute price reversals or sudden market movements.
For more insights and strategies, listen to the Infostock podcast on Google. Sharing and recommending it to friends and followers can benefit others as well.
Conclusion
Trading in stocks with poor volume during a breakout is full of risks. It’s essential to stay vigilant and informed to avoid potential losses. Always consider the fundamental health of the company, the psychological factors at play, and the risks of market manipulation before making any investment decisions.