The commodity markets were in a chaotic situation on January 30 when most major metals hit lower circuits- silver crashed 30% and gold plunged 15%. According to Zerodha’s founder and CEO, Nithin Kamath, this commodity market crash has a key lesson for investors: trade only with money you can afford to lose because when markets gap through circuits, there are no margin calls, no exits, and no second chances.
Sharing his views on the social media platform X, Kamath highlighted that there are rare days when risk management doesn’t work due to the markets’ violent moves. That’s when traders lose more than their entire initial margin, and both the trader and the broker feel helpless with no way out.
Giving an example of a commodity market crash on Friday, Kamath emphasised that what happened in commodities on that day can happen in equities too. It was seen in the year 2008, the year of the global financial crisis.
Does risk management always work?
For traders, risk management measures, such as position sizing, stop-losses, margins, and diversification, are the first line of defence.
However, there are rare days when even the best-laid safeguards collapse under the sheer force of market volatility.
When markets move violently and gap through circuit limits, traditional risk controls stop working. Stop losses become meaningless because there is no liquidity at intermediate prices. Margin requirements are breached instantly, and losses can exceed the trader’s initial capital.
History has such examples: crude oil prices turned negative during the COVID-19 crisis; in 2008, global equity markets experienced sudden, severe collapses.
As Kamath says, the key lesson from episodes like these is that only trade with money you can afford to lose.
“The lesson is simple but critical: only trade with money you can afford to lose. You can trade successfully for a decade and lose it all in a single day if you’re not properly managing risk. There’s no margin call, no exit opportunity when markets gap through circuits like this,” Kamath wrote.
However, Kamath’s statement should not be seen in the context of undermining the importance of risk management.
Risk management is essential—but it is not a guarantee. Extreme events will always exist. Respecting that reality is what separates speculation from sustainable participation in financial markets.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
