Be cautious while doing trading in stock market
Many people want to know about the art of making money from trading. These are simple investors with limited income. Their eagerness stems from the belief that there is money to be made by buying and selling in the markets and that there should be some way to learn how this is done.
Due to lack of knowledge, they do not perceive trading as risky, only as a missed opportunity. Then there are several women who make money in the stock market, but then inevitably lose it. Almost all of these women attribute the losses to their failure to sell or close positions on time. Many believe it is easy to become traders, ignoring the rigour that is needed.
Trading is a unique skill calling for a different mindset. The ups and downs in the market provide a big opportunity to trade. With electronic platforms that enable superfast implementation, trading has increased in volume even among ordinary investors. A good trader learns and applies two simple principles in the market. First is the technical understanding that there is always a reason for the price movement and every position has to be linked to the trader's interpretation of this reason. Most traders use technical analysis extensively to track prices as they unfold.
Second is the focus on managing capital. A trader understands that money is made when capital is deployed in the best trades and when it is churned several times. Successful traders have their own theories about the technical patterns that will make money. They also have their justifications about losing-sometimes very heavily-and how they learnt their lessons about focusing on capital, rather than returns alone.
The longer a trader has been in the market, the greater his humility and acceptance that the collective wisdom of the market is superior to a trader's conjectures on the price. Good traders do not argue with the market, nor are they wishful thinkers who hope that the market will always favour them.
The investors who get into trading with an eye on quick gains seldom focus on developing these valuable traits. A few bouts of successful trading and making gains tend to make them over-confident about their abilities. They believe it is easy to make money. They fail to see the story that the price reveals. Worse, they impose their views on the price, falling prey to human limitations in dealing with uncertain outcomes. Even the best traders do not rely on replication of their trading tactics.
At some point, the tactic fails and they begin the search for a new way to trade inefficiencies in the price. The investors who look for surefire ways of making money through trading are clearly unrealistic in their expectations. They should be willing to put in the years that are needed to hone trading skills. Many of them are not ready for such hard work. The fact that trading is considered inferior to long-term investing also creates the impression that the former is an easy way to make money. Trading is immensely tougher, needs a sharp mind and a stronger gut.
The eagerness of investors to make a quick buck has spawned an industry that lures them into trying their luck. Several broking houses offer electronic platforms, relationship managers, margin funding and quick execution to those who want to trade. The brokers earn from the income from margins and commissions. Several investors open trading accounts and hand over their passwords to relationship managers, who may not be trained and experienced, but rookies learning the ropes with other people's money.
There is an entire industry comprising 'expert traders', who offer to make money for others. Many of their technical theories are dubious, and their track records unknown. However, investors do not seem to mind this dispensation. They see themselves as risk-takers, though they may be secret gamblers banking on luck. One market crash is enough to impact them severely. At such times, they speak about investor protection and recovery of money. Some withdraw permanently from the markets, others wait for the next bull run.
As long as investors see trading as a casual fling with the markets depending on luck to make money, they are not likely to make consistent gains. Trading is hard work that requires close and continuous involvement with the market and a hard-nosed ability to close losing trades, accepting defeat from time to time. This is tougher than most people would like to believe.
Source: Economic Times
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