You must have heard that money can be made easily in the stock market. It is true that it has become very easy to start trading in the stock market. But you have to keep in mind that making trading profitable is a difficult task.
What is the difference between trading and investing?
I think if you take stock and sell keeping in mind the time frame (usually short duration), then it is trading and not investment. For example, if you buy a house to live without the intention to sell, it is an investment. If you buy a house just because the price is attractive so that it can be sold when the price increases, it will be called trading.
Countless people have been tempted towards markets by dreams of getting rich quickly and achieving financial freedom. The ease of starting trading makes this attraction big. However the truth is: less than 1% of active traders earn more than bank fixed deposits over a period of 3 years. While this number seems unusually small, it is, in fact, similar to the success ratio of ordinary businesses; It’s just that ease of entry entices a large number of people to start trading.
I am a trader for almost 25 years. I have been very fortunate to get the chance to interact with thousands of traders before and after starting Zerodha. I felt that as a trader it would be a good idea to talk to all these and share the lessons learned from my own successes and failures.
Defeat limits – money and time
Markets may remain confused for longer than you know – John Maynard Keynes
Just as not everyone can succeed in a sport, music or business, not everyone can make a profit from trading in the long term. The stock market is like a black hole, where if you are not good at trading, you can lose an unlimited amount of money. If you are a new trader, define a stop loss and ensure a loss limit – an amount you can lose and a time period until you wait to be profitable.
Apply stop loss on every trade
Two basic rules when trading: (1) If you do not bet, you cannot win. (2) If you lose all your money, you can’t bet – Larry Height
I had the privilege of hosting this podcast with Jack Schwager – author of Market Wizards, which any aspiring trader should read. I agree with what he says in this conversation after interviewing some of the best traders in the world – “You should make sure that you don’t lose more than 1% of your trade capital on any trade”. The larger your deficit trade, the more likely you are to act inconsistently during or after trading, which can ruin your trading career.
And for those who buy a call or put, it is only possible to keep a 1% stop when the trade to buy your option never exceeds 2% to 3% of your trading capital. Remember, buying options without a hedge is almost like buying a lottery ticket. If you have one lakh rupees, how much will you spend to buy a lottery ticket?
Keep up with the trend
In trading, one who is comfortable is rarely profitable. – Robert Arnot
We are attracted to buy stocks whose prices have fallen and we sell those that are expensive. While this may be a good strategy when investing for the long term, when you make short-term trades it will win. Reduces the possibility of. Share prices are in trend, ie they move up or down in one direction for a long period. Going against the trend – Buying a falling stock, or selling what is rising is a bad trading strategy.
A common starting strategy is to buy stocks that are at their 52-week lows. The thought process is that the prices that have fallen are bound to bounce back. This is probably one of the worst trading strategies ever. We are all ready to buy whenever there is a discount sale. But while trading, you should buy the stocks which are going up and sell it which is going down.
Lakshmi is destroyed by “averaging down”
Do not invest any more money in a loss trade.
When you buy stock at 100 and buy more when the price drops, such as at 90, something else at 85, etc .; Hoping that a surge would help recover the damage faster. Unfortunately, ASHA is not really a trading strategy. Stock prices tend to be in trend (up or down for the long term), and buying more to average may work a couple of times, but is usually a strategy to lose money in the long run. By over-buying the falling stock, you are essentially trying to correct a trading mistake that could have been avoided to prevent a stop loss. Worse, to trade a stock, small traders usually sell the stocks where they are making a profit (also known as the divestment effect).
At least when you average the shares, you can give time to bounce in it. But when you buy stock or index options that have a limited time to expire, this strategy of averaging is a sure recipe for destruction.
To trade, the winners must be captured and the losers removed, and not vice versa. I also want to say that averaging is the biggest money-destroyer for small traders. See this post on lessons from Yes Bank’s trade.
Leverage is a weapon of mass destruction
Money cannot be the goal; Use it as a means.
Leverage (in futures and options) is to trade with more money than what you have. It is extremely dangerous in the hands of someone who does not know how to handle it well. While this may convince you that you can quickly make enough profit if done right, if you take more leverage, you may end up in the same bad trade. If you talk to an active trader who has stopped trading, it is most likely that they have traded with very high leverage. If you decide to use leverage, make sure to use it sparingly and only when you are really confident about trading. Still make sure you keep stop loss!
Use of fundamental analysis with technology
Buy on rumors, sell on news.
Many early traders began their journey in the markets by learning fundamental analysis, the most popular strategy being the Price to Earnings (PE) ratio. While fundamental analysis is a great way to invest for the long term, it is not for short term trading. For example, stocks that have a low P-E can maintain that low P-E and decrease for an extended period of time, while the share price continues to decline. If you want to use the core principles, it is best to mix it with some technical analysis (T-A).
TA is based on the fact that market prices show all (you don’t wait for news to buy, you buy when prices go up (rumor) and then sell when it goes down ( Usually when there is news)). Most TA strategies do not allow you to trade against the trend. So if you have decided to buy less P-E stock by mixing in TA, you will buy it only when the price of the stock goes up. For example, if the price is above the 50-day moving average (a simple T-A strategy) – a trading strategy is much more likely to win than simply buying one share because it has a lower P-E.
Trading the stock price without looking at which stock is not a good strategy. Penny stocks (companies with a market cap of less than Rs 100 crore and most where there is no real business) are well-off wealth destroyers. These stocks are usually manipulated and have a tendency to go up sharply and then fall down rapidly without giving you a chance to exit. If fundamental analysis is part of your trading strategy, you can avoid such stocks.
Avoid Stock Tips
Always start from the beginning (think of all possible outcomes and be prepared before trading). Professional traders have an exit strategy before every trade. – Robert Kiyosaki
While there are many “advisors” who claim they can give you stock tips that will generate high returns or earn you quick money, they rarely get easy money this way. While trading on the tip, you will not know the reason for entering, and therefore do not really know when to exit, which is the most important part of trading. Most of us are also terrible at using advice, which means that if you somehow find a mentor who gives good suggestions, you still can’t follow it properly. Either way, it usually creates difficulties. Also trading on tips is almost spoon-fed, your learning curve and growth as a trader stops. More importantly, there are piles of unsolicited stock tips spread on social media and the SMS “pump and dump” scams. These scammers raise the stock price by generating publicity through tips, only to dump those big blocks and take advantage at the expense of the traders who fall prey to it.
Diversification or diversification
Do not depend on one instrument.
If you are building an active trading portfolio of stocks, then make sure that you do not have more than 10% of your trading capital in any one stock. Ensure that more than 25% of the portfolios are not in any one sector. Although diversification can reduce returns, it also reduces risk. As an early trader, risk reduction is the most important thing in the first few years. Think of it this way: You must go through 16 years of education before you can find a job. Likewise, you need to give yourself time and opportunity to learn and grow as a trader. But you can only achieve that time when you are left trading for a long time, and this is possible only if you reduce the risk as much as possible.
Trading Addiction and Trade Sizing
Many times, the best trade is not to do any trade.
It is very easy to become addicted to trading. Most people enter trades simply because there is nothing more interesting or exciting to do. It is very important not to become such a trader. Whenever you feel that trading has surrounded your life, take a break. If you find it difficult to stop trading completely, then reduce your trading size to 1 / 10th when you know that you are only trading by your habit.
By the way, this strategy of changing the size of the trading depending on the situation is called “trade sizing”. Essentially, one should not be trading with the same quantity all the time – shorten your trades when you have a drawdown (or stop earning money) or when you are not confident, and make big bets when you are winning consistently. And are confident about their trades. By measuring bets in this way, you increase your chances of winning in trading.
Keep an alternate income to improve your chances of winning
The confidence is not that ‘I will benefit from this trade.’ There is confidence that even if I do not benefit from this trade, I will not care. – Ivan Biyaji
If trading and earning money is difficult, then it is many times more difficult to make a living from trading. Very little succeeds under the added pressure of earning from trading to put food on the table. This decision of trading to make a living should only be taken when there is a large source of income to cover your lifestyle, and a hard stop in place. Even when all this is in your favor, there should be no decision to take it lightly. Alternate income income can come from a fixed income tool, rental income, a salaried job or anything that will reduce the pressure on every trade to make a profit. In my experience of meeting countless traders, most of those who were profitable were also those who had another source of income.
And finally, remember that trading is not life. Trading is an exciting way to generate income. If you are not enjoying it or constantly losing money, stop it. Do not let bad or missed trades affect your personal life. As they say, opportunities always look bigger as time passes. And remember, there is always another trade; If not in the stock markets, then elsewhere.
If you are starting trading, make sure you learn how to trade and invest through Varsity. For those who have been trading for some time, it should be sure to learn trading psychology through this collection of Innerworth newsletters. they’re amazing. If you have any questions, you can post them on TradingQ & A.