My friend is a home maker. Not in a very good place financially, she and her husband want to increase their earnings to fund their children’s education. Since he invests in funds, he has given her “some money” and told her to start trading so that she can build a corpus over a decade.
I immediately thought about what personal finance advisor D Muthukrishnan recently shared. An individual he personally knew, lost more than half of his wealth over the past few years trading in Futures and Options (F&O). Prior to this, he was worth a few million dollars. Muthukrishnan cautioned: “Wealth is difficult to build and easy to lose.”
I asked my friend why her husband believes that she can be a good trader. She responded by saying she is good with numbers and math.
Most investors do not grasp the fact that trading is inherently risky, and no trade has a guaranteed outcome. The possibility of being wrong and losing money is a constant. Moreover, trading is difficult on many fronts, psychological and practical. And it is much, much more than getting your math right.
Many years ago, George Stein, then the managing director of New York-based Commodity Talent, explained that “there are different types of traders, but a common characteristic to most of them is a cool head that knows not to fall in love with a market view when the tape runs against you.” Temperament matters a whole great deal.
“The hard, cold reality of trading is that every trade has an uncertain outcome.” – Mark Douglas.
Mark Douglas lost nearly all his money due to his trading activities and an exorbitant lifestyle that consumed all his earnings, which pushed him to make a fast buck at trading. He authored The Disciplined Trader and Trading in the Zone after learning much about himself and the role of psychology in investing. Here is what he has to say in his writings.
Anyone who puts on a trade can claim to be a trader, but when you compare the characteristics of the handful of consistent winners with the characteristics of most other traders, they are as different as night and day.
A large ingredient of success for a trader is psychological. That is not to say trading is all about psychology, even a perfect mental game – emotionally balanced, always focused, consistently in the zone – won’t make you profitable if you don’t have an edge in the market. The edge means there is a higher probability of one outcome over another.
But if you have an edge and you are still making errors in execution - hesitating on entries, exiting trades too early, moving a stop too soon, moving your profit target before it hits, talking yourself out of a good trade, and so on - your mental game is costing you much more than you realize.
It takes a lot of psychological strength to not fear the erratic behaviour of the market. The best traders not only take risks, but have learned to accept and embrace that risk. It may sound simple in theory, but not so in reality when it is your money at stake. No matter how much you learn about the market’s behaviour, you will never learn enough to anticipate every possible move that the market can cause you to lose money. So if you are afraid of being wrong or losing money, this will hinder your ability to be objective or act without hesitation.
“Making money from the market is not magic, neither is it luck, or gambling. It is mastering probability through hundreds of hours of chart studies with money and mind management.” – Naresh Nambisan.
Trader Naresh Nambisan shares his perspective on trading for those who want to try their hand at it.
Trading sounds like loads of excitement, but that is a far cry from reality. To become a successful trader, it takes not less than 5 to 7 years and that too if you are willing to put in 16 hours daily. Just like any other profession, there is a learning curve involved here too.
Trading is not a walk in the park. It's not a game. It's not fun. It's not easy money. Trading isn't something you're "just good at", something you master overnight. Trading is a highly developed skill that takes years to learn. It is hard work. Analyze trades. Learn from your mistakes. Tighten your rules. Research. Study different strategies. Test new techniques. Good record keeping. The ability to stay calm. To trust your charts.
And this is what most do not want to hear; that even after years of learning, there is no guarantee that you will become a successful trader. Unlike any engineering or medical or law course, after which there is high likelihood of getting a job and a monthly income.
The stock market looks sexy from the outside, but is brutal. The interest rate cycle is changing. There is a war in Europe. Valuations are getting corrected. Markets are going up and down. Take the last six months which have been unbelievably volatile. The number of individuals who have lost hard earned money is stunning, and extremely tragic because this is not money they could afford to lose.
But this is how markets are. The market owes you nothing. The market will do whatever it wants as per its whims and fancies. You have to adapt. You have to work around it. You need to be psychologically strong and humble. There is no place for ego.
Identify yourself: Trader, gambler, investor or crowdsourcer? Traders have rules to protect capital. In gambling, the house has rules to protect itself. Investors have various strategies. Tips and hope are not strategies.
This is the time to buy quality stocks and sit tight. Comprehend the cyclical nature of the stock market and sectors. It will help you understand deep value and enable you to patiently wait for the right purchase price. If a stock doesn't come to your desired valuation levels, let it go. Never buy at any price. Verify your thesis. Check. Be cynical. Think independently. Then invest on your conviction.
Have risk management in place. Buy Quality. Don’t overpay. Protect downside.
There is nothing called "No brainer" or "sure shot" idea in the stock market. If somebody claims so, take your money and run. Far away.
I honestly believe that if individuals are not financially well to do and do not have much knowledge or time to perform such analysis, they should stick to actively managed mutual funds or index funds or exchange traded funds (ETFs).
BEHAVIOURAL FINANCE archives
Articles authored by LARISSA FERNAND
