Trading is a profession of emotional doom.
One CANNOT catch the highest price when selling and lowest price when buying a stock. It does not matter which service one subscribes to; how expensive a trading system is or how complicated/sophisticated a methodology is. It is simply not possible every time.
If you are prone to judge the success of a trade by what it earned, YOU WILL ALWAYS BE UNHAPPY. There will always be a higher price at which one could have sold and there will always be a lower price at which one could have bought the stock- for MORE PROFIT. In the trades that get stopped out (whether stoploss is used or not is not a question as it is financial suicide to not use one) you will simply never forgive yourself.
Such attitude ALWAYS leads to a downward spiral of emotions leading to depression and a sense of not being good enough. It results in people exiting the stock market for good, never returning because the pain they inflicted on themselves by chasing profits it too intense for them to get over.
EVERYONE OF US HAS BEEN THERE.
What differentiates professionals from amateurs is the ATTITUDE towards the market as a result of CONTINUOUS LEARNING from mistakes.
The stock market is a wonderful attitude corrector. There is no place for arrogance, overconfidence, negligence, denial and forsaken attitude.
AMATEURS make the mistake of judging success or failure from the standpoint of the ‘money’ they can earn from a trading corpus of say Rs. 25000 in a month. They wish to double their savings in a month and they ask questions like ‘how much money can I earn from the stock market everyday’. I get this a lot every single day.
PROFESSIONALS, on the other hand, look at success in the stock market in terms of the ‘trade set-up’. A trade that leads to loss is a success if they managed to stop out before the stock fell further and a profitable trade is a failure if they booked profits too fast without waiting for the target to be realized because they got greedy or let external factors influence their better individual judgement.
The concept of risk management, money management, stock analysis is all covered when one designs the trade set-up. Trust me, these concepts are not as difficult to understand as MBA courses make them sound. It is one part vocation and one part (the bigger part) common sense. There is no reason why a layman cannot make use of the ‘set-up’ to be successful in the stock market. All it takes is a pinch of discipline and a whole lot of integrity to trust yourself to stay true to the set-up. Designing the set-up may not be as simple and requires formal vocation.
The set-up comprises of things like-
Ticket size to be allotted to a trade based on the riskiness (beta) and liquidity (market cap)- Requires common sense and can be decided by everyone for their respective portfolio basis simple understanding of their own risk profile and how the market/stock of their choice works in terms of volatility.
Risk to reward ratio for a trade to qualify as acceptable– The ratio of stoploss percent and target percent from entry point. This decision is based on vocation and years of practical experience.
Making the decision of the target price and stoploss price is where the professional trader has edge. Application of Technical analysis is a great way of identifying potential support and resistance levels which ultimately convert to stoploss and target levels. It takes years of practice to understand the pulse of the market and of stocks. It requires an open mind and the ability to come to the market as an observer every single day because one cannot predict what is going to happen in the market, but can only make an educated guess and observe whether the market is playing to the tunes of one’s analysis.
When you begin to get judgmental and emotional about your trades and the set up- you will always be unhappy. It takes discipline and objectivity to review the past trade set-ups continuously, improve where ever a miss was noticed (as in deviations from the set-up) and keep emotions exclusively for family and friends who will give enough opportunities for feeling disappointed and elated. There no need to exercise those emotions in trading and investing.
The market will always be here and history will repeat itself. If you missed an opportunity, there will be many more and you will know better that time because you have taken the time to reflect on the missed opportunity and you know now what it looks like at the on-set.
Analysis may not be everyone’s cup of tea. It is time intensive and takes years and years of practice. For someone engaged in another profession or committed to a lifestyle that barely leaves enough time to focus on themselves, it is better to ‘outsource’ the analysis to an expert. Otherwise, the stress and overload will explode in the PnL statement and is not worth it. What would be better is to consult an expert who does this full time and take their advice for as long as you need. Even with expert guidance, there is still the monumental task of adapting to the right market psychology where you are in control of your greed and fear to make the right decisions in the market.
I hope you found this article useful. Please share your opinion and thoughts with me in the comments section and I will respond!