Saturday, 11 January 2014

Trading Psycolology

Everyone is interested in making money in the share market. They enter the share market with high expectations, looking forward to make money with share trading. But in reality about 90 percent of the share trader often experience loss of money. Very small percentage of trader manages to win and stay in the share market. In this article we will be looking at. some prominent reasons why traders lose money in the share market. 

Greed and fear is the number one cause that damages a share trader.

Lack of knowledge of the share market and its functioning becomes the second most common reason.

Taking advantage of exposure or margins provided by the share   brokers, without considering the market trends

Ignoring the news related to the share markets, particularly individual share that is mostly under scanner or widely discussed.

Ignoring the risk management 

Ignoring the money management rules

All the above said causes are interlinked to one another. Let us take the first cause. Most of the traders who get affected are due to greed and fear. Traders who buy a share wait till the share  price begin to climb and sell it to take some profits. When the same share keeps on making new high, the same trader who sold it earlier tend to buy it and seek more profit. But this time the trader gets into trouble. The share price that was on the run slows down and begins to come down. The trader eventually sells the same share this time losing some money. What could be the reason?  In this case the trader had little or no knowledge about the share that he has traded. He had traded without any knowledge of the share s support and resistance levels.

The fear factor which comes next is another thing which takes away the capital of many traders. When a share is bought the price of the share starts to declines. When it is sold the price begins to climb high. This is a very common occurrence in share market with which many day traders are familiar. Why should a trader gets exited and buys or sells and still realize loss of money? 

Most of the traders especially the day traders take advantage of exposures or margins as popularly known, provided by the share brokers. Share brokers usually allow 10 times exposure of the cash deposited by the traders. ( in Forex market the margins allowed are several times higher) The traders take these exposures as an advantage and take full benefit out of this. The result is when there is a price rise, good profits may come in but if the correction sets in, the trader loses a lot of money. Fearing the erosion of the capital, the traders take quick decisions to close the positions they hold. So here we understand the power of fear. Margins offered by brokers can be utilized only with proper knowledge of the price movement of share the trader is trading. If not it will only be beneficial to the share brokers in the form of brokerage charges.

Lack of knowledge is one of the most important factors which could be widely observed. In our day to day life we meet many professionals. They have become professionals after proper education in the fields they have chosen. Similarly the traders too must devote considerable time and energy to study the share markets. There are some must learn subjects like Dow Theory, Gann Theory and Elliot wave Theory. Knowledge in one or more of these theories can maximize the winning percentage of trades. 

Market news is something that a trader should be always be aware of. Changes in policy decisions, news related to share markets, and also international happenings can increase the volatility of share market. To be on the right side of the market the trader should make it a point to pay attention to all share market news.

Risk is a word associated with any type of business. The share market too carries a great amount of risk.  Risk management is a very special talent that requires the full concentration of the trader. Proper risk management helps the trader to cut loss early and preserve capital. 

Another important factor is Money Management. The trader should have a trading plan. He should not put all his eggs in one basket. He should learn to diversify. There is a rule that requires only 10 % of the capital be invested in one share . The trader is also required to have some money as reserve. He should only deploy the surplus money set aside for investing. No borrowed money should be used for trading. Trading with very strict discipline can help a trader in the long run.
Can trading be a full time business? There is no definite answer to this question. Trading can be profitable and a full time business only for those who can mobilize large money and reserve capital. For others it cannot be a full time business. There are good reasons for this statement. The main reason is the share market has its own ups and downs. The downtrends can last for months leaving little or no room for a small time trader to make money. Therefore unless he has another source of income he may face difficulties to manage his living.

Trading in share market can be interesting if a person acquires the necessary qualities to be a share trader. Trading can be highly rewarding if carried out in the way it is supposed to be done.

1 comment:

  1. Thanks for posting such a nice article and i really liked the way you presented each and every point clearly.commodity tips