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Trading

Investing is staying from point A to point B.

In the above example we see

Year Sensex Level
Sept 2007 15590
Jan 2014 21000
% Returns 34%

In the above example Returns made as an investor are very low.
But as the graphs shows there have been many opportunities to buy at lower points and sell at higher.

 

Sr. No Entry Date Entry Exit Date Exit P/L Capital
15590
1 07/09/2007 15590 25/02/2008 18361 2771 18361
2 25/02/2008 18361 19/03/2009 8900 9461 27822
3 19/03/2009 8900 12/08/2011 16839 7939 35761
4 12/08/2011 16839 03/02/2012 17604 -765 34996
5 03/02/2012 17604 10/08/2012 17577 -27 34969
6 10/08/2012 17577 29/11/2012 19170 -1593 33376
7 29/11/2012 19170 02/08/2013 19078 -92 33284
8 02/08/2013 19078 13/9/2013 19732 -654 32630
9 13/9/2013 19732 26/02/2014 21000 1268 33898
             
        Total 18308  
        Accuracy 55.56%  
        Investment 15590  
        % Returns 117%  

 

This activity of buying-selling is called TRADING. Trading is benefiting from the cycles of the market.
Moreover Stock Trading gives you an additional option of Selling First and Buying Back later.
The above chart is the output of a technical analysis strategy with weekly chart Sensex which requires
once in a week review.

  Investor *Trader
Entry 1 9
Exit 1 9
Accuracy 100 60
Profit 34% 117%
Make Money When Markets up When Markets up as well as down
Assumptions Market will always go up. Markets have a trend which can be followed.
Nature Waiting for Appreciation Just follows the Market.
Instruments Stocks, Mutual Funds, ETF. Stocks & Derivatives
Perception Capital appreciation. Business (Regular income +Capital Appreciation)
Time horizon Compulsorily Long Short, flexible as demanded.

The question remains is how to identify the entry and exit points to profit from trading.
To answer the question let us first understand this Business in detail.



TRADING IS A BUSINESS

Trading in Markets is similar to buying and selling in regular trading business. In fact it is also a
Business.

This makes trading a huge Business opportunity. When we call it a Business we are very sure it
has the following characteristics:

We say it has Unlimited potential because of the magnitude of this Business. For
example just the Turnover of the Stock Market is 37.5 Trillion $ per year which is 20 times India’s GDP.As the business is huge, earning possibilities should be naturally huge.
Also, Trading is very simple.
If you buy a stock it will either go up or down, so 50% possibility of profit always exists.

But Statistics suggest
More than 95 % end failing.
Why?

All Businesses have rules.
Similarly here there are rules which are mandatory for profit generation.
These rules of Trading have to be strictly followed as it is a High Discipline High Returns Business.

RULE NO 1

Accepting that Loses are expenses of this Business
While there are nominal expenses in form of brokerage and taxes, “Loses” should also be given expense treatment.
One has to understand that loses are part of this business and bound to occur.

The key is to minimize them as it is impossible to avoid them.
Most traders end up with disappointment because they are focused on Accuracy and not on Profitability.

  Trader A: Focused on Profit Trader B: Focused on Accuracy
Trades 100 100
% Success 50% 80%
Average Profit in Successful trades 100 20
Average Loss in Losing trades 20 100
Net Profit 4000 (+5000-1000) -400 (+1600-2000)

As seen in the above table Trader A is focused on profit generation and knows that he has to let his profits continue (make bigger profits) and cut down his loses. So inspite of a lesser accuracy he is making profits.
Trader B is just doing the opposite, where he is unable to accept losses and lets them grow big as he is focused on accuracy. He is always in a hurry to book profits, resulting into many small profits and few but very big loses.

Rule No 2:

Manage the Risk All Businesses are associated with uncertainty and risks. But there is a big myth that “Trading is very risky.” This statement is highly biased and contains an assumption. While there is always some inherent risk involved, the magnitude of risk is relative to a person’s knowledge, understanding, experience and competence.

Risk is not absolute; it is relative to the individual undertaking the activity. Also, people assume that in order to make above-average profits, you must expose yourself to bigger risks.A competent trader most probably won’t find trading to be a risky thing to do. An experienced pilot wouldn’t find flying a plane to be particularly risky, whereas someone without a pilot’s license would think so.

As for taking big risks in order to make big profits, that may not necessarily the case when it comes to trading. You can reduce risk by aiming for high probability trades or actively manage risk by monitoring and closing out your open positions if it seems that the market is not going your way. You can even completely avoid risk if there seems to be no good opportunity. There is risk in everything you do – whether you walk home, drive or marry a stranger.

What is important is to have a risk-minimizing system in place so that you can come out profitable in the long-term. The more you learn the better you become.

80/20 Rule applies everywhere.
80% of people just have 20% of the money.
80 % of the companies just have 20% of the market share.

In trading the rule is stricter,
95% lose.
5% make all that 95% lose (Zero Sum Game).
5 % traders who are equipped with right trading methods EARN BIG MONEY.
Rules are simple, but there is no room for error.