Day to Day emotional resemblances
used in stock markets which make people lose money.
1) After
buying an item from the market people tend to ascertain that their buy is a
right one by enquiring with other people about that product. (This research
should have been done before buying that item!!).--- They do research on the
stock after buying it and justify it even if that buy is not right and lose out.
2) People
show emotions on Non-living things like their first bicycle, their house in the
native etc. ---They always tend to feel lucky or sometime keep vengeance on a
particular stock for the profits or losses made in them respectively and lose
money by trading at the wrong times forced by that emotion and lose out.
3) They
always benchmark their neighbors in terms of growth. --- They feel left out by
looking at a profit done by others nearby them and in the want to profit at
same levels tend to make wrong decisions in hurry and lose out.
4) They
always keep telling others what is the right thing to do but they never follow
it themselves (e.g Traffic rules). – They never learn from mistakes even if
they know what the right thing to do is and repeat mistakes and lose out.
5) To
get steady income always people want for jobs in good companies. They expect
the same thing from stock markets too and exit from the stock by loosing
patience and lose out on the potential future profits.
Determining Risk in the Context of Trading (Posted on 06-01-2012)
When we are talking about Risk in the markets in short term Trading Context Risk can be divided into 2 components
1) 1) Amount of Loss that can incur by entering into a trade
2) 2) Chances of making that loss by entering into a trade
Calculation of Maximum amount of loss
Amount of Loss can be calculated by finding the Strong support or Strong resistance of a particular scrip using an appropriate technical tool.
Based on the stop loss level the Maximum amount of loss in a trade can be determined.
Calculation of chances of making that loss
A risk in a trade is more when that trade has less chances of making profit and more chances of making loss and Vice Versa.
A trade which can have little higher amount of maximum loss but has little chances of getting to that loss is less risky trade
A trade which can have smaller maximum amount of loss but has more chances of getting to that loss is more risky one.
So Calculating the Chances of making loss is as important as deciding on the maximum loss (i.e Stop Loss) that can be incurred.
So Calculation of Risk of a trade is the mixture of two components which is mentioned above.
Let’s have an example
Buy 100 shares of Scrip A at 100 Rs for a target of 105 with a Stop loss of 97
Maximum return is 5% Maximum Loss is 3%
Now Lets Assume the chance of making profits is 30% And Chances of making loss is 70%
In Traditional calculation the Risk Return Trade off is 3/5 = .6 (60%) which is favorable
Actual Risk Calculation
5% multiplied by .3 and 3% is multiplied by .7
5*.3=1.5 (Return component)
3*.7=2.1(Risk component)
Now the Risk Return Trade off is 2.1/1.5 = 1.4 (140%) which is not favorable
Actually the above trade is not favorable but on Prima facie it looks favorable.
The next Question that can be expected is how to calculate the chances of making profit or loss.
This Topic will be covered in our next Post. So keep a track.
Simple Ways to Make Money in the Markets
This article will not be giving you strategies for making money. Strategies can be obtained from this site by logging in daily. This article will enlighten you about the proper approach to the strategies that you are going to adopt and will explain how important is your approach towards making money.
So let’s start with an old but relevant proverb “As you sow, so shall you reap”. Here we are going to discuss only the do’s not the don’ts. This is because the simple character of our mind is that it cannot take “no” or negation. It can take only “yes” or positives. If you say no to something the mind will continue doing the same thing again and again. So let’s start with that positive note.
First and Foremost thing in the markets is High risk high return and Low risk low return. We should keep in mind this in any point of time during our open positions in the markets (may be they are making loss or profit). Why I said during open positions is because our mind tends to divert during that time only. After you close the positions you will come to know the reality and your mind starts feeling about the approach that you have adopted. So you got to be consistent with your strategy that you wanted to adopt before taking the positions also even after taking the positions. Let’s come to the point now. When you have decided about some targets or returns while taking positions, (of course doing some analysis or by some recommendations from an analyst) stick to it consistently during the position is open and execute it as per the strategy. This may seem like very silly when you read. But believe me almost everyone who looses in the market is because of the inconsistency that they show with their strategy. How does this thing relate to the above said rule of “High risk high return and Low risk low return” in the markets?? It’s like this……. When your position is achieving your targets you will start thinking about going for little more return looking into the momentum of the market at that point of time. You can do this but before doing that just go back and check out your risk appetite i.e whether you are ready to loose little bit more than what you thought you may be when entering into that position? If no then get satisfied with your return and come out of the profitable position. Even if the answer is yes then you shouldn’t continue your positions because most of the times the answer will be yes because you will start thinking that there is very less chance that price will come down to that level if you are long or less chance that price will go up to that level if you are short. So in both the situations it’s not wise to continue the position. This thing applies to the situation when you are near your stop loss also. Adopting this approach you can make money in any type of market (Bull, Bear, Volatile).
Second thing is that Stick to few ways of doing analysis (may be two or max three). If you use lot of analytical tools you will get confused and end up making loss again.
Third and the most common mistakes done by traders is that not being consistent between analysis and the targets. It’s like aiming the stock price to go up within a week and doing analysis for intraday movement of the stock then getting into wrong decision making. This is common mistake because most of the traders take the position for intraday and if it’s not achieving their targets (or making losses), continuing the position for overnight or may be for a week hoping that it will make profits. Here people need to understand that “Target” word is not only associated with the stock price but also with the timeframe with in which the target price is going to be achieved. So stick to your targets means that stick to the target price and target time also.
Fourth, people tend to get diverted not only with their strategy but get diverted by looking at others strategy and looking at others gains. What a trader needs to understand here is that perception of risk changes from person to person, appetite for risk changes from person to person. So there is no point in looking at other’s strategy and other’s gains. Be consistent with your strategy achieve your targets come out of the market.
Fifth is, mixing of the self strategy with the advisor’s strategy. If you are asking your advisor about a tip it’s well and good. But if you are asking him then stick to it. Mostly it happens that traders ask strategy with the advisor and then during the course after taking the position they tend to forget who’s strategy was that and start applying their own mind into it and loose money.
Sixth, keep track of your positions by yourself and don’t leave it to the dealer who is handling your account even if the dealer is your most trusted person like a best friend or son. This is because 1) Dealer is a person giving service to many people and he will find it difficult to concentrate on only one position. 2) Make yourself as responsible for making profits or losses because it’s your money and you can take of it better than anybody else.
Seventh, trade only such instruments of which you have proper understanding of risk return tradeoff. Don’t do something which you don’t understand or unaware of. Because risk is there only, when you don’t know what you are doing.
So let’s summarize all the points explained above.
1) Always remember in the market “High risk high return and Low risk low return”
2) Use only few tools of analysis for avoiding confusion.
3) Be consistent with your strategy vis-a-vis your targets
4) Concentrate only on “your” strategy and “your” gains during the open positions.
5) Be clear about using YOUR strategy or your ADVISORS strategy. Stick to one.
6) Only you can take care of your money better than any one else even if the other person is your most trusted one.
7) Risk lies only when you don’t know what you are doing.
Keep these seven approaches in mind you can actually mint money in any kind of markets. It’s all about do’s and not about don’ts so hope your mind minds about all these seven do’s.
