3. Know The Facts About Trading

Curated By
Vivek Gadodia
System trader and algo specialist

Skill Takeaways

  • Busting myths about trading
  • Merits of staying focused and honing skills
  • Trading or investing – what are you cut out for?

The lure of money drives novices to the stock market. While the share market is indeed a great place to make money, it is not a place for the uninitiated. A basic understanding of how the markets operate is essential before starting to trade.

Uninformed trading is like trying your luck in a slot machine, in other words, gambling. Lack of knowledge makes one vulnerable to clutter without having the requisite skills to differentiate between facts and fiction.

This is your lesson in trading myth-busters. Read along and make notes to sift facts from fiction in trading:

Trading is very easy

This is a myth. While it seems easier to open an account and start buying and selling stock based on some random tips, it is not so. Social media is full of traders sharing screenshots of profitable trades, alluring novices to the markets. Know for a fact that no one washes dirty linen in public.

Fact: Trading is a difficult profession. One can start trading but may find it difficult to be a full-time trader. It is widely estimated that only 5-10 per cent of traders are successful despite having a robust trading plan.

It takes a short time to become a trader

A myth, again. Information is easily available these days, thanks to the internet. While learning new skills and techniques is easy, mastering technical analysis to be a good trader takes a lot of time and perseverance.

Fact: Trading is not just a mechanical process where you buy and sell stocks. The moment one enters a trade, the emotions of the trader get activated. The success of a trader depends on their psychology, and an emotional trader is bound to lose objectivity. To be objective, one has to have a trading plan that has built-in contingencies well before a trade is executed. Building a plan and test takes a lot of time and experience. More importantly, it takes time to build a plan that suits you.

A place to make quick money

This is one of the biggest misconceptions of trading. One can achieve targeted returns by trading in the markets, but it takes a whole lot of planning, preparation and patience.

Fact: Making money in the markets takes skills, effort and knowledge, apart from time. Each day poses a different challenge for a trader. Every day different variables have to be dealt with, and quick adjustments have to be made. This cannot happen without a strong trading plan.
There is a saying, “Trading is the toughest way to make easy money”.

Trading is better than investments

This works only if you have strong skills and a risk-taking appetite. Many take to trading as investments need a lot of research and monitoring. Trading is an easier way to make money, as only a few technical indicators are enough to jump in and out of a trade.

Fact: Trading will not give you instant success. One needs to time the market successfully and regularly to make money consistently. On the other hand, investing requires spending time in the markets. The fact is there are more successful investors than traders. Successful professional traders are only a small minority in this vast ocean.

A very important differentiator between trading well and investing well is the ability to handle leverage.  In investing, the leverage is 1, i.e. with Rs.10,000, one can buy and hold stocks worth Rs.10,000. But in trading, especially with options, with Rs.10,000, one can trade contract values worth lakhs, increasing the leverage manifold.

If handled well, it leads to higher profits, but eventually, in losing phases, leverage hits hard and, in many cases, leads to the risk of ruin, i.e. trader eventually blows up the account. Managing this aspect is extremely crucial for a trader to survive and, hopefully, thrive in the markets.

Trading doesn’t require special skills

Most newcomers confuse the ease with which you can enter the market and place an order with the ease with which you will make money. After a few successes, they also believe trading doesn’t require a strong special skill set.

Fact: A successful trader not only requires skills for identifying trades and profiting from them but also needs to have a firm check on their emotions. They need to think on their feet and be in the know of things, which can be exhausting in the long run. It is important to develop particular trader traits such as perseverance, patience, independence, fortitude, adaptability and urge to learn.

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