The Greatest attribute of a successful trader is to think & have a doubtful mind with curiosity. Doubts pushes to think harder & curiosity helps to ask questions. Believers cannot be traders.
Trading & Analysis Mindset
I believe this short note should help you identify yourself to being a Stock Trader & what is takes to be a Stock Trader. Well to do that, this is what you need to understand.
Who is a Stock Trader?
A stock trader is someone who works for themselves or for a firm, buying and selling stocks. They may also buy and sell bonds and other financial instruments. Stock traders typically focus on making profits by taking advantage of price fluctuations on individual stocks in the market. They may buy or sell shares for short-term trades lasting just seconds or longer term trades with a holding period of several weeks.
A stock trader is a professional, and some stock traders are known as financial advisors if they have clients of their own that they trade for. These types of stock traders also act as an adviser or money manager to their clients. Professional stock traders may work independently or as an employee in the office of a large bank corporation, or on the floor of a trading exchange.
What does a Stock Trader do?
A stock trader watches the market and manages monetary investments in different stocks. These professionals may engage in different types of stock trading; from day trading, momentum trading or market making, to trend following, arbitrage, and trading the news.
One of the main responsibilities of the stock trader is researching the stocks they are interested in trading. There are different types and philosophies behind company stock research, known as technical, fundamental and general market environmental research. Trading professionals may choose to use one or a blend of these types of research methods.
The goal of researching stocks is to cut the element of risk and make higher profits from their investments through trading disciplines and insight into the companies as well as external market factors. As mentioned earlier, winning is only a probability – to get this probability right, an ideal trader braces oneself to constant reading as a habit.
Now, what is the general mindset of a trader?
Remember – “Money is the OUTPUT of the game of trading and not the PURPOSE. “
Lets understand the psychology of a trader. There is a difference between OUTPUT & PURPOSE. Money is the OUTPUT of the game of trading and not the PURPOSE. If money will become purpose, a trader cannot keep himself motivated when he would have a streak of losses. If money will become the purpose, how cannot remain motivated to trade even after earning a lot of money. Why is Warren Buffett still in the business, if money is the PURPOSE? Why is Ed Seykota still trading if money is the PURPOSE? Why is Amitabh Bachchan still working so hard if money is the PURPOSE. If money is a trader’s PURPOSE, no one can save him from being bankrupt in this business. Not even this, a person with money as a PURPOSE will not succeed ever in anything. Let me tell you why.
Learning to trade will take years and during those years, a trader might not make money. Plus he would have to study for uncountable hours, sacrifice his sleep, family time, leisure time to study and that too without making money for a long time. So, how would one be able to do that if the purpose is MONEY? Same with anything in life. If somebody wants to be a cricketer, it will be because cricket is his/her PASSION and not because he would get a lot of advertisement contracts when he would become a cricketer and would make a lot of money. Because being a successful cricketer will mean hard-work for uncountable years without money. It will mean working very hard without anything in return. And even then one might not succeed. So trader must always get his trade perspective right, motive right & this should be the true mindset of a professional trader.
– source, inspiration in the above note on Mindset of a trader – courtesy Nishant Arora, Techno-funda Society.
What does appetite for risks mean & why is it so important for being a trader?
When ever i mentor new aspirants who takes a plunge into trading, i usually ask these question. Do you really believe you can take risk that comes along with the trade? Have you really accepted that the trade has a non-guaranteed probable outcome? Have you fully accepted the possible consequences? Well, most often i get ‘Yes’ for an answer, which i am used to hearing.
Now take a minute – analyse your risk real appetite in being a trader on these lines. Remember – the best traders not only take risk, they also learn to accept & embrace that risk which they take. Mind you there is a huge ‘psychological gap’ between assuming that you are risk taker because you – put on trades & fully accept the risks inherent in each trade. When you fully accept the risks, it will have profound implications on your bottom line of thoughts.
What i mean to stress here is – The best traders can put on trades without quite a bit of hesitation or worry & admit it openly if it doesn’t work their way. They get out of the trade – even with a loss – and even by doing that their mindsets don’t show even bit of emotional discomfort. They do not loose their discipline, focus or sense of confidence. Now this is exactly why i say – when you are unable to trade without slightest bit of discomfort – that means you still haven’t accepted the real risk that comes with a trade.
Now what happens when you don’t accept – the proportionate of not accepting risk – is equally proportional to the same degree that you will avoid taking such risk again in future & you will let your emotions rule your trades forever. Repercussions – You will either get out of winning trades too soon with little profits or you will obviously start keeping your stop losses very close to your entry point, which will eventually get hit on most trades.
Remember market is always neutral – its the emotions which are at play that triggers a buy or a sell in stock markets or in any other business. Loosing money & being wrong against the market – is an inherent clawback which you must accept it – not with just words – but with wilful mindset that should become one’s attitude towards life & trade.
Purpose behind Technical Analysis:
Every trade has a 50:50 chance of getting right, even if you don’t do any analysis. By applying your thoughts to analyse any stock or indices based on the Technicals – it will only give you a better gut feeling to stand a chance of taking your winning trade to 70% level.
In stock markets getting data or tools is not the key. Adding a structure to the data you collect & making sense of it is the key to successful trading. If you wish to become successful in the difficult game of trading, you must always be mentally working towards bringing an order, structure and classification to everything. It need not come from a book or person or tools, you must have your own mental maps of everything you know. Always remember, data is knowledge only when it is structured on a fabric of concepts. Isolated data points are of no use. So applying technicals & fundamentals analysis methodologies will give only get your mind more clarity by refining your thought process in a structured way.
General tips for an ideal day trader:
Remember there is nothing called perfect style/way of trading, you only learn by applying all methods & choose the best one that suits you.
1> Make the right choice – to execute a day trade or be an investor. Most people with borrowed knowledge get into dat trades – loose money – loose direction – gets converted to being an investor.
2> Practice structural thinking as a way of living. Know what technicals & fundamentals are & how best you can apply them to analyse your entry levels into a stock.
3> Stock selection – go through stocks after market close and give priority to stocks with volume spike and Open Interest spurts. Choosing stock & sector which you can understand is the key.
4> Identify if selected stock is part of NIFTY 50 or Sectorial Indices. If yes, movements of individual stocks can be matched with Index, to get a better of which way markets are moving.
Example 1: If my selected stock is Vedanta which is into metals, this stock is also part of Nifty Metal. i would watch for NIFTY Metal index as well.
Example 2: If my selected stock is Asian Paints, this stock is part of Nifty 50. I would watch for movement in Nifty index as well.
Example 3: If my selected stock is IDFC, which is not part of any sectorial indices or Nifty index, then i would be less bothered about movement in index, instead concentrate more on stock specifics.
5> If you are planning to carry forward the trade for a week’s time – you may check for % delivery against total volume of equity traded on the stock. Ideally data for 10 -15 trading sessions, helps in identifying price trend for the next subsequent weeks. (excluding budget times, results quarters)
6> Go through candle stick charts for the chosen stock – looking through these charts every day across time frame — weekly, daily and hourly you start building some idea of patterns. Note that stock can be going through different battle in different time zone. Uptrend in weekly and downtrend in daily and hourly.
7> Understand the Support & Resistance levels by going through candle charts. This will help you draw entry & exit points for a trade & arrive at a right stop loss point. This will save your mind from triggering unwanted emotions that may spoil your winning probability. Getting the support levels right will save you from worrying when stocks falls or raises & helps you into being more logical in your thinking. Also make sure to get the pivot levels right from where you choose to draw support & resistance. Daily Moving Averages is ideally used for long trades by investors, knowing 20 DMA helps in analysing trends.
8> Understand the buying / selling pattern. Check the stock BUY/Sell quantity. Note the variations that you notice & prepare your own ratio. Start noting their readings every 10 minutes, so an ideal 10 such readings – will give you some data to speculate market condition for the next 1 hour. It will clearly tell you who is having an upper hand on prices – Buyers/Sellers.
For Ex: Buy Quantity – 100, Sell Quantity – 80 .. so that says – Buyer/Seller ratio stands at 10:8.
9> If you are carrying out a F&O trade – monitor how Open Interest (OI) & Volume is changing with price – every 10 minutes for the respective month series which you have chosen. OI is very useful in understanding how liquid the market is. Bigger the open interest, more liquid the market is. And hence it will be easier to enter or exit trades at competitive bid / ask rates.
Typical Understanding / Analysis:
Increase in Price, Increase in Open Interest = More trades are on the long side, bullish view.
Decrease in Price, Decrease in Open Interest = Longs are covering their position, trend could reverse.
Decrease in Price, Increase in Open Interest = Trades are getting on the short side, expecting bearish view.
Increase in Price, Decrease in Open Interest = Shorts are getting covered, trend could turn bullish.
[Note: Open Interest is a continuous data, while Volume is for given day only)
10> Stop Loss – this is most important parameter. But understand that they are two types of stop loss – technical stop loss & money stop loss.
a> Technical Stop Loss: You should let the chart decide where the trade would stop being right. It is that very point where price will deny your original thesis of entering the trade based on the chart structure. For example, if you are taking a long trade with 1000 shares of Rs 100 each. And the nearest support is at Rs 90. So SL will be put there because that is the point which, if broken, will break the thesis of going long in the first place.
b> Money Stop Loss: This is simply deciding how much you wish to lose in the worst case scenario. For example, if you are taking a long trade with 1000 shares of Rs 100 each and you don’t want to lose more than Rs 2000. So, you will place a SL at Rs 98 irrespective of what chart says.
Well, the rationale for choosing which kind of stop loss suits you entire depends on your capital, your emotional intelligence & your risk appetite. Ideally potential stop loss should not be more than 2% of your trading capital.
Note: I have intentionally omitted using of statistical indicators/overlays on chart. This will certainly need more familiarity from readers perspective, which is difficult for me to put in on text on these platforms. But yes, these are beautiful when you understand how to apply it, it tickles your mind to have more & better perspectives while executing trades. You can always reach out to me for help in analysing overlays.
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