Nine ways to beat the evils of trading this Navaratri
The festival of Navaratri has a deep significance for Hindus in India. While it is celebrated in different forms across India from Ram Leela in the North to Durga Puja in the East to Dandiya in the West, the essence is the same. Navaratri represents the victory of good over evil, where the evil is outside us and also within us. This Navaratri let us apply the essence of Navaratri to trading in stock markets. What are the 9 evils of trading that we need to beat, to be successful in the stock markets?
1. Trying to pre-judge the market
The biggest risk in market is that as traders we try to pre-judge markets. We try to stratify markets into bull markets and bear markets but when it comes to your trading strategy such classifications can actually be counterproductive. The key is to take the market as it comes, be a good student of the market and keeping your trading strategy as flexible and as supple as possible. Remember, if your analysis of the market is theoretically correct, there is no guarantee that the market will actually pan out the way you expect it to do. In fact, more often than not, the markets will surprise you the other way. Just take the market as it comes!
2. Overcoming the evil of overtrading in markets
The cardinal sin in trading is overtrading. This can happen due to a number of reasons. Firstly, when we make losses, we tend to overtrade and average to recover these losses. Secondly, in a volatile market we tend to trade more aggressively because stop losses are triggered more frequently. That is the time to sit back and take an objective view of the market. The answer is not to jump in and trade more aggressively. When we make aggression a strategy in markets, it is normally at the cost of reason. That is unlikely to work in markets.
3. Not being in full control of your trade
It is fine to initiate a trade; the bigger question is whether you are in full control of the trade. Have you defined the maximum risk you are willing to take on your capital? Do you have a Plan-B in place in case your original strategy is not working out? Is your trading strategy sound enough to handle the volatility in the market? The crux of the matter is to be in full control of the trade.
4. Getting too emotional while trading
When you are trading in the markets, emotions can be your biggest enemy. When you see your neighbour making money in the market you tend to become greedy. When the markets are cracking sharply you tend to become fearful and miss out on opportunities. Trading is all about being in control of emotions because when you get carried away by emotions you subsidize the other trader who is able to keep her cool. The most classic example is that we tend to buy on greed and sell on fear whereas actually we should be selling on greed and buying on fear.
5. Lack of planning and preparedness
Like any sport or any vocation, trading is a full-time job. The more prepared you are, the more well versed you are about the rules of the game, the more you have your plan of action in place, the more you are able to document the finer details of your trading activity; the greater are your chances of being successful in trading. Do not approach your trading in a haphazard manner. That is the classic recipe for you to lose money in your trading.
6. Refusing to accept losses
Sounds simple but it is actually a lot more complicated than that. It is easy to understand the need to accept losses, but when it comes to the real situation we tend to hold on hoping that your target price will eventually come. As John Maynard Keynes rightly put it, “The markets can be irrational much longer than you and I can remain solvent”. The smarter thing to do in trading is to accept small losses, wind up your trade and protect your capital. Unless you have this ability to accept small losses, you are likely to have a problem being a successful trader.
7. Not managing your risk efficiently
You will be surprised to know that nearly 90% of your trading success comes from managing your risk properly. Are you setting stop losses while trading in the market? Are you flexible enough to exit your position when the market tide turns against you? Do you have clear real-time view of how each trade is going to impact your capital? Remember, we all trade with finite capital and therefore protecting your capital is the key and that can only be done by managing your risk smartly and efficiently.
8. Being unorganized about your trading documentation
As a trader you may wonder, what is the need to be meticulous about the smaller aspects of trading? Actually, it matters a lot! For example, you may be overtrading and your profits may be lower than the brokerage that you are paying. You may be paying large amounts of short term capital gains tax, which could have been avoided had you held on to your positions for a full year. In the era of online trading, you are saved from the hassles of maintaining physical contract notes, ledgers and demat statements. But it still makes sense for you to reconcile your books each month. It can provide you a lot of useful insights into your trading activity.
9. Betting too much money on a few trades
Concentrating too much money in a few trades is never a great idea. More so when the markets are volatile or when the overnight risk is quite high or when the sector itself is going through a churn! When your trades are focused on a handful of stocks or themes; your entire trading becomes vulnerable to a set of events. If they go against you then the losses can be quite large. It is a better option to spread out your trades across horizons and themes and sectors to reduce your overall risk.
On this Navaratri, let us endeavour to overcome the 9 fundamental evils of trading in stock markets. These are not too difficult and can be done with a higher level of commitment and discipline. May the blessings of Ambe Mata help you circumvent these trading evils this year!