Understanding yourself is an important part of trading or investing in the stock market.
A trader is someone who analyses the charts to buy and sell stocks. Investors are those who analyse the fundamentals, and consider buying stocks as owning businesses.
However, most new entrants to the stock market are somewhere in between – neither traders nor investors.
They enter the market as long term investors or intraday traders, but the volatility in the market forces them to take random buy and sell decisions.
Due to the volatile nature of the market, the very nature of the human mind proves to be the biggest shortcoming.
Most people end up buying stocks when the market is at its peak, and sell out of fear when the market is falling.
To avoid mistakes, knowing yourself becomes extremely important.
- Intraday Trader: Buy and sell on the same day.
- Short Term Trader: 2 days to 2 months.
- Medium Term Trader: 2 months to 1 year.
- Long Term Investor: 1 year and above (owns a good business till it performs)
Now, the important part. You do not need to strictly belong to one of the above four categories. You can belong to all of them.
But, before every trade or investment, you need to understand your time frame and stick to it.
If you plan an intraday trade based on your chart analysis, you should avoid converting it into a short-term trade if you end up in losses. You need to close your trade on the same day and take the loss.
This discipline will play a key role in your success. If you are firm with your decisions, you will plan and analyse your trades better.
For example, let’s say you buy a stock as an intraday trade. Your trade goes wrong, you end up in losses. Immediately, your mind will tell you to hold the stock for longer, what if the stock rises the next day?
The stock could rise or fall the next day, but the fact is your intraday trade has failed. If you cut your losses, the pain of your loss will make you plan your next intraday trade more carefully.
If hold your intraday trade for longer and let’s say the stock rises – giving you a profit. You might think you’ve taken the right decision and made some money. But you’ve buried your own mistake, without analysing where it went wrong. This will end up hurting you in the future.
Making mistakes and learning from your mistakes is a very important part of trading.
Taking losses is also important and difficult at the same time, especially for inexperienced traders who are new to the market.
The same applies for short term and medium term trades.
- Before you enter a stock, plan your trade carefully.
- Don’t take casual decisions, analysis is very important.
- Keep a stop loss when trading, irrespective of intraday / short or medium term.
- Cut your trade if your stop loss gets hit (extremely important).
- If your trade goes wrong, take a loss. Analyse and understand why it went wrong. Only this can make you a better trader in the future.
- The pain of a loss will make you work harder in the future.
Ask any successful trader, they will tell you ‘discipline’ is probably the most important part of trading. If your trade goes wrong and you cannot take a small loss, then trading is not meant for you.
Losses cannot be avoided in the stock market. Even the most successful traders or investors have lost money. But the successful ones are smart enough to take small losses before the loss gets too big.
The rules for investors are completely different.
Understanding the business, analysing the financials and having the courage to buy when the market is falling – is important, along with various other things.
Investors should not worry about daily price movements of stocks. Patience plays a very important role as investing is boring.
Buying a good company and holding it for 10 years plus – sounds easy, but it’s extremely difficult and boring.
Difficult because an event like Coronavirus can bring down your stock by 40% in less than 2 weeks. Holding it during these times is very difficult.
Boring because the human mind is not accustomed to doing nothing. You would feel like doing something every day. If you have cash in your account, you feel like buying some stock – even if the time and valuation isn’t right.
Which is why you could keep two demat accounts – one for investing, which you don’t touch. And the other account for trading, where you learn chart analysis and plan trades with a small amount of money.
Final word – Only invest money which you are willing to lose. Success in the stock market is a life long journey filled with mistakes and various emotions of extreme greed and extreme fear.
Understand yourself, be disciplined and enjoy the journey.