Friday, January 25, 2013

Trading lessons for dummies!!

Well, I am myself quite a newbie in Trading arena but here I would like to jot down few lessons that would come handy for every "greenhorn" who is just getting started with Trading. I would just limit this post to stocks. I wouldn't describe the techniques of stock picking as these can easily be found in any of Trading books/related websites. I would focus on the behavioural aspects, most of which I have experienced in last few months of Trading.

  • First and for-most don't get emotionally attached to your stocks. It's important to book profits at the right time. Blindly obeying the fundamental theorists and believing in the adage that in long term, stocks would provide the highest returns might leave you disenchanted!
  • Never go for impulse purchase in case of any stocks. Impulse purchase is no less than Gambling.
  • One strategy I have found quite useful is to have your own benchmark for returns. For e.g: Expecting a 15-20% return before you book profits. This is a very good strategy for short term traders. Being too greedy and delaying your profit booking might be at the cost of short term liquidity of your stocks.
  • Buy low, Sell high is still the best strategy. Complicating stuff with intrinsic value and current market value comparison might expose you to the vagaries of artificial demand-supply dynamics.Advanced mathematics in fundamental analysis looks good in excel and makes you feel satisfied that you have utilised your MBA knowledge but these involve mutiple assumptions which might be flawed. Basic analysis like company fundamentals, whether the stock is underpriced or not, projects in pipeline etc is good enough to start with. For e.g. Most of the auto stocks have zoomed inspite of most of them reporting losses in last few quarters. Most of the analyst opine that there is a huge mismatch between the intrinsic value and current market of the auto stocks which is led by irrational exuberance.
  • Don't put all your eggs in the same basket. Easy profit might lure you into putting all your money into stocks but remember losses are equally likely as profits in the markets and hence, its important to diversify with other asset classes.
  • Invest in the industry which you understand or atleast track closely. This would help you to take an informative call and read between the lines of any news in the media.
  • Lastly, to get started with Trading, it's important to start with your own money. No matter how many articles or best practices you read or get hands on numerous virtual stock trading games, without experiencing the ground realities of Trading, one can't learn and grow to be a seasoned trader over time!
Happy Trading :)