The science of stock trading during volatile times
Markets are the most entertaining and thrill-providing opportunity ever. But, when emotions take over, the results could be fatal.
As the legend goes, on an average most people lose money trading the stock markets. This would make a pessimist think that it is not possible for him to fall within the minority money-making crowd. But all the money lost by the majority goes to this minority crowd.
And the most astonishing fact is that most people from the majority crowd have no clue about the markets and their functioning. They have been trading merely on gut feeling, news, tips, rumours, etc.
It is not that the minority crowd who makes the money is an extremely savvy lot. They know just a little bit more than what their losing counterparts do. However, it is my contention that this little bit of knowledge is extremely simple and easy to understand. Being in the minority money-making crowd would thus mean holding an optimistic view.
Markets are the most entertaining and thrill-providing opportunity ever. But, when emotions take over, the results could be fatal. Taking decisions based on emotions could be very lethal. If you ever go to watch a game of cricket, just observe the spectators closely.
The best display of various emotions is visible there. People emote anger, joy, frustration and disgust. This is exactly what happens in the market. But unfortunately, there is no money to be made in emotional trading.
I have learnt this lesson the hard way. While I was learning the chart set-ups, all the while trying to discover and build my systems, I was completely unaware of the role of emotions in trading. In the wake of a trading blunder, I would keep changing or tweaking my set-ups and systems to make them better.
It never dawned on me that it is my own emotions that held me back all the while. Once I realised that and began working on my emotions instead of my systems, my profit and loss account began to change for the better.
When we deal with the market, we are essentially dealing with the collective intelligence of us all, put together. This collective force has its own idiosyncrasies, which are diametrically different from those of the human mind.
Let us examine a few of them.
At the outset, let us understand the term Markets, which is a regular gathering of people for the purchase and sale of provisions, livestock, and other commodities.
This is the broader perspective. The words Financial Markets fall in this domain. Every market has two major components – a buyer and a seller. When one meets the other, a market is created. A few examples of markets are vegetable markets, fruit markets, textile markets, toy shops etc.
The key ingredient here is that buyers and sellers meet and agree on a common price for an exchange of goods and services. Similarly, in financial markets too one exchanges financial instruments such as stocks, commodities or forex for money.
Stock markets are in our minds
Where do stock markets exist? When I say the Indian Benchmark Index – Nifty is trading at 10,000 or the stock of Apple is trading at $165, where are these actually trading at? Markets do not exist physically in true sense.
One cannot see, feel or touch Nifty. So, these quotes are, in true sense, a perception of people trading the market. Markets exist only in our minds. In the absence of its physical presence, you can trade any market sitting in any part of the world.
The markets trade in scheduled timings. For instance, Indian Equity markets open for trading at 9.15 am and close at 3.30 pm. But anything that stops, resumes from the same point.
Considering that the price travels from point A to point B from 9.15 am to 3.30 pm on a Monday, it ought to open at point B on the following morning on Tuesday. But that is seldom the case. In effect, the markets have already travelled some distance into our minds while they were shut.
Markets tend to be in perpetual motion. They are only unavailable for us to place trades. How else does one explain the effect of movement in global markets over each other? This is one reason people find it most difficult to deal with markets because there is neither a fixed beginning nor a fixed end.
Markets are an unstructured environment
Since childhood we have been conditioned to operate in structured environments where everything has a fixed pattern and pre-laid rules. This is another reason we find it difficult to adjust to market environment which is highly unstructured.
When you approach a stock broker to open an account for yourself, does he guide you on the entry and exit? Does he tell you that this is the right way to do it? He will never do that since there is no right way to do it. And that makes it a completely unstructured environment. That is why human beings are inherently not designed to make money in stock market. The mind is at play.
It is due to these physiognomies of the stock markets that makes them seemingly difficult to trade and make money from. We are therefore left with little choice but to adapt to this environment, otherwise we will be unable to trade them successfully.
Markets are the way they are – unstructured and in perpetual motion. This creates a sense of madness, which most traders and investors find difficult to trade in. Hence the need for a method to deal with them.
Edited by Javed Gaihlot
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
