MAKING MONEY IS NOT SO SIMPLE lllllllll

1. There is no clear cut way to make money from trading, which is why most private traders lose money. Trading is definitely not the easy-life, loads-a-money kind... I believe so many start trading in the belief that they will have fantastic riches with very little effort. Sadly they will definitely be in the 80% that lose and give up. Most accounts have been blown because of the 'account killer' mindset. For myself it took me quite a bit of time to stop losing like an idiot!
2. Becoming an expert trader does not happen overnight. It takes years of practice - when you enter the stock market you need to realise that you're up against some of the best people in the world operating in very complex markets. It is easier to lose money than to make money on a consistent basis.
3. Trading is very fickle. Just like a restaurant you are only as good as your last trade. Don't ever take success for granted...I should know...having gone straight from novice to making a lot, then having a bad few years, I'm now clawing way back up. You have to treat it like a business and invest substantial hours into it.
4. Don't think that just because you have read books on technical analysis and have familiarised yourself with the patterns and signs, that it will automatically follow that you will make money from trading. Imagine how difficult it would have been trying to become a plumber from just reading books. I'm not saying you couldn't become a plumber (of sorts) from reading and trying things out and practicing various skills of the trade over and over again but imagine how many cock ups there would be before you got it right. How many times would you have lost your temper and threatened to give up? How much money would you have lost before being able to do plumbing jobs consistently profitably? That's the journey we are on. We are up against pros with experienced mentors and bottomless pits of cash. Brings things into perspective just how difficult it is.
5. The main problem with books is that you cannot ask questions in order to test the strategies and check understanding of the subject matter. Add to that the fact that simple strategies make money and imo an intraday technical book would be 90% about money management and psychology - only 5-10% on strategies. So two and a half chapters and the book is finished. The real fact is that you can't gain experience from books and as such I believe experience and practice is a far more important ingredient for success (in anything not just trading) than the technical information and methods. The trading methods can be acquired in books but it is experience that allows us to see the things that really matter and I'm not convinced that the information from a book can ever act as that 'filter'.
6. A very important principle to remember when trading is that that which is easy to do is almost certainly the wrong thing to do. It is easy to take your profits when you have a big winner and that is why it is wrong. 90% of traders take profits way too soon because it is the easy thing to do and because of this they never generate the handful of big winners that are required to pay for all the small losing trades. 90% of traders lose money at the end of the year because they do the easy thing. If we want to be part of the 10% that makes money then we have to do the hard thing. This is the true essence of being a contrarian trader.
7. Patience is one of the key ingredients in my trading strategy, it stops me rushing in to things which in current market conditions helps me... Remember that knowledge is important, but patience and discipline are more important and tend to be harder to come by. Even if your system requires you to trade short-term you shouldn't be jumping in all the time believing that every move has to be traded because there's money to be made on every trade... (actually there is but that doesn't mean you can monetise it!).
8. So patience guards against overtrading in the markets. Patience for a trader is an invaluable attribute to possess; the ability to wait for a trading setup or market opportunity and the patience to keep a running trade open without interference will surely help you create the gains you targeted. In fact, you can greatly improve your chances of success simply by having the discipline and patience to wait for the right opportunity. Take your time and only go for the best of opportunities making sure that the elements of your trading strategy are satisfied before entering the trade. Never worry about missing the boat and accept that waiting on the sidelines is a vital part of the game. Set strict targets for profits and losses and preferably the trade should offer a favourable risk/reward ratio.
9. All the best traders make mistakes. The guys who make the most money, are those who maintain a position and stick with it if they get the direction right of course. The skill is limiting your losses and running your winning trades. Never fund a losing trade but also never keep too tight a stop. How many of us can say how much we would have made if only we had held on just that little bit more?
10. And don't give up. Keep plugging away. An experienced broker once told me that there are quite a number of good analysts in the City, but very few of them can manage money. At the time I didn't understand that but in fact he was very much spot on. As you evolve you will find out the real problem that traders face : THEMSELVES. This is where the journey becomes interesting.

HOW YOU TAKE UR INVESTMENT DECISION ???

Should you be emotional or logical in taking investment decisions? That is an easy question. Every one is, or should be, logical in their investing decisions, right? Wrong! Even seasoned investors with 20 years experience in the stock market make silly mistakes by letting their ‘gut feel’ overrule their own logic.

This is what makes making big money in the stock market such a challenge. How can you overcome the mental impulses that lead to poor decision making? It takes patience, discipline and several years of effort to reach a stage where one can be dispassionate enough to buy or sell a stock purely on the basis of logic, and not get swayed by what is happening in the market or in the country or in the world.

One way to approach the problem is to have a plan. First a financial plan where you set out short-term and long-term goals for achieving different commitments such as buying a car, an apartment, children’s education, etc. The financial plan will lead to an Asset Allocation Plan, where a certain percentage of your portfolio gets allocated to different asset classes, like stocks, fixed income, real estate, gold.

Of course, you should not take my word for it. Assess if you have a problem at all – the ‘problem’ being emotional decision making while investing. So here is a little and apparently easy test that you can undergo to determine if you think emotionally or logically.

Shane Frederick of MIT’s Sloan School of Management introduced a three-question Cognitive Reflection test in his paper ‘Cognitive Reflection and Decision Making’. The three questions – modified for an Indian readership – are:

1. A bat and a ball costs Rs 110 in total. The bat costs Rs 100 more than the ball. How much does the ball cost?  Answer: Rs ……..
2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?  Answer: ……….minutes
3. In a poultry, eggs are being collected in baskets. The number of eggs in a basket doubles every minute. If a basket gets filled in 48 minutes, how long will it take to fill half the basket? Answer: ……..minutes

Please take a sheet of paper and a pencil and do not take more than 30 seconds to answer all three questions. Then take a minute or two to reflect on your answers. Did you get the answers right the first time? Did you get the correct answers after thinking about the questions a bit more?

Don’t feel bad if you didn’t get correct answers the first time. After testing several thousand people, Frederick found that less than 20% got all three answers right. Among professional fund managers, traders and analysts less than half managed to answer all three questions correctly!

Frederick also found that those who do well on the cognitive reflection test tend to be more patient in decisions between smaller sooner rewards and larger later rewards.

(Note: You don’t have to send me the answers. This is supposed to be a self-assessment test. But your comments are most welcome.)

SOURCES : EMAIL

WHY LONG-TERM INVESTORS SHOULD LOOK AT THE BIG PICTURE ?

With the Sensex and Nifty indices stuck within trading ranges for more than a month, small investors are in a quandary. What to do next? Two days of sharp bounce from a bottom, and the urge to jump in and buy is almost uncontrollable. Three days of correction from a resistance level, and every one is worried about a 2008-like crash.

Getting worried and disturbed about short-term index gyrations only increases your blood pressure and clouds your decision making. Times like these are true tests of your investment mettle. In life, unplanned action is some times better than planned inaction. But, for building wealth through successful investing in the stock market, you should practice the discipline of planned inaction.

The inaction refers only to buying and selling of stocks. Reading annual reports, books and preparing buy/sell lists are part of the daily ritual of  long-term investors. What then is the big picture referred to in the headline? I’m not an economist, but here is my take on what is happening around us.

Thanks to the Internet and FIIs, our stock market is fully integrated with global markets. All the nonsense about decoupling because of our strong domestic market is just that – nonsense. So, keep an eye on what is happening in global markets. To keep readers updated, I regularly post about stock indices in the US, Europe and Asia. If you are not reading those posts, ask yourself: Why not?

Europe is in quite a mess due to a unified currency that is not helping profligate nations - like Greece, Italy, Spain, Portugal - that are deep in debt and have very little capabilities (or even intentions) of repaying that debt. They neither can print their own currencies, nor can they devalue their currencies. The only options are that a financially stronger economy like Germany, and perhaps the IMF, will bail them out to stop them from defaulting. But that is postponing the problem – not solving it.

Many Indian companies – particularly IT services companies – switched their export focus from the USA to Europe post the dot.com crash in 2001. Some have built up significant businesses in Europe, including acquisition of European companies. The economic mess in the Eurozone is going to affect their bottom lines for the next few years.

China is a wild card. For years, they have been far ahead of India in building world-class infrastructure and an export-led high-growth economy. But with global economies slowing down, China is desperately trying to re-focus on their domestic market. There is strong suspicion about their reported growth figures, and that is reflected in their sliding stock market. If they start cutting back on their commodity purchases, which has been sustaining the global commodities market and shipping businesses, a big crash in global stock markets may follow.

The USA is not on the verge of collapse – like they were three years back. The situation is grim, but not hopeless. There will be a lot of pain before their economy eventually turns around. But thanks to two rounds of quantitative easing, and significant belt-tightening, US corporations are sitting on a lot of cash. They haven’t curtailed spending on existing IT services, and there are signs that they may be spending more on new services. The strengthening dollar will add to the bottom lines of IT services and export companies.

Our over-dependence on oil imports will further add to our balance of payments problem. The government had introduced several populist measures to help the rural poor. Subsidies on diesel, kerosene, fertilisers have added to the fiscal deficit. Rampant corruption and scams, as well as high inflation are keeping FIIs away. Their inflows partly help in reducing the deficit.

However, our GDP continues to grow. Not at 8-9% but more like 6-7%, which is much better than almost every one else except China. That pretty much rules out a 2008-like crash in the Indian stock market. But it could take a while before we see new highs on the Sensex and Nifty.

The sensible approach will be to cut out the daily noise emanating from the business TV channels, and concentrate on companies that have capable and trustworthy managements, and have records of several years of good performances through bull and bear cycles. If they produce goods or services that find buyers regardless of the state of the economy, so much the better. Companies that sell toothpaste, cigarettes, soaps and detergents, biscuits, life-saving drugs, drugs for chronic diseases, tractors, power tillers, tea and coffee will continue to do well.

Just remember that the stocks that don’t fall much during a down trend, don’t rise much during the subsequent up trend. The ones that fall more, tend to rise more. Of course, this ‘rule’ works only for well-managed companies.

SOURCES : EMAIL