As population rises and jobs are shrinking trading and investing is increasingly becoming a serious profession. In developed countries there are many companies and brokers who teach trading as a profession and the better traders among them get placed internally and start managing the company’s money. Trading methods based on technical analysis, news interpretation and algorithms are commonly taught topics.
In India there are few such options, if any. Most of the learning on how to make money in the stock markets has to be self-taught or if one is lucky to get a mentor who can guide, but that is tougher than getting a lottery ticket.
However, most of the traders and investors in the market, either in India or abroad are all self-taught. Baptism by fire is the best way a person can learn to make money in the market. The only thing one has to ensure is to burn as little a capital as possible during this training period.
Markets and sports
Making money is both easy as well as difficult in the stock market. What differentiates the two is the person’s attitude. Making money in the market is like any other competitive sport. Just like in a sport you win some and you lose some. It’s the losses that offer the biggest learning lessons for a sports man. But if the sports person leaves a sport when he is in a losing spell and jumps over to try another sport, will he ever be successful. Very unlikely.
Similarly in the markets, the path for steady money is persistence and faith in your strategy. If practice makes man perfect is true in sports, it is the basic credo when it comes to trading and investing.
So before one learns how to make money, it is important to know that if one is learning by themselves, there will be a tuition fee and it will be charged by the market. There will be losses, but the trick to fast learning is not only to keep losses small but also to learn from them.
As in sports, one needs to first decide which game to play, similarly in markets one needs to decide which route should one take for making money.
Many roads lead to the bank
There are various ways in which a person can learn to make money. Again the attitude of a person decides which path he would choose. Among the traits that are absolute essential to succeed is to have an independent thought process. One should not be taken away by crowd thinking. In investing and trading the battle is between the person and the rest of the world. A strong and independent character who sticks by his decision is an absolute must in stock markets.
As legendary investor Warren Buffett says there is one sure way of winning and that is to be fearful when everyone is greedy and be greedy when everyone is fearful.
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The fundamental way
There is the fundamental analysis way that can ensure big money but needs the person to be knowledgeable in financial principle and should be extremely patient. The person should not be afraid of losses if his premise for investing is valid.
One of the best fund managers of all time – Peter Lynch said that his best stocks gave him returns after the third, fourth and the fifth year since he bought them. It was not the third of the fourth week. This is the kind of patience on needs to have in making money through the fundamental way.
With fundamental analysis there are again many strategies that an investor can apply. One can wait patiently and be a value investor like Warren Buffett or one can train to be an investor in turnaround stocks. Some others can wait and invest in dividend yield stocks while others can invest in growth stocks.
There are numerous formulas and strategies to pick up stocks through fundamental analysis. But the key to success, as mentioned earlier is to stick to your investment strategy and only after you have mastered one to jump to another to build your arsenal of strategies. Each strategy will take its own time to fructify. The main reason many brilliant analysts do not become successful investors is because they are not patient or they like to jump to another strategy that seems to be working in the current environment.
As Peter Lynch says ‘The most important organ in the human body as far as stock market is concerned is the guts, not the head. Anyone can acquire the know-how for analyzing stocks.’
The technical way
Perhaps the least understood and most exploited way of making money in the markets is by using technical analysis. Many fundamental analysts consider it to be nothing short of voodoo practice, but when one compares the returns of a technical trader with that of a fundamental investor, the former wins hands down. However, the number of trades needed to have a higher return will be much more for a technical based trader.
A technical trader has more strategies to trade with as compared to a fundamental investor. He may however, not need to have knowledge of reading financial reports. But he has to have a working knowledge of technical analysis.
In technical analysis, which is the use of charts and the patterns that are formed in it, the trader can gain expertise in one or more than one strategy. As in the case of fundamental investor, the technical trader has to be cautious in sticking to his strategy.
However, a trader would be more likely to change his strategy because of the number of strategies available to him in technical analysis.
This is because by tweaking only a few numbers in an existing strategy he can create a new one. Say for example a trader is buying a crossover of the 5 day moving average over the 20 day moving average. If he finds that the strategy is not working or giving him late entries and exits, he would like to use the 5 and 10 moving averages. Within moving averages crossover itself the trader would be faced with thousands of option.
This is why, though technical analysis is easier to trade, there are few successful traders. One needs to trust their strategy and stick on to it.
In any physical sport, exercise or physical fitness is given the most weightage and the maximum time is spent by the athlete in building his stamina and staying physically fit. The equivalent to fitness in stock markets is money management.
A professional trader will make money in any type of strategy he trades with, simply by effectively using his money management skills. This is perhaps the least understood and studied parameter by either a trader or an investor.
Money management, as the name suggests is cleverly allocating capital for each trade. Reducing your position when you are in a losing spree and increasing it and riding your winners.
As mentioned earlier, it is not too difficult to make money in the markets. All one needs to do is to choose a path, test it on paper and then with small amounts. After one sees profit in these two approaches he can increase his position.