There is no easy money: less than 1% of active traders outperform bank FD.
In 2021, we saw a record number of new traders and investors. Despite the recent drop, the Nifty 50 gained 23 % for the year, indicating that we are still in a bull market for the time being. I've seen a lot of changes in the markets over the years, but one thing has stayed unchanged: greed. Long term, the stock market may be the most difficult area in the world to make easy money.
Many people are drawn into the markets and have a bright view of trading as a result of social media.
However, less than 1% of active traders earn more than a bank fixed deposit during a three-year period.
For over 25 years, I've been a trader. I've been really blessed in that I've had the opportunity to engage with thousands of traders. Here are a few things I've discovered from engaging with all of these traders, and also through my own trading wins and losses.
NUmBER #1 Make a clear stop for both your time and your money.
The one thing that all of the smartest people I know see in common is that they all know where to stop. If you are a starter, be sure to define and stick to a reasonable stop loss, an amount you can afford to lose, and a time period you will wait to turn a profit. I was blessed to record a podcast with Jack Schwager, and one of his noteworthy comments was, "You should make sure that you don't lose more than 1% of your trading capital."
Number #2 Go With trend.
Buying stocks at their 52-week lows is a popular starting technique. They believe the stock will recover since it has already gone too far. However, stock prices tend to trend, i.e., go up or down in one direction for lengthy periods of time. The greatest strategy is to buy stocks that are heading up and sell ones that are trending down.
NUMBER #3 Averaging down results in the loss of wealth.
The disposition effect leads to people's tendency to sell shares that have increased in value while purchasing or staying stocks that have decreased in value. Most traders are influenced by this, and they should be doing the opposite: cutting losers and following winnings. Hope is not a trading technique. Buying more while a stock's price falls rapidly may work temporarily, but it is often a losing strategy in the long term. Buying more of the dropping stock is effectively you want to correct a trading error that might have been stopped with a stop loss.
NUMBER #4 Leverage is a LIKE an Atomic Bomb
While the idea of achieving outsized gains using leverage is wonderful, all it takes is one terrible deal to blow out your account. This is by far the most frequent cause for traders to discontinue trading. As much as possible, avoid using leverage. If you do decide to use leverage, do it carefully, or rarely only when you have strong confidence in a trade, and only with a stop loss in place.
NUmber #5 Stock tips must be avoided.
There are many people who promise to be able to help you get rich using stock advice, but it hardly works out. What made things worse is that people are famously bad at taking tips. So even if they find a great advisor, they still don't make any money. The main danger, however, is that most of the advice on social media and other groups are pump and dump scammers.
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