Trading overview:
Trading:
Trading appears to be deceivingly simple. All you do is buy something low, sell high and vice versa. When you buy first and sell later, the position is called long. Long is easy to understand as people are usually used to say buying a property first and selling it later. What is tough for many people is to understand short. You can actaully sell something without even having it. How does that work? well when you sell, you deposit enough margin amount just to take care of movement of say stock in disadvantageous direction. Be it advantageous or disadvantageous position, you need to eventually cover the position by buying back what you have sold earlier. This will complete the transaction. Differential is either profit or loss depending on at what price stock was sold and bought.
Complexity:
The whole complexity of trading is because you don't know in advance what you bought is either going to go up or down or remain the same. There are many differnt schools that claim they have almost mastered in what direction the stock will move.
Ananlysis:
There is technical analysis that tries to look at past data and tries to forecast future move based on the past. There is fundamental ananlysis that looks at how company and macro economic situation is and come up with potential price. Random theorist who claim the future can't be predicted. The move is always random. People make a a career advocating people on potential stock move. But the tragedy is however confident the TV financial analysts talk, he is as clueless on direction of move as you are.
Who loses and gains money:
Trading is supposed to be a zero sum game. But in reality its not accurately zero sum. This is because there are many middle parties between buyer and seller who eat up their share (like broker, taxes), So winner wins less than what loser has actually lost. And loser end up losing more than the price differential. This extra money can be small or significant depending on broker you have, size of transaction and frequency of transaction. So in summary traders win sometimes and lose sometimes. But middle men always take their share.
Data shows 95% traders lose money. Remaining 5% seem to be consistent winners.
Factors involved:
New entrants to trading business make the mistake of assuming trading is a mechanical business. In reality thats not so. If not more there is as much psychology involved in trading as it is in gambling. Its very easy to get gamblers high and lose the money.
In the next article we will try to get into details of why traders lose money. Till then enjoy the following quotes on trading.
Quotes:
-Every man lives by exchanging
-Don't put all your eggs in one basket.
-You want to be greedy when others are fearful,and you want to be fearful when others are greedy.
-Trading is hardwork, laborious and boring, just like any other jobs. If you are excited about it, you are gambling
-Never depend on a single source of income.
-A fair bargain leaves both sides unhappy
-The value of a thing is what that thing will bring
-If you buy things you don't need, you'll soon sell things you need
-Its not about being right or wrong, rather, its about how much money you make when you’re right and how much you don’t lose when you’re wrong
-Experience is a hard teacher because she gives the test first, the lesson afterwards
More quotes on
money
