Right temperament for making money from Stocks

Investing and Trading in stock market (as well as forex, crypto, etc.) is a science, as well as an art. You cannot be a successful investor or trader till you learn both.

In this article, we will learn about the common mistakes that people make in stock markets. Most of it can be traced back to their wrong expectations, mindset, temperament and attitude. This is what we will throw some light on in this article.

Let’s begin!

Right Investment and Trading Attitude

More than tips and techniques of investment and trading, your temperament and attitude matter more. This applies to long-term investors, as well as Intra-day and F&O traders.

Here are a few things you need to keep in mind in this regard:

Hurry

Never be in a hurry to make money and be rich overnight. People who think that they will become rich in a year or two in share market often make big mistakes.

You should not invest more than 5-10% of your savings in share market. If you are younger, you may invest a bit more though. But I personally was and am a very conservative investor.

I do not even invest 10% of my savings in share market. I invest 10% of my current earning (i.e. salary). I do not even touch my savings.

Some people even take loans for investment and trading – this is a big no, no! Never do that.

Greed

It’s somehow related to the first point. People who are too greedy are often in a hurry to make money. Sometimes, you may have a genuine need too. But avoid setting up huge gain targets, as that will mean your risks will increase too.

Ideally, restrict yourself to long-term investing. But if you are more interested in trading, then restrict yourself to intra-day and options trading with proper stop-loss.

Futures trading is a lot riskier than Options trading. That’s why I never do Futures trading. Options trading is the most I do.

No matter what you do, learn when to exit the market. If you are too greedy and wait for the market/share to rise perpetually, then you will never be able to sell. You cannot book profits if you do not sell. People who wait for too long will find it hard to book good profits.

Practice

Yes, invest some time in learning the basic concepts of trading and investment. If you are reading this article, then you are already doing that. Congratulations!

Then, do some paper trading for some time, e.g. use NeoStox. Do this for 5-6 months. Once, you are confident enough, start trading with very small capital.

In the first year, you are more likely to book losses than profits. If you will end up investing large capital at the very start, and make big losses, you may get so discouraged and scared that you may never enter stock market again. So, start slow and small.

I invested around a year in learning various things about stock market, and did paper trading. Even after that I started with a petty amount of Rs. 1000. For the next one year, I took it more as a fun game, than serious investment – a game of numbers and charts that I like so much!

Research

This is also related to the preceding point. Apart from learning the science and art of stock market investment/trading, you should also invest a few days in acclimatizing yourself with the index or stock you are planning to invest/trade in.

Investors should understand the fundamentals of the company, that sector, and how macro-economic factors (such as inflation, oil price, rupee value, economic state of other countries, etc.) impact them.
Traders should understand the price action of that index/share. Just observe it for a few days – how it goes up/down, the patterns it makes, how its operator works, analyze its previous months/years performance, etc.

Share market is a game of numbers and patterns – make them your friends. They will start talking to you – once this happens you will automatically know when to enter and when to exit. You will need to ask no one else.

Note

If you are an investor, then you enter a business while investing, and exit a business while leaving (i.e. the company fundamentals decide when you invest and when you exit).

If you are a trader, then you enter and exit based on the price action (i.e. based on technical analysis).

Patience

The prices of shares and indexes keep on falling and rising in a periodic manner. So, do not get distressed very soon if you see the price of your share in the red zone.

Sometimes, the bear phase lasts in the stock market or even in case of individual shares for years. If you can wait out that rough period, then you will eventually make profits. If the company you have invested has solid fundamentals, then eventually it will book profits.

You do not make real losses till you sell your share – Remember that!

As per Warren Buffet, stock market is an instrument of transferring money from non-patient people to patient people.

Similarly, even for short term traders, do not be in a hurry to jump into a trade. Wait till you get clear indication that a trend reversal is about to come. Wait for confirmation, or even double confirmation.

Sometimes, the operator tries to bluff the traders by creating a fake breakout. You may learn to identify that. But the best remedy against falling into that trap is patience!

Develop your own skills

You should develop your own knowledge and skills. Do not blindly follow some expert, or a set of experts. That’s because:

Not every so-called expert is really an expert. Advise is something that we Indians like to give for free – a lot.
Even experts commit mistakes and even blunders.
The intentions of the expert you are following may be malafide and he may be giving you wrong information, or even worse – he might be giving you only half-information.
Sometimes too much information can be a bad thing. It creates a lot of noise in our mind and deters us from applying our own mind. Most of us are lazy and do not want to do research on our own. We look for shortcuts and that may harm us.

Though it does not mean that you should stop listening to other people all together. You should listen to everyone, but develop your own skills and capability. Listen to everyone, but do what you want to do – based on your own logical skills, experience, and analysis.

Do not invest in share market till you have some basic confidence in your own capability. Do paper trading till then, or invest only petty amounts.

Decide your Goals

You should decide beforehand what you want to do:

Do you want to become an investor – that is, whether you want to buy a share for more than a day (preferably of a few months/years)
Do you want to become a trader – that is, whether you want to buy a share for less than a day (i.e. intra-day, futures, options)

Both of them require their own set of skills and knowledge. So, decide what you want to do, and train accordingly.

Investors should buy shares in a gradual manner, i.e. in stepwise manner. Do not buy or sell in one go. Keep on buying as the price of a share goes down (given that it is a good share with bright growth prospects). And keep on selling and booking profits as the price of a share keeps going up.

Traders should wrap up their trade within that day. In trading you should always place a stop loss and book losses if you have too.

Decide what you want to do, and work accordingly. Do not mix the two.

Of course, you can do both, but decide beforehand what your goal is before you buy a share. Do not start trading and then develop an investor mindset midway.

Discipline is a must

You need to be disciplined while investing or trading in stock market. Develop a good strategy and follow it in letter and spirit.

Do proper risk analysis, and have practical expectations. Decide beforehand the profits that you aim to make, and the losses that you are ready to suffer. Do not be too greedy when it comes to profits and do not be too fearful or heartbroken if you book losses.

Winding Up

Last but not the least, learn from your mistakes. Even if you learn a lot of tips and tricks and have an excellent mindset, you will still make mistakes. You will still suffer losses, especially in the initial few months.

So, keep in mind that there will be some setbacks in your journey. Take them as learning experiences. Nothing teaches us better than our own experience.

You cannot make gains in life until you are not ready to bear some risks. Boats and ships are the safest at the harbour, but that’s not what they are made for!

Even the most experienced and learned trader and investors bear losses in this market. Our aim should just be to minimize our risks and maximize our gains.

Keep on learning and keep on practicing. You will eventually be successful. Have faith!