Dealing with fear psychosis in trading

Whenever we talk about stock trading or commodities trading, it is generally observed that most people, who have little knowledge about financial instruments, fear that trading is a dangerous game and stay away from making investments.

They are also prone to discouraging new investors, who might otherwise show an inclination towards investing in these financial instruments. Their fears stem from real-life examples that they have heard from other people as the experience. Many successful people, like Warren Buffet, Charlie Munger, Peter Lynch, have made a big fortune by investing in these markets, but they all applied different strategies according to their needs and requirements.

Buffet, the net worth of approximately $82 billion, had once said that you don’t need to be a rocket scientist; investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. The financial market is an easily available venue from where you can make a big fortune if you apply the right strategies and follow certain principles.

Many people lose money from trading when they don’t follow basic principles. We follow a set of 5 rules, which are mentioned below. Let us first understand these top five basic principles which will help you to become a successful commodity or equity trader:

Develop your trading methodology supported by facts: Every individual has a different temperament, different cash flows, and differing risk appetites. It is always advisable not to follow a random trade, but instead make a plan based on your trading techniques, which includes your cash flow.

Never trade without a proper trade plan: Successful traders don’t pick trades randomly. They follow proper execution methods which have a stop loss, profit booking levels, and a risk management strategy in place before entering into any trade.

Let’s see an instance on the usage of stop loss in a trade - say you just purchased a share at Rs. 20 per share. After buying the stock, you enter a stop-loss order for Rs 18. If the stock falls below Rs 18, your shares will then be sold at the prevailing market price. The advantage of a stop-loss order is that you don’t have to monitor how a stock is performing daily. Another use of this tool, though, is to lock in profits, in which case it is sometimes referred to as a “trailing stop”.

Over-leverage kills the investment: Leverage is a double-edged sword. When people borrow money from lenders and invest in stocks and subsequently incur losses, they need to settle such losses and also pay interest on the leveraged amount along with the principal money. Such instances make trading a painful activity. On the contrary, managing your own money with proper risk management tools can save you from this pain and suffering. Minor losses can be accommodated easily than the bigger ones.

Remove the fear of losing money: Fear of loss in trading generally makes traders nervous and affects their entry and exit strategies in the market. They lose patience and undertake random trading, which does not have a proper trade plan or research back-up.

Use technology to execute a trading plan: Back-testing of your trade idea and trailing with small amounts can reduce the chances of failure. Always prefer to use technology to your advantage. Commodities and capital markets have experienced a revolution driven by modern advanced technologies and radical changes as electronic trading has dramatically increased trading volumes.

The common man fears commodity and equity trading, however, if they learn how to make it a profitable trade by consistently, we are confident that they will eventually become successful traders.

(The writer is the Chairman of ABans Group of Companies)