There is no denying that the technique of the stock market game has a very important function. However, novice investors devote too much time to it. They can also focus on m.in budget management. Despite this, it is only with time that it turns out that technical indicators are only part of the success. What also counts is mastery and skilful risk control. So if you want to know how to play the stock market, the answer is: work on every aspect of your investment strategy.
Table of Contents
Risk control, profit-loss ratio.
Online trading is conducive to getting risk out of control. Concluding transactions without restrictions causes a sudden jump in adrenaline levels, quick reward and the development of harmful habits, so that the stock market game ceases to be a business and becomes a gamble.
What distinguishes a speculator from a gambler? First of all, risk control. Human nature avoids discomfort. In order to avoid the feeling of loss, we devote more emphasis to the effectiveness of the entrances. In the case of a stock market game, this causes a lot of trouble. You can have an efficiency of 90% and… regularly lose the money invested. This is not even such a rare situation, as the average retail investor has a habit of quickly realizing profits while holding losing positions,sometimes even adding funds to them.
In such a situation, even the best stock market forecasts will not help you and will not protect you from losing funds.
This risk management is not the only difference between an investor and a gambler. Gamblers take a different approach to the calculation of profitability. Every trade you make brings with it risk. Textbook knowledge of the basics of the stock exchange says that it should not exceed 1-2% of the funds held.
Another mistake is to open a position, taking care of setting the stop order, and not paying attention to take profit. Note that both elements are equally important. What if the graph shows that the maximum risk return can be 1R? Maybe in such a situation it is not profitable to place an order?
A safe game on the stock market assumes a small capital squeeze.
If you focus too much on possible profits, and ignore thedrawdown,then you will make one of the biggest mistakes. The trader's occupation on the stock exchange is to do work that ultimately does not consist in multiplying the funds held, but in the proper placement of risk.
Ask yourself the most important question in the context of your strategy: how many losses in a row are you able to withstand? How much damage can the so-called black series do to you. Be ready for the darkest vision!
Risk management through martingale.
It assumes doubing the stake in the event of a loss. It is based on the belief in ending the black series and finally coming out with the desired profit. This approach makes sense only on paper and with an unlimited amount of resources. Practice shows that the use of marathon quickly cleans investors' accounts of the necessary funds, especially those counting on quick earnings on the stock exchange.
There is also the inverted marathon rule, suggesting doubing the stake in the case of winning, and halving in the case of losing.
Do you know what is the biggest problem with using strategies based on martingales? Connection with gambling!
However, certain elements of such systems may be useful. For example, if you have a small account, knowing that the strategy brings regular profit, you can, for example, double the stake for the funds earned after winning series. This will work if your system has the ability to generate several profitable trades in a row. Such ways can accelerate the growth of funds in the account. Even in the absence of a proper budget, and knowing that your strategy is thoroughly tested, you can use a similar plan. For testing, it is good to use a demo account of a stock game.
Still, with plenty of resources, spare yourself a martingale and create your own stable risk management system.
Common stock market errors.
The average trader has a problem with psychological problems. Well, it's hard to find a cure for them in the form of an investment rate on the stock market.
A crowd of lemmings.
Human nature has a natural tendency to follow the crowd. According to this principle, the probability of being right depends on the number of people who hold a belief. The biggest pitfall of such thinking is the problem that such a belief does not have to be true.
The scheme of following the crowd accompanies you every day. This explains many nonsensical decisions. If your passion is to play the stock market, then pay attention to the fact that there is a simple way to incur losses. Your decision may be influenced by various stock market signals, forums or other types of groups.
What's the problem? Well, according to statistics, more than 90% of retail traders lose their invested funds. This means that the crowd is wrong, and when investing in the stock market, you should approach the decision yourself. Take full responsibility for them and forgive yourself the described cognitive bias. After all, one competent person in a given field will make a better decision than dozens of total laymans.
This is a complex topic, making the stock market instead of the investment environment turn into a gambling plot. It consists in the desire to open a position as soon as possible in order to cover the losses incurred. If you want to stop this type of behavior, focus on its causes. For example, it can be a small budget and out-of-touch ideas about possible profits and quick earnings.
Laymen argue that good stock market traders should use a lot of leverage at the lowest possible spreads. They want to increase their capital as soon as possible with the help of scalping and totally disproportionate position size in relation to the account. This may be a good idea, but there is one condition. This so-called account flip has a chance of success in the hands of an experienced trader.
Risky scalping has the advantage that despite the possibility of generating huge profits, it can drive the investor into huge losses. The first wrong decision will be a prelude to the capital squeeze and the desire to play out. This is nothing more than a gambling game and a proven way to become a donor of capital.
Do yourself a favor and limit the number of investment decisionsby putting emphasis on their quality.
Putting too much emphasis on the result.
Sometimes it is impossible to explain to beginners that a wrong strategy under favorable conditions can generate profits. Usually, after passing the good streak, the market verifies misconceptions and receives its gift.
If you open a position because someone said it's a good investment, everybody does it or that's what you think, well, you're gambling. If there is no solid hypothesis behind your market decisions supported by the history of the price, then do not count on breaking out thanks to the stock market. However, keep in mind that the basic issues of technical analysis are not enough. The trend line is simple to determine, but the market is much more complex.
Exaggerated belief in one's own competence.
Have you heard a sentence from a disappointed person that you can not make money on the stock market? This is, to say the least, an irrational opinion about the financial markets. Unfortunately, incompetent people in a given field do not allow this to be known at all, significantly overestimating their skills.
What does the path of a novice trader look like most often? After learning the basics of technical analysis, he deposits money into the account, after which, ignoring further education, he loses it and, thinking that he has mastered the rules of the stock exchange, considers the stock market a total fraud.
Working as a trader means that you will have to get rid of your natural laziness and get to work. Lazy people will remain only donors of capital, unlike those who take the stock market seriously.
A popular piece of advice given to novice traders is to set a stop loss order close to the position opening point in order to maximize possible returns. On the surface, it looks reasonable, but actually a tight stop loss is almost like a lack of collateral. Especially when you start your adventure with trading.
Banks and hedge funds are liquidity providers who know very well where they have pending orders and use them to open or close their positions.
Minimizing the risk of such manipulation is by setting stop orders at points after which the price exceeds your theory will cease to be reliable for future movements. This will eliminate situations where market noise can close positions with a start despite the predicted direction of the trend.
What trading style to choose?
Probably every stock market trader has his own style of trading. Traders, however, can be divided into short-term and long-term. How are they different from each other? Swing trading, i.e. long-term investing, is more a lifestyle of people who have developed the necessary habits.
Day trading is sometimes called a field for gamblers. Due to the number of positions opened and the short period in which profits and losses are realized, it does not necessarily require large funds. An experienced speculator can multiply them in a short time. Despite this, a large earning potential generates a greater risk of a greater capital squeeze.
Swing trading understood by many as a safe exchange is profitable while maintaining the maximum degree of caution. However, it requires more capital. If you want to make it a maintenance tool, you need to invest funds greater than several hundred thousand zlotys. In addition, comprehensive economic knowledge and regular analysis will be necessary.
Most day trading people will think about long-term investments one day. Ideally, the larger funds obtained from day trading should be invested in listed companies. This may not make sense, as day trading is a practice field for future long-term investors. The knowledge acquired then becomes invaluable when portfolios are built. It also allows you to look at the instrument in a technical light.
When you have the right financial resources and prefer to devote yourself to fundamental analysis rather than explore the secrets of price fluctuations, then after successful training with a demo stock account, you can try long-term trading.
However, you will not free yourself from the knowledge of day trading, the shortcomings of which will very quickly come to the surface. Assimilating the theory of auctions, the Wyckoff method or other such issues are stages that are not worth skipping.
Unfortunately, the stock market is not an occupation for everyone. Only a fraction of day traders make a regular profit. It is a common argument for switching to long-term trading. Possible profits of a dozen or so percent per month in day trading are ridiculed. Because
"Warren Buffet reaches 20% a year and you can't get any better."
Consider that Warren Buffet is not a stock market trader, but a long-term investor. His actions are based on such large funds that day trading in their appendages would be completely meaningless.