Earning money in the stock market:
At whatever level, when you get to know about the stock market, this is the most obvious question.
When you ask about the possibility of earning money in stock market, you will be flooded with news, posts, advice etc. about both sides of opinion.
People who lose money or who have lost money in the stock market have ample evidence within their circle about people who have lost.
And let me be clear, statistics support their claim. In trading, historically, only 2-3% of traders succeed.
Why do we have such low success rate in the stock market trading?
There are the variety of reasons, though the only reason that takes the top slot is the ease of entry into trading itself.
Ironic, isn’t it?
It is the truth. To start your trading career, all it requires is signing up at any broker, put up the margin money ( which not much anyway) and you are ready to trade.
The whole process is completed within few days.
Which means, most of beginner’s or new entrants into the stock market come with little or no experience about how to trade as a serious business.
The image portrayed by media is such, that:
- Trading is not difficult.
- What you need to do is find the right direction and stay with the trend.
- You can easily earn good side income with trading.
So let us deal with addressing these points, one by one. With that, you will get to know that yes, you can earn money from stock market consistently and how to do that.
1:-Trading is not difficult
Trading as the concept is not difficult. It is very easy to understand and learn.[If you are absolute beginner] You can follow through this list of books and articles which can give you a good foundation in the stock market and trading.
The difficult part in trading is execution.
You will come across many terms like emotional control, following the rules and risk management. Well, they are very much real.
They are real in the sense, that when you actually start trading, your emotional control will be tested to the limit.
It is one thing to say to control your fear and greed, and different matter to actually sit through a trade while prices are moving up and down.
How to handle emotions while trading?
This may sound little philosophical but what the heck!
Ask yourself: Why do you want to trade? This is the most important part.
If you are trading because:
- Someone, you read about or know is making easy money through trading
- You read few business columns about trading opportunity
- There is a gut feeling that you have good intuition about general direction of the market and thus can profit from it.
- That all it takes is putting in order, maintaining stop loss and have a nice little side income
or any of the variation of these points. Then STOP and save your money.
Trading is not easy.
It is a serious business, which needs planning and execution like a proper business.
You are up against people who devote their time and energy ( and now even computers ) to design, test and then execute profitable strategies.
If you are serious about making money in trading, then you have to be serious about learning the proper way of how to trading. As a business ( even side business will do fine) but still a business. Not a hobby!
When you understand this, it will become easy to manage your expectations out of trading as a business.
Every business takes its own time to scale.
This is true to trading too. Many of emotions related mistakes in trading business are due to hurry/desire of trader to scale up fast.
Let me explain that a little:
When you start trading, you are new to the field. You enter a trade based on your analysis. You maintain stop loss and follow the trend. Most probably you end up in a profitable trade and earn well.
Now the problem starts after 4th or 5th such trade.
Suddenly the time it took to earn money looks very small as compared to the money you made. This is then compared to the amount of money made with the amount invested.
And you scale up!
Either you increase the trading capital (less chance) or you increase the trading size ( more chances).
Now in monetary terms, the effect of each trade has increased. Which is not something you have done before.
You see the problem here?
There is little experience, hence mind is inexperienced about emotional entanglement involved with bigger trade sizes. Especially when probable profit and loss with each trade is coming closer to your normal monthly income!
How to scale up then?
There are many ways in which you can scale up your trading size.[If you want to read about it from different trader’s perspective, then you can read this and this post. (Not affiliated)]
In short form:
- You can scale up as a percentage of your profit in the previous month. So, in simple words, you can scale up the trading size you trade as a percentage of profit you made in previous month.
- You scale up or down according to your stop loss. It means when stop loss is near you have bigger size and vice versa. This is dynamic approach and seldom preferred. This is more suitable for position sizing.
- You set a time, like twice or thrice in a year when you take out a part of profit and make rest of trading capital as your new base capital and then decide to have a certain trading size, till next such review.
There is no hard and fast rule about it. So, ideally you should try out all three combinations and pick whatver suits you best.
2: -Finding the trend and staying with the trend
Ah, the famous quote.
Well, my friend, let me tell you the reality. A trend is not a textbook case. Not at all.
When you have so-called trend confirmations or trend patterns, they are just probabilities. Nothing more, nothing less.
So what’s a probability?
It means that from the number of possible outcomes, which outcome has a higher possibility of happening!
And that’s it.
A possibility is what it is, a possibility. Not guarantee.
Means, a trend is just a possibility. Not certain path.
Once you have this understanding clear, it will help you a lot in managing your trades.
Look at following charts of failed trend breakouts to understand how anything can happen:
So does trend exist? YES.
But remember: Markets moves in an unpredictable manner. So, though trends exist in the market, it is not guaranteed that they will follow textbook patterns.
Does it help you to learn technical analysis for success in stock market trading?
This is a million* dollar question.[* At higher scale(hedge funds level), nobody uses technical analysis like you see in books or articles. At such levels, analytics, algorithms, statistics and other highly sophisticated machine-based tools are used]
And the answer is: Technical analysis is just one of many tools you equip yourself with getting yourself better understanding about trading overall. That’s it.
And there is a reason to it.
Technical Analysis developed as analysis by traders who were very acute about their observation about data, numbers, and patterns.
With time, they developed a deeper understanding of these patterns, which were then studied by other traders.
When you study all these patterns, indicators, signals etc. it becomes clear what observations were made about the market at that time.
Broadly, the market still works on patterns, because these patterns are based on human nature as a crowd. As aptly said:
When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once.
– Gustave Le Bon in, “The Crowd: A Study of the Popular Mind”
Means, time and again, market participants as crowd behave in a predictable manner. Not in textbook style, but still predictable.
Technical Analysis and study of charts will give you clarity about this predictable behavior.
After that, you need to work on your observation skills in the current market to able to find out patterns, which you can exploit to earn money from the market.
Then. only then, you will be able to find a trend in the market and also be able to stay with the right trend until the end.
3: -Earning side income with trading
This is most seductive thought for anyone to get introduced to trading. What this statement leads people to believe about trading is something like this:
Well, trading doesn’t work like this.
Trading is a serious business.
For any chance of earning money from trading, you need to approach it like a business only.
Which means you need to devote time to:
- Develop the business plan (your trading strategy)
- Maintain accounts (trading ledger)
- Market research ( backtesting)
- Customer feedback ( reviewing your trades)
This is the only way you can earn money from the market by trading.[ I would take liberty and say that this is the only way you can earn money at all. You can not earn money without working for it]
Just like every business, once you have gained enough experience, then you can change the rules for yourself. Then your experience will allow you the liberty to take fewer, better trades and thus being able to stay away from the market too.
This stage takes time to come.
When you read about people earning from trading, they are able to do it after putting their dues in honing their skills. Not before that.
A short note of technical courses: All the technical courses which are advertised on the web ( some even on this site too) will only do one thing: shorten your learning curve.
Technical courses are just like any other professional courses, they equip you with tools of the trade in a systematic format. But to really earn from that knowledge you have to gain experience.
So my ‘tested’ advice would be:
After completing any of such course, either join a senior trader/ trading firm. They already have a system in place and thus you will learn how to handle trades professionally.
If you want to trade for yourself, then start with the smallest amount possible. Scale up from there gradually.
But at very least join online trading forums. Experiences from other traders will keep your expectations managed.
Free online resources to learn trading:
Below mentioned are some of the websites, blog and forum which are mostly free to access and learn from.
These have thoughtful content and active traders providing helpful inputs.[ If you know about any other resource, please mention that in the comment section. I will add that to the list with due credit to you 🙂 ]
- http://www.traderji.com/ (Indian forum)
- http://www.babypips.com/school (Forex bent, but sound technical analysis
- Varsity by Zerodha ( an initiative by Indian brokerage firm Zerodha)