How does one make profit in trading ? :
I have seen very complicated answer to this question.
The only way to make profit is— Sell at a price higher than the buying price.
No other way of making profit has yet been invented.
The problem is in execution. We are not able to sell at a higher price.
These two scenarios are common:
One buys a stock at Rs. 1000 with the hope of selling at a profit.
It starts going down.
In few days, it is down to 900. Now the trader is fearful.
Well, stocks do what they have to do. The trend reverses and it moves upwards.
920, 940, 960, 980 …………
Trader is now happy even though he is yet in a losing position.
990, 1000, 1020, 1040……..
Greed sets in. Thoughts of profit are now real.
1040, 1030, 1020…….
Now it is time for Fear.
Trader exits, booking a small profit of Rs. 20.
Stock resumes the upward journey.
1020, 1040, 1060, 1100, 1150, 1200…….
Trader keeps on wondering what he did wrong.
He had picked the right stock. Only he could not or did not take the profit.
His Fear of going into loss affected his possible profit.
Same stock as above.
It keeps on falling.
1000, 980, 960…..
Trader is fearful but hoping that it would reverse.
It does not.
Trader exits at 940.
Loss is Rs. 60.
In the trade which ended in profit, the profit was small —- Rs. 20.
The loss was big—- Rs. 60.
It happens with all of us.
It happens due to Fear and Greed.
And it hurts.
How to overcome Fear and Greed ? :
I would be a saint if I could really do it all the time.
But we can try.
Saints are humans but they have better control over emotions. We have to do that.
Let us exercise control over losses. Keep the losses to a manageable level by appropriate stop loss put in the system.
Leave the profits to the market.
We can not decide how much profit to take.
We take Rs. 20 and market mocks us by going higher.
Let us only control the losing part and gracefully accept what the market gives.
That way, we do not have to struggle with emotions.
It would be better to illustrate with an example:
These were my trades in Futures in September 2017.
Out of the 9 stocks traded, 5 were loss making and 4 gave profit.
Losses were kept small and profits kept running.
There were two big profits which made the exercise profitable.
It is not how many times you make profit, it is how much you make when you are right.
The above is true for investing and is true for trading also.
Thanks for reading.
( This was originally published on Quora.com )