Characteristics of Trading
India is an emerging market for trading, and is fast becoming a market for future growth. At present, only a very low percentage of the household savings of Indians are invested in the domestic stock market for trading, but with GDP growing and a stable financial market, these investments may see a rise.
Trading everywhere has some basic characteristics, which are :–
1] Frequent Trades –
Trading involves frequent buying and selling of commodities, currencies or other securities. Frequents trades help take advantage of the fluctuations in the market. Trading practice generally is buying when the market is down and selling when the market rises to its maturity and is about to fall again. Even smallest changes in market give high profits through frequent trades.
Some financial advisors and trading institutions advise not to make trades frequently. By engaging in frequent trading, the trader may increases the costs of buying and selling. This in turn reduces the overall returns.
“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.”
– William O’Neil
2] Short term Gains –
Trading helps to earn short term gains by taking advantage through volatility through buying and selling. Even smallest volatility can give high gains. Short term gains are helpful in satisfying the currents need and fulfill the short term goals. Short term gains increase the corpus available in the longer period.
In theory arbitrage profits (short term gains) may seem possible, but practically they are not possible.
3] Short Term Approach –
Trading has a short term approach. This approach can be very lucrative, but it can also be risky. In trading, investment period can be as short as few minutes. Investments are bought when the market is low and are sold immediately when they rise even a little.
To succeed in this approach, traders must understand the risks and rewards of each trade. They must not only know how to spot good short-term opportunities, but also how to protect themselves. Some basic steps to be followed are – watch the moving averages, understand overall cycles or patterns, and get a sense of market trends.
“The four most dangerous words in investing are: This time it’s different.”
– Sir John Templeton
(Any time you hear that things are different this time, invest as if things are the same as they always were.)
4] Focus –
In trading, complete focus is given on short term aspects. Basically, trading is short term and therefore its focus is also on short term opportunities. Trading focuses on finding out short term trends of underlying asset’s price movements. These short term trends in price movements can be analysed and sometimes predicted. Thus, gains can be made by focusing on short term trends in price movements.
Focus should be on trading process and not trading results. Overall trading results are the end game, i.e overall results should be the focus in trading. A trader must look at the big picture.
5] Technical Analysis –
Technical analysis is the forecasting of future financial price movements based on a study of past price movements. Technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.
Technical analysis is the most important part of trading. Technical analysis provides the entire base for making decision about trading. For this, charts and graphs are used extensively. Charts and graphs help understand various patterns, trends, etc on the basis of which trading decisions are dependent. Technical analysis provides with information on the past performance of an investment instrument, current performance of that instrument and its future probabilities.
“The stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.”
― Benjamin Graham; The Intelligent Investor
( Stock prices ultimately go up because companies perform and the profits go up. They do not go up sustainably because of people’s speculation. Facts and analysis ensure that any uncertainties that an investor may have are satisfied leading to lower risk and good profit margins.)