Trading in the stock market can often feel like making quick buy-sell decisions, so you can’t leave your computer screen for even a minute.
This is called day trading, meaning the entry and exit of the security occurs on the same market day. However, this is only one style among many, which in turn is also the most competitive and stressful way of participating in the financial markets, because the trader competes with computers and algorithms that are many times faster and more accurate than a human being can be. human.
Whether you are an investor or a trader, we all aim to grow our assets in the financial markets. When the investor carries out his transactions on the stock exchange, he plays the role of trader. If I, as a trader, hold a stock that does well for a year based on price movement, that position might look like an investment even though I don’t even know what the company is. As stocks are held longer, the distinction between investing and trading becomes blurred.
An example of a technical system is the S&P 500, an index of major US companies based on market capitalization, which for most people means investing because they hold a long-term index fund without even knowing which companies they own.
Don’t frame yourself
Here is the first recommendation to abandon the stereotypes and prejudices of the sector to think more outside the box and identify which portfolio management style could suit your character and objectives.
For example, I make all my stock trading decisions based only on price movement, which is mathematical and probabilistic, because I see no advantage for myself over others in fundamental analysis. Some other stock market participants want to make decisions based only on the company’s turnover and profits, because it seems understandable and logical to them. There is no right or wrong methodology when participating in the markets, because capital moves from one pocket to another and therefore the goal is to be smarter than other market participants in your decisions. Finding a market advantage requires differentiation from others to perform better than the market index or market average.
Today the information for making decisions is infinite and must be filtered accordingly, because more information does not always mean better decisions, but an abundance of input information can make the outcome more random.
Everyone’s time horizon is different and personal
My second recommendation is to set your time horizon in the financial market. I have already described day trading above, which is the style with the shortest time horizon, because the trader always enters the money before the market closes. In fact, you don’t need to be aware of the price movement of your stocks throughout the day if the stocks are held for weeks or months and the size of each individual stock position is relatively small compared to the entire portfolio.
Additionally, modern technology allows you to place automatic trade orders in your trading software to limit your losses if the stock price starts to drop. In this case, the stock broker executes the trade without the presence of the trader according to the previous setup.
I have built my trading system in such a way that I do not need to be at the computer during market hours, because I have set up all my activities with automatic trading orders. So for me the market works and not the other way around.
Practice thinking and deciding independently
If the supply and demand of the financial market or a particular security is on the one hand unbalanced and overcrowded, most market participants expect the price movement to continue in the same direction. In this case, for example, the price increase often risks turning in the opposite direction, because the last optimists have already made their purchases and there is not enough new capital to continue the price movement.
In contrast, during market declines, when the negativity towards expectations is already so great that the last pessimists have sold stocks, there are no longer enough transaction orders on the supply side to continue the selling pressure, and demand regains its dominance, upon which the market begins to rise again.
Here is my third recommendation: make buying and selling decisions independently and do not rush together with others in your decisions.
Human nature makes us feel comfortable in the market
As humans, we are not designed to make good decisions in the stock market because we don’t like the unknown and uncertainty of the future. We want security and stability in life. Unfortunately, the courage to take risks in the dark is precisely what markets reward best.
Financial markets are quite efficient, which means that all known information is already included in market prices and it is very difficult to overcome them on an individual level. We therefore have to run the risk of something happening on the market that not even the market knows about yet. This means that we ourselves do not know exactly what will happen in the future. Since such a decision-making process is often unacceptable for the human brain, convenient decisions are made based on what is clear and known to everyone at the moment, but there is no longer a deserved risk reward in it. This way, a novice trader can wipe his mouth from a good result.
My recommendation here is not to try to predict the future with today’s information, but rather to think about what the market or others may not be predicting yet.
The main goal is to survive in the market
In the stock market the most important thing is to stay in the game. It is not possible to get opportunities from the market if the market participant loses his capital. All successful traders who have 30-40 years of results to show are characterized by the fact that they have managed to stay in the game all this time through good risk management.
My fifth recommendation for a novice stock trader is to spread the risk among many small bets, the potential return of which is many times higher than the risk taken, instead of large trades. Exiting the position with a small loss helps measure and limit the risk, if the set path does not unfold as expected. Such a plan should also be created before initiating the transaction to prevent emotions from arising at this time. Accumulating losses and letting them get too large destroys a stock trader’s account and ability to continue in the market.
My principle is to calculate the risk first and only then the profitability when making a new transaction on the stock exchange. Staying in the game is more important than high short-term returns that then disappear.
If you want to know how Markus Tamm analyzes stock prices, manages risks on the stock market and makes trades, take a look at the training course “Getting started with stock trading”, which will take place soon.
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2024-01-04 07:30:00
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