Trading concept & the common blunders that retail investors should avoid..
Retail traders in the financial markets can typically be categorised as either manual or algorithmic traders. Manual trading comprises of individuals either calling their broker to place trades or manually implementing trades on the terminal’s themselves. In the case of automated, algorithmic or system trading, pre- programmed strategies are coded and directly placed in the trading platform or fed into third party software’s from where the system picks up the signals using application program interface (API) and converts them into orders.
Regardless of the trading style, there is certainly a dearth of successful traders in the financial markets, globally. Several studies over the years have proven that the percentage of traders consistently earning profits are very, very small compared to the large numbers losing money. Although trading psychology plays a major role in defining a trader’s frame of mind, there are numerous blunders that newcomers and experienced traders generally commit, which distinguishes a profitable trader from the rest.
For beginners in the financial markets, there are essentially two basic strategies or concepts that are typically used to analyse markets and forecast future trends
1. Fundamental Analysis-
They comprise of a mixture of economic, political and financial information that are broadcast frequently, which is then used by specialists to predict price action. Analysts generally take a look at the economic and financial data to scrutinize the markets and forecast price trends from individual asset classes to the broader indices.
Fundamental analysis comprises of macro- economic data which is generally looked at by using the top- down approach while the micro- economic data of an asset class is analysed using the bottom- up approach.
2. Technical analysis-
It is the study of historical charts and their comparative volumes to project price trends in the future. The best part of this form of analysis is the idea remains the same regardless of the asset class unlike fundamental analysis where individual scrip’s within the same asset class have to be evaluated separately.
Notwithstanding of the category of traders; manual or algorithmic, all trading strategies comprise of either one of the above or a mix., however, analysts may differ in the way they approach the markets depending on the asset class, volatility, holding period, open interest etc. While some of them are technically sound, there are others who prefer the fundamental route to implement trades.
Trading in the financial markets can be very alluring especially if you are in the midst of colleagues or a group of friends claiming to have made large sums of money in the markets.
Earning profits in the financial markets is not an impossible task, but there are certain common blunders that traders generally fall into which should be avoided. Following are some of them
- Investing savings
- Borrowing cash to fund trading
- Following the pack
- Absence of a pre- defined strategy
- Over- confidence
- Pushing strategies to use without testing them appropriately
Traders in general, even the most successful ones will admit that at some point in their trading career, they have been involved in one or more blunders, which has cost them tremendously. Though its common tendency that as humans, we all commit mistakes, nevertheless learning from them is the key to becoming a successful trader.
Trading psychology plays an important role in the life of a trader and although it is very challenging to recommend the right approach, one way to get started would be to avoid the common slipups, follow trading discipline and keep emotions in check as far as possible.
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