Let us see the things which are required to make profits. The first requirement is money. We invest money in stock market and make more money. So money is our input. The second requirement is a trading system. This trading system tells us about four things. 1. When should we enter in the market, means, when to buy or sell, 2. When should we exit from the existing position? We exit from trade to book profit or loss, 3. What should be our stop loss? We place stop loss order to minimize the loss in a trade, 4. What should be the allowable maximum quantity for trading a share? We can not invest our whole money in a single stock. If we do so and if market moves against us then, we will suffer with huge loss and if we want to invest in other stock then money will not be available with us for trade.
Now we will see that how to develop our own trading system. To develop this system it is required to gain two types of knowledge, 1. Theoretical knowledge. We gain this knowledge by attending coaching classes. In today’s time we can take help of either online or offline coaching classes. We can gain this knowledge by reading books also, 2. Practical knowledge. We gain this knowledge by trading in stock market directly.
Now we will see that what do we learn while gaining theoretical knowledge, 1. Chart reading. In this chart the movement of price of a commodity is shown in vertical axis and time in horizontal axis. Today many types of charts are available in trading platforms. But out of these, traders must know how to read candle stick chart, 2. Technical indicators. By studying these, we can forecast the movement of price of a commodity, 3. To know the fundamentals of a commodity. In this we study about the factors affecting the supply, and demand of a commodity. Supply and demand is directly linked to the price. If supply of a commodity is increasing, then price will tend to be going down, and if supply is decreasing, then the price will tend to be go up. Like this if demand of a commodity is increasing, then price will tend to be go up, and if demand is decreasing, then the price will tend to be go down, 4. Analyzing the news, report and data. In this we predict the effects of a news, report or data on price of a stock.
Now we will see that how many types of technical indicators are available. These are mainly of four types. 1. Momentum indicators. These indicators show the speed of price movement. RSI and stochastic are the examples, 2. Trend indicators. These indicators show the market is bearish or bullish. Moving Average, MACD, ADX and Super Trend are the examples, 3. Volatility indicators. These indicators show the range of price in a time period. Range is the difference, between highest and lowest prices, in a time period. This time period may be anything like 1 hour or 1 month. DATR is the example. DATR gives the average of ranges of price for some days, 4. Volume indicators. These show the amount of, total bought and sold quantity in a time period. OBV and Money Flow Index are the examples.
Now we will see that what we require to gain practical knowledge and how these things are constraints also. 1. Money to lose in market, 2.Time to lose in market. I am using losing word here, because after gaining only theoretical knowledge we cannot make money in stock market. When we start trading in stock market after gaining theoretical knowledge, then we have to lose money to gain practical knowledge. Our lost money and time is like a fee to the stock market, for learning out of it. Now a question arise here that how much money and time do we require to gain practical knowledge so that we can develop our own trading system. Answer to this question is that we should have sufficient money until and unless we gain minimum required practical knowledge. For gaining this minimum required practical knowledge one may require many years also. Hence money and time are constraints and requirement both in the way of gaining practical knowledge.
Now we will see that what we learn while gaining practical knowledge. 1. Which indicators work for which commodity? It means which technical indicator forecasts commodity price movement accurately. We find this relation by applying the technical indicator, on old price chart of commodity. This analysis called Back Testing, 2. Correct time frame of commodity price chart. In this we learn that in trading chart of which time frame will be more suitable. It is possible that for some commodity one hour time frame chart and for some commodity chart of one day time frame is suitable. This analysis is also done by Back Testing. 3. Quantity of shares. In this we find that which proportion of our available money should be used for trading a single commodity. So that our risk remains less and money is available for future trading also. We find this quantity on the basis of, volatility of the different stocks, 4. Controlling of our emotions. If a person cannot control the emotions, he cannot trade in stock market. Because, the price neither goes up nor comes down continuously. If market is bearish, then the price of commodity may fall for some time and may rise for some time and if market is bullish, then also price of commodity may fall for some time and may rise for some time. Price of commodity keeps fluctuating up and down. Two types of emotions are very important while trading in stock market. 1. Fear, 2. Greed. Due to fear trader exits from his position after seeing some profit or loss even if his direction of the trade is right. However, his trade was having potential, to give him good profit. Due to greed, the trader stays in market for more profit even if, indicator tells that this time is to exit, from the market. Because of the greed his profits, either reduces, or converts in to loss. These emotions are required to be controlled. Whe way to control fear and greed is called patience. In fear patience tells, that your trade is correct as per technical and fundamental indicators, wait for some time. This is not the right time to exit, and in greed patience tells that, this is not the right time to stay in market. Profit or loss whatever is there take that and come out of the market. There will be many opportunity in future also.
Now we will see that, after gaining theoretical or practical knowledge, how to make money. We develop our trading system by using this knowledge. We keep faith in our trading system and we make money using this system.
Is it so easy, to make money, in stock market? Answer of this question is No. Because most of the people lose money in stock market. Now we will see that, why this is not so easy. 1. Quality of coaching. It is not sure that, the coaching which we attend, is good and, we gain right theoretical knowledge there, 2. This is also not sure that everybody is having sufficient money and time to lose to gain minimum required practical knowledge. I am not trying to demotivate you, but telling the reality. Now there is question that is there any solution and short cut to make money in stock market. Answer of this question is absolutely yes. There is a solution of the every problem. I will tell you about solution and short cut, in Part II of this Blog. You should also think about what can be a solution and short cut of this problem.