Best Stock Trading Book

 

Profit From Prices

A book on stock market trading
By Jayesh Patel, CFA

.........Chapter 1 continued

Chapter 1

Trading Needs Training

Most investors don’t see any need for training when it comes to trading stocks! They approach stock trading as if they were born with natural skills to trade stocks. A person spends years in college to learn engineering, medicine or law but somehow he thinks that he doesn’t need any training or experience to trade stocks! Predicting stock prices is not an easy job but it can seem easy when one has only witnessed a bull market for many months or years. This causes a novice trader to think that he has all the skills that are needed to trade stocks. And guess what? Any fresh trader’s first few trades are likely to make money for him (maybe because there was good research behind it or just some luck) and this is the beginning of a bigger trap. He starts taking big positions and due to over-confidence ignores the importance of a stop-loss. Then when the trend reverses, he fails to adjust himself to changing market conditions and his losses start getting larger. The end result is similar for most traders: losses, frustration and stress. Only with the experience of a few market cycles and with eyes wide-open for learning from one’s own mistakes and from those of others, can a person be worthy of graduating in trading.

Take Responsibility For Your Outcomes (Don’t Blame Others)

   

It is human nature to blame others for one’s own mistakes. There is a saying: It is human to commit errors. Someone went a step further and added: It is human to err but it is even more human to blame others for one’s own mistakes! This is quite true about stock market losses. When there is profit, most individuals feel they are smart and also genuinely believe that they are the ones who were intelligent to make profit in that/those trade(s)! However these same people would rarely ever blame themselves for a loss! For a loss, it is some close friend, or some magazine article that caused them to lose money. It is Enron and WorldCom who acted unethically and they are the ones responsible for pushing down stock prices! It is the Wall Street analysts who had put BUY and OUT-PERFOM ratings! This list never ends. The truth is, unless a trader assumes responsibility for his money, his trades and his losses, he is never going to change his trading approach, style or strategy. If someone believes there was no mistake on his part, how can he learn from it?

Trading basics- Risk Versus Reward

Every trade or bet a trader makes has to be done after figuring out potential risk versus a potential reward. There is no surefire way to make free money anywhere. In any job, one has to utilize his knowledge, skills and time for the employer in order to earn a paycheck every pay period. In trading however, one does not have to go to a workplace and do what his supervisor or his employer wants him to do. He is free as a bird. So what are the costs of trading? It is the risk taken in order to be able to make money. In a trade, one can lose money- this is my simple definition of Risk. When one enters into a trade, he does not know for sure what will happen. One has no control over outcomes. Though one may expect or hope that prices go up, they can go down! Thus in trading, a person can make money or he can lose it. So it is very important that a trader understands the amount of risk he is taking in his pursuit of profit.

Before entering into a trade, a trader needs to look at all possible outcomes in order to determine how much risk is involved versus the potential for gain. If the potential for profit justifies the risk in the position, then and only then is a trade worth entering into. Success in trading is very much dependent on a trader’s ability to find risk-efficient trading positions and to control his risks at all times.

 

 

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