The markets continue to be in a funk with the major indices closing in the red today. Given how emotionally intense trading is, market volatility tends to accentuate our emotional impulses. This is how traders end up making costly mistakes.
In this week’s issue:
The importance of keeping your emotions in check when trading
Beware if snake oil salesmen
How to calculate your P&L when trading options
Everything is a trade
Having the right expectations when trading
It’s not personal
“Greed and fear are both good and healthy for an investor and capital markets as a whole. Emotions are like fire, beneficial if controlled, destructive if wild.” ― Naved Abdali.
Money and emotions are inextricably linked—It’s impossible to separate one from the other. If you make a list of things why traders don’t make money, letting their emotions get the better of them will be right at the top. Trading is an intense activity. Every price tick, every trade, every fluctuation in your P&L can activate fear, greed, and anger in you. When fear and greed take over, we end up doing silly things that we know are silly.
We all think we are calm and rational beings. But the moment we face a loss, our objectivity goes out of the window. A lot of novice traders abandon common sense and start revenge trading. This is how traders blow up their accounts.
Things are infinitely harder when you’re trading for a living or have rupee targets. This is why trading only with the money you can afford to lose is probably the best thing you can do.
Having said that, recognizing that you are emotional and that your emotions can influence your trading decisions is really important as a trader. Sounds easy in theory but insanely hard in practice. But with enough practice and experience, you can develop a level of objectivity that allows you to keep your emotions in check.
This won’t be easy and requires years of self-awareness and experience. But that’s what sets successful traders apart, and that’s why 99% of traders don’t make money.
This Innerworth article has some really sane advice on the importance of learning how to keep your emotions in check.
It's Not Personal – Varsity by Zerodha
There's no easy money
One of the easiest ways to make money in the stock market is not from trading, but actually “showing” people that you can trade. You don’t even have to be a trader or know much about it. As long as you can fake it realistically, you’re good. Human greed will do the rest, and people will quite literally throw money at you.
A popular strategy to suck people in is sharing P&L screenshots on Twitter, WhatsApp and Telegram groups. In these screenshots, these people are always making money, no losses at all.
What most people don’t realize is that these people aren’t actually trading. They fake it by editing screenshots and sharing them. You don’t even have to be a coder to do it. Karthik last week shared how to fake P&L:
The scam typically goes something like this. These fraudsters start sharing screenshots to build a following. These screenshots naturally appeal to the greed in people. Wannabe traders start believing that the people sharing screenshots must be geniuses and following them is a sure way to make money.
Then these people slowly start selling stock & F&O tips, unregulated money management services, trading courses and seminars. You might think this is ridiculously stupid and that nobody could fall for this. You’d think that people will be more careful with their hard-earned money. You’d be wrong!
It’s scary just how many people blindly trust random scamsters and trade based on their tips or give them money to manage. This almost always ends in tears. Not a day goes by where we don’t hear a horror story of someone losing their hard-earned money to these frauds.
If you are new to the markets, making money in the stock market is not as easy as editing screenshots. Don’t blindly trust someone just because their screenshots are always green. The odds of making money from trading are abysmally low. When someone tells you they can help you make X%, be very, very sceptical.
Nithin had written about this a while ago:
Countless people have been lured to the markets by mis-sold dreams of getting rich quickly and achieving financial freedom. The ease of getting started adds to this allure. Here is the thing though: less than 1% of active traders earn more money than a bank fixed deposit over a 3-year period. While this percentage seems abysmally small, it is, in fact, similar to the success ratio of ordinary businesses; just that the ease of entry entices a large number of people to give it a shot.
On Varsity
One frequent query we get from traders on the options module is how to calculate P&L when trading options. The confusion is because there’s no daily mark to market (MTM) for options like futures. In this chapter, Karthik explains how P&L is calculated for long and short options when they are sold before expiry and held to expiry.
Options M2M and P&L calculation – Varsity by Zerodha
In the comments
Everything is a trade - Nithin
Having the right expectations when trading - Karthik