It is said that greed, fear and hope drive the markets. It means human psychology plays an important role in the market place. This is also the main reason when all facts are same, why different analysts offer a different version of the story around the same facts. It very important for the traders to understand the fundamentals of the markets while working on technical charts.
Pitfall 1: Very often people tend to follow the tips. It is important to know that the same tip is with everyone in the market and if the information is the same as with everyone, why people make losses. There is no reason to copy the approach adopted by others while taking trading decisions.
Caution: Your risk profile, requirements or positions may be different from another person, therefore do not copy what others are doing. Understand your profile and invest accordingly.
Pitfall 2: To be successful in commodity trading, one should be cautious of depending on others for your success. Most of the people are likely to trust insiders and known faces or people with connections. If such people have all the information, then why they are not able to make millions? Please note many of them are probably not effective traders or have no idea about your profile and requirements.
Caution: You may seek information for your education, but not for trading. Analyse every information which you get at your end before investing and then invest. You may take help of others only for discussions to clarify your doubts and not to outsource your decision-making process. It is your money, take charge of the decision making as well.
Pitfall 3: No one can make a profit every time and all the time in commodity & equity trading. There will be ups and downs in prices in the market. The market reflects the collective will of all the traders participating at that given point. You may lose or make money depending upon your homework and understanding of the market.
Caution: Please don’t blame others for your failures. This is an easy trap to fall into. It is your money, it should be your decision and you are responsible for the ultimate result. Unless you accept that it is a responsibility to make a sensible investment, you will not be able to change your incorrect behaviour.
Pitfall 4: It is a human tendency to get rich fast. In this greed, there is a tendency to ignore the facts on the ground and people prefer to look for short-cuts. One of the shortcuts is overexposure and over-leveraging in the market. Sometimes people borrow money to take an overexposed position and try to play the market. They assume the market will adjust to their style of functioning. This leads to fatal errors in a hurry and very often it ruins the trader or investor.
Caution: It is not possible to make windfall gains every time. Stay long-term oriented. Don’t adjust your approach based solely on short-term performance. If you trade based on tips and short-term performance, you are working for brokers, not for yourself. Whether you make or lose money, the broker always makes money. So, let brokers serve you as a service provider, do not surrender to their pressure techniques in the influence of greed and fear. Maintain calm and study where you went wrong and correct your investment approach for a better future.
Pitfall 4: Very often people enter into the market for the excitement factor and soon becomes addicted to the market anxiety. Many feel market fluctuations are essential for adrenaline in the body and use market fluctuations as drugs to remain excited. They sit in front of the screen under compulsion and without understanding the market and facts affecting the market, starts trading. Very often, with initial success or under peer pressure, most traders cannot handle losses and they keep throwing good money after bad decisions.
Caution: Please keep in mind no one in the market is God. No individual is bigger than the market. A market is a dynamic place and one must update himself regularly. Evaluate the performance of any approach based on many trades and multi-year results. No individual can change the course of the tide when collective wisdom is against the stated position of the individual position. The best way to handle is to fix a limit for the trading and stick to the discipline, irrespective of your position. Learn to cut positions with least losses if you identify that your analysis was wrong.
Pitfall 5: Very often people get emotional about trading. They make profit and loss in trading as a point of personal emotion and feel their competency depends upon success and failure of their trade. This is a very dangerous self-made trap. To recover the losses, in place of taking pause, people start pouring more and more money into the trade. This is like throwing good money after bad money.
Caution: It is advisable to keep trading in correct perspective and as part of a balanced life. Trading is emotionally intensive no matter whether you are doing well or not. It is easy to let the emotions of the moment lead you into strategic and tactical blunders and eventually loses. The best way to keep cool is don’t become too excited and elated during successful periods. Such blunders or mistakes traders make soon after a successful period. This is the worst thing you can do because good periods are invariably followed by awful periods. This is the fact because commodity markets cannot keep moving in one direction. This is beyond the logic of fundamentals of the markets and economy at large. If you increase your trading just before the awful periods, you will lose money twice as fast as you made it. Knowing how to increase trading in a growing account is perhaps the most difficult problem for successful traders.
What to do for successful commodity trading?
- There is no alternative to learning and constant learning. The best times to learn is when someone suffer setbacks. Don’t become too depressed during when markets are down. This is the best time to understand the strengths and weakness of the market because froth is out of the system.
- Stick to financial discipline and control your emotions. Do not fall into the trap. Stick to your discipline and your documented trading policy. When you are making money, you are thinking about how wonderful trading is and how to expand your trading to achieve immense wealth. When you are losing, you often think about giving up trading completely. With a little practice, you can control both emotional extremes. Please keep in mind all wants to make money, so you are not the only player in the market.
- Don’t let excitement and distress cause you to make unwarranted changes in your approach. Other common themes of good traders are self-understanding, balance and self-control. Before placing orders on the terminal, ask yourself are you deciding under the influence of tips of others or due to fear, greed or hope? If the answer is yes, close the screen go for a walk.
Future of commodities market is bright in India when there is a target to make India USD 5 trillion economy. Investors should understand the commodities and their dynamics in globalised market before investing.
Authored by Advocate Vijay Sardana, Member of CDAC, SEBI
