Sunday, October 4, 2009

Pin It


Trading Stocks is All About Taking Chances

Image Source

There is a myth about stock trading in those who do not trade and also that bewilders even those who trade stocks. People just think about to make money from stocks we should predict the future price of the stock. Let me say that is a foolish belief. A novice thinks like that because that is what is apparently revealed by the stock market. To learn the fundamental truth about stock trading one should go deep into it.

Predicting the Future to Win is Worse than Gambling

Stock trading is often thought to be about predicting the future price of the stocks and then making bets on them. That is not true. Even professional gamblers do not do that though on the outset gambling looks like it is about betting by predicting.

Whether gambling or trading stocks you do not win by predicting what will be the scene in the future but by taking chances. You study the chances of a certain outcome and bet on that outcome that is most likely to happen. It can happen that your first bet goes wrong. But that is not the end of the world. Atleast that should not be the end of the stock trading. Depending on the chances of an outcome, your second or even third bet might win.

If you are betting on stocks by predicting then you are doing worse than gamblers. Gambling does not share some features that only stocks have. That is the reason why it is foolish to bet on stocks by predicting. It is more like blinding yourself after you make entry in a stock through prediction even when the stock is on the move whether in your anticipated direction or against it.

The Simple Difference Between Gambling and Trading Stocks

The simplest difference between gambling and trading stocks is the time dimension attached to the stock price movements unlike the outcome of a bet in gambling where there is no continuous path from present scene to the outcome in the future. The stock prices generally move continuously from one price to the next and this is what makes trading stocks more exciting than gambling.

To see the present, to know there is a path but not a sudden shift and still make the bet on a certain outcome while on the move is something more exciting than any activity I think of, and more riskier than any risky sport in the world. Hercules should have known it!

You should note that there is also another difference I had explained earlier. That’s not the point we should worry about when talking about this fundamentally incorrect belief about stock trading.

Astrology, Forecasting, Extra-Sensory Perceptions… are all Not Needed

I too though of a stock trading as predicting game back when I started. There were so many things that I thought of to help make an accurate prediction. I studied about astrology, financial forecasting, even extra-sensory perception. Sometimes I used to wonder about time-travel or to attain some mystic yoga Siddhi. All the time I used to come back to one conclusion: If I can have any one of the extra sensory or even physical abilities than an ordinary person, I need not really trade stocks. I need not even earn money for I can find a way to get what I want and do what I want to do.

So I gave up on all these things and concluded that the real thrill is in winning the game with only the abilities of an ordinary man. My confidence to success in stock trading did not come until I succeeded in doubling my capital in RNRL shares.

Even before that I realized that stock trading is not about predicting but it is about taking advantage of whatever the stock market has to offer. During bull markets, stocks just move up at a rate of 4-10% consistently every month. It was simple to think of participating in that ride and gain along with the crowds. But the reality is that we can end up participating in a downside ride as well. To succeed or fail like this was more of a gambling than professional stock trading.

Betting on Stocks with Highest Odds

To trade stocks successfully one should change the fundamental paradigm of prediction to win, to taking chances to win. We should start finding the chances of a certain outcome or a certain price move action on a stock and bet on it. This is possible by studying the stock price movements’ history.

You shouldn’t be worried about history repeating itself but about the hidden patterns that consistently repeat most of the time. In stock trading, unlike some other disciplines, there are no hard and fast rules.

Whether the outcome is going to be profit or loss, a stock trader only takes his/her chances at the trade. If you are not willing to take a chance then it good to avoid wasting time. If you do not yet know, it costs a fortune to waste time on the stock market.

No comments: