By March 7, 2024, India’s National Stock Exchange (NSE) had recorded over 90 million unique accounts. Going further into the statistics, stock trading accounts had nearly tripled from 41 million in 2019 to 140 million by 2023. But why is there a buzz? Can trading make you rich? Let us explore if trading is profitable and how you can earn through trading
What is trading in financial markets
Let us first gain a clear understanding of the term “trading”. It refers to the act of buying and selling various financial assets, such as:
The primary goal of trading is to make a profit from short-term price movements. This is usually done by speculating on the future price movements of financial assets rather than holding long-term ownership positions.
Traders use strategies and analysis techniques, such as technical analysis, to:
- Enhance trading success and
- Identify profitable trading opportunities
Mostly, this involves analysing historical price data and trends to forecast future price movements.
Is trading profitable
Before starting a debate on this topic, let us first see some successful Indian traders who have earned substantially by trading:
- Radhakishan Damani
- Known as "Mr. White and White"
- Damani is known for his contrarian investment style
- He has made successful investments in companies like:
- United Breweries and
- 3M India
- Rakesh Jhunjhunwala
- Referred to as "The Big Bull" and "The Warren Buffett of India"
- Jhunjhunwala made his fortune through intraday trading and investing
- His investment philosophy focuses on:
- Buying undervalued stocks and
- Holding them for the long term
- He holds notable holdings in companies like Titan Company and Tata Motors
- Raamdeo Agrawal
- Co-founder of Motilal Oswal Group
- Agrawal is renowned for his fundamental analysis-based trading strategy
- He prefers investing in high-growth companies with strong fundamentals
- His investment philosophy revolves around "QGLP" -
- Quality
- Growth
- Longevity, and
- Price
What is the success rate
If we consider statistics, trading, especially day trading, can be challenging and risky. It is pertinent to note that more than 95% of day traders lose money. However, this trading success varies significantly, with some even making six figures. It all depends on your trading knowledge and execution. Upon observation, it can be stated that successful day traders have a well-defined trading plan and they:
- Manage risk
- Use stop-loss orders
- Aim to profit from short-term price movements
How can you become a successful trader
To earn by trading, you need to build your market knowledge and maintain emotional psychology. Let us take a look at some popular strategies through which you can maximise your chances of trading success.
Do position sizing
- Allocate only a portion of your capital to each trade.
- Ensuring that no single trade can significantly impact your overall portfolio.
- Limit your exposure to any single position.
- This position sizing helps in mitigating the risk of large losses that could wipe out your trading capital.
Use stop-loss orders
- Stop-loss orders automatically trigger a sale when a security reaches a predetermined price.
- These orders help in limiting potential losses on a trade.
- To begin with, you must analyse support and resistance levels.
- Then, set stop-loss orders at strategic levels based on your analysis.
- Make sure that you exit losing trades quickly.
- For example,
- Let us say you are trading XYZ stock in the share market
- After analysing its support and resistance levels, you decide to set a stop-loss order at Rs. 150
- At this price point, you are comfortable cutting losses
- Later during the day, the stock price drops to Rs. 150
- The stop-loss order automatically sells your shares to limit potential losses
Perform technical analysis
- You should capitalise on short-term fluctuations in stock prices to generate profits.
- To do so, you can perform technical analysis.
- This kind of analysis helps identify patterns and trends in price movements.
- Post-identification of prevailing trends, you can:
- Enter and exit positions quickly
- Capture small price movements
Control your emotions while trading
- By controlling your emotions, you can make rational trading decisions.
- Some common emotions that come into play while trading are:
- Fear
- Greed
- Overconfidence
- Try to stay disciplined and stick to your trading plan.
- Make more objective decisions based on analysis and strategy.
Can trading make you rich
Trading, particularly in volatile markets like stocks, currencies, or cryptocurrencies, offers significant opportunities for high returns. Usually, skilled traders capitalise on price movements and generate substantial profits over time. Furthermore, for some, trading serves as a primary source of income and a means to accumulate wealth over time.
But, it is essential to note that trading is risky, and you must recognise the associated risks. Observe some common challenges below:
Challenge I: High risk
- Trading involves significant risk
- It is even possible to lose all of your invested capital
- You can face substantial losses due to:
- Market volatility
- Unexpected events
- Human emotions
Challenge II: Skill and experience
- Successful trading requires:
- Skill
- Knowledge, and
- Experience
- It is not enough to simply buy and sell assets
- You need to develop effective strategies
- You must analyse market trends and manage risk effectively
- Achieving consistent profitability in trading can take years of learning and practice
Challenge III: Market uncertainty
- It has been widely accepted that the financial markets are unpredictable
- Its past performance is not indicative of future results
- Predicting financial markets is tough due to several external factors, such as:
- Economic indicators
- Geopolitical events, and
- Regulatory changes
Conclusion
In the context of financial markets, trading is a process of buying and selling financial assets like stocks, commodities, and derivatives. It certainly offers potential for wealth accumulation, as evidenced by the success stories of Damani, Jhunjhunwala, and Agrawal. However, it is not without risks. Statistics show most day traders lose money. To be successful, you must manage risk, use stop-loss orders, and aim to profit from short-term price movements. Furthermore, you must build a strong market knowledge and maintain emotional discipline.
