THE ESSENCE OF PROCESS IN STOCK MARKET

Majority of people have bad experiences in the stock markets , often what they do not follow a proper process of the stock analysis. What we usually see most of the time people want the easy way out not willing to put necessary efforts and seeking easy way to make the money without considering the amount of risk they are taking.

What we normally see people often ask for tips from the people to whom they consider experienced in stock market. They think it is not a bad idea to take help from the people who are making money in the markets . But they don’t think in a way that they can borrow the stock ideas but not the conviction to hold the stocks. Conviction only comes with proper research and well followed process.

Most of time usually in stock markets , people attract just because they think they can make much money in no time. The basis of this type of thinking is originated from the market itself. We have 24/7 access to market prices and with prices in your hand phones at every tick per second , the emotions like greed and fear start surpass our common sense and we usually carried away with market tides ( trends). It is not that it is bad to follow the trends , but people usually don’t have the proper process of how to follow the trend.

People even start anchoring the prices . If we take the example from the recent time and see what happened in the case of the Yes bank like when stock came down from the levels of 400 to 200, usually people started buying ,thinking that it has become cheap now because they see it at the levels of 400.

Yes Bank

When one doesn’t follow proper process to buy and manage the position, this is what happens usually.

One ends up loosing hard earned money. The price went to around 12 -13 rupee. The lack of process is depicted if after buying, one doesn’t have proper way to exit in both scenarios i.e winning or losing trade. Like it can be seen in the above example usually people tend to hold position in losing trade and wait for the price at which one initially buys, which in most of cases prices never comes back and people end up losing the money.

On the other hand, usually people are happy to take small profit whenever their trade goes into profits, they often cut the position because they don’t have the proper process to have conviction to hold the idea. And in the fear of not loosing what they earn they cut the position because they are playing purely on the luck. The don’t have any idea what will happen next, no odds in the mind(what are chances of losing) , no basis of decision in hand at the time of buying. People usually play in the stock market just the way they do play while gambling and in the end put the tag of gambling to the stock market. They don’t even think it is their way which is wrong not the market.

To this types of behaviour, which I usually notice in people , the only way out is to have a process in which one should have a proper process of buying, holding, selling, it is generally built with experience. One should start with minimum risk and then keep on increasing the capital as one gets confidence / conviction in buying out ideas . You needs to keep on experimenting (keeping risk small), eventually you able to find the way which suits you. After buying , one need to focus on position sizing ( how much should an particular idea be part of ones portfolio) . To position sizing there are various ways to decide depending upon the idea , conviction , certainty in the future of idea etc. ( Which will be discussed some other day) . After that comes the part when to sell , when to average up ( keep on buying even the price is rising ) , when to average down ( keep on buying when the price is falling) , when to cut some position when the trade is in profit and keep the rest to manage the risk.

If the process followed with discipline and with proper measure of risk measurement ( avoiding the capital loss) helps in earning adequate return over very long run as the survival of a person is ensured.

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