You may have read our previous article “Is Equity Trading Right for Me?” where we outlined the different factors you should consider before taking the plunge as a trader. In this article we will delve a little deeper into the subject, focussing on the role of knowledge in trading.
Knowledge plays a vital role in the life of an equity trader. Trading becomes a profitable proposition when you are in a position to make accurate predictions on market behaviour and act accordingly by keeping a tab on trading patterns and trends. Gathering information on the technicals of a company or the direction its share price will take in the near future and trying to execute what you initially set out to do is crucial to your success. But having said that, good trading is also an intuitive response to your gut feeling and your decisions will more often than not hit the bull’s eye when you are willing to back your instincts.
Does psychology have a role to play in trading?
Keeping your emotions in check and maintaining equilibrium is crucial to your trading experience.
You will frequently see that factors beyond your control may affect the growth and earning potential of your stocks. Gains from trading don’t come by without a few minor hiccups along the way and successful traders learn to ride the wave by staying objective as they go about buying and selling. The anticipation of things not turning out as expected should prompt you to action rather than allowing it to get the better of you.
On the other hand, it is difficult to let go, especially when on a winning streak. There’s always the temptation to hold on to a stock too long while it is increasing in value, only to see it get whipsawed – a sudden and abrupt 180 degree change in direction of the stock’s price. Try and keep yourself distant from the frenzy and excitement of seeing all that money roll in and that too in lightning quick time. Having clearly defined entry and exit ground rules helps a great deal in this respect.
How do I equip myself to be a successful trader?
Knowledge acquisition goes hand in hand with trading as an activity.
In addition to being aware of your own behaviour and how you respond in a given situation, it also helps to observe what experienced or successful traders are doing. With all those years in trading behind them, you can be sure to draw many valuable lessons from the manner in which they approach trading as an activity and apply the essence of it all to your own practice.
You must read up extensively to stay up to date on all intraday stock related news. The essence of equity trading is to capitalise on the sporadic trends and progressions in the market that cause share prices to momentarily ebb and flow. Identifying as many reliable sources of information as possible goes a long way because you want to have the best possible chance of gaining a heads up before everyone else on what’s in store for the day.
How do I put my trading knowledge to use?
Preparation and homework are the key to implementing your plans with minimum friction. Try and think about all the possible scenarios you would encounter on a typical trading day and plan your responses accordingly, with a little margin for spontaneity, improvisation and the unexpected, of course! The more thorough your preparation is in this regard, the less susceptible you are to momentary impulses and indecision. With adequate preparation, execution becomes easier because you have a detailed modus operandi for the targets you have set out to achieve
So as you can see, there is a direct correlation between how well informed you are and the success you see as a trader. And although at times the outcome of the choices you make might seem uncertain, the fact is that the level of your understanding is directly proportional to the probability of your trade turning out well. Happy Trading!