Fear and greed are the two basic emotions in the stock market. However the most important thing affecting the trader is discipline. Yes. Discipline. Without this no trader can survive in the market for a sufficiently long period of time without his capital being completely wiped out.
A typical trader begins with a set of resolutions which he says are going to be his rules for his trading game. All these rules when on paper appear as if to generate a decent and a guaranteed profit, and he begins to dream of how he is going to spend he money made this way.
The market is generous for his first set of moves. I feel Benjamin Graham has done his greatest work by coining the epithet Mr. Market. This Mr. Market rewards him handsomely for his first few trades as much so that a false feeling of being an infallible grips the trader. He feels he’s born to win and win large. So his confidence level is high and complacency at its highest.
It’s time for Mr. Market to strike now.
He then makes a small loss. Unperturbed this trader goes out into the market thinking that this was a one off and you can’t be winning all the time, just contradicting his mentality of infallible that he developed some days ago.
His trades go on…some short…some long…and he continues in tit bits. After a period of time he thinks its time to reflect on the past and take a look at his profit and loss statement. Yes it’s a profit overall. He’s made decent amount of money and he is happy about it. But then he begins to think that this pace or conservativeness isn’t going to take him anywhere. Forget about the 4 wheeler dreams that he must have seen for himself, he wouldn’t even be fulfilling his 2 wheeler dreams.
Mr. Market is now sharpening his weapons for the strike.
So this trader unaware as to what Mr. Market has decided for him begins a rethink of his strategy. He says to himself that now he’s got a decent grip of the markets and now is the time to make it big. Let me increase my volumes a little bit so that my profits increase and I get to my goal a bit faster. Greed grips him and he fails to see that an increase in volume not only increases his profit potential but also his risked loss. He becomes greedy when he needs to be fearful. He says I’ll work hard. So if he watches CNBC for 6 hours a day he thinks he’ll work hard by watching it for 9 hours a day so that he can catch every bit of news. He wants to tame the pulse of the market. He thinks the time has arrived for his big trade. His heart swells by pride that the world is going to discover a new king being born tomorrow. A new badshah of 9:55 to 3:30.
The day arrives.
He has done all his analysis for this day. He has studied a few extra charts too, which he normally wouldn’t do and has heard a few extra analysts on TV giving their opinions. He likes those that support his view. He puts in his trade. His volume a 10 times higher than his usual one. He is nervous. Obviously he will be. And he keeps his eyes fixed on the screen. If some doctor were to perform a cataract operation on his eyes he could do it easily this day for he doesn’t even wink his eyes. Mr. Market is generous. The first few moments his trade is going all correct. He feels good. Should he book his profit now? No. He thinks he should wait as he would want to make his killing today.
And then Mr. Market strikes.
The markets turn against his call and move in the opposite direction. And the movement is fast enough for him to be undecisive during that period. How could he go wrong thinks the perturbed trader. He had done all things write. He watches the prices with agony. Even a small movement in his direction fills him with ecstacy and a warm feeling fills his heart. He thinks he has to be brave for kings have to pass the toughest tests of bravery and have to prove themselves. The day slowly comes to an end. Thankfully for him, that’s what he thinks. It was not his day. He has lost a whopping sum of money. He may have lost all his months of profit and only a miniscule amount remains. He goes home. He can’t get his brains out of the market. He reflects back and relaxes. He concludes. This was just not his day. It was a day when things just go wrong. Everything goes wrong. And such a day it was. No problem thinks he. There is always a tomorrow and he will strike back.
Mr. Market has done what he does best. Killed greed and a greedy trader.
I am not dead still thinks the trader and goes back the next day. Now this time he is overly cautious. He doesn’t want to make any mistake. Rather he cannot afford to make any. He puts in his trade. Similar volumes like the earlier day. An effort to make a killing. And as the previous day, he fails. He fails miserably. His trade is all wrong, once again and maybe for the last time. His large volumes ensure that he’s lost another whopping amount of money. It’s more painful than the earlier day. He stares at the market with anger in his heart. What the hell had I done to you that you are doing this to me. As the trades go even more against him his anger turns to cowardice. He pleades with the market. Ohh…please. For once do me a favour and move in my direction…Little does he realise that Mr Market is deaf. He listenes no none and is a slave to none. He is the king. Mr. Market is the king. And this trader wanted to dethrone him. The fatefull day draws to an end, maybe his broker counsels him to take rest for a few days. The broker is happy for his large volumes have generated enough brokerage for him and an even larger amount of money if he has carried out a dabba trade for this trader.
This trader has lost all his capital and will have to dip into his savings account to repay this loss. Virtually till the next time he brings in more capital he is dead. He is dead for the market and all this just within a few months. All his resolutions are falsified and his theories of market rejected.
Over a period of 7-8 years when I was involved in the market I have seen enough people go through this phase and be wiped out completely. Some get in more capital and continue to trade. Some learn and add discipline to their trades with things like stop losses and stop profits. Some learn to control volumes. But a majority of them pass through the same grinding cycle again and again with a few variations. And some like me write on their experiences.