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  • Writer's pictureraytraceventures

What to expect from trading?

Blog-1 in our series of blogs on swing trading

This is the first blog in the series of blogs that we are going to start. The purpose of putting in the effort to bring out this content is to spread right awareness among folks who are interested in trading and investing. I'll be sharing the things from my standpoint what has worked for me, what works for me and how I'm going to evolve as a trader and investor. There are number of ways to use stock market to your advantage, there is no right way or wrong way. In this series I'll be sharing the things from my learning, observation and experience into the stock market. I'm primarily focused into Indian stock market and really feel the need to bring out techniques and methods that work best on Indian turf. Before we start, I would like to clarify that my overall objective with the techniques and methods that I have used is to gain good Return on Investment but not to be right 100% of the times.

What is trading?

Trading has been existed since the start of the human civilization. In the past, one of the most prevalent form of trading was the barter system where people used to exchange goods and services for other goods and services. Needless to say, this system was pretty inconvenient because of not having any standard to measure the value of any product or service that's when money was invented and all the products or services were given a price tag based on their value. Invention of money led to many economic and financial developments such as lending and borrowing, buying or selling of shares on the stock exchanges etc.

Dutch East India Co. founded in 1602 became the first ever company to offer its equity to the public launching the world's first Initial Public Offering (IPO). It was involved in the business of exporting textile, spices, gems, metals, tea, coffee, sugar, indigo and porcelain from China, India, Japan, Sri Lanka and Saudi Arabia to European countries. In Aug. 1602, the shares of Dutch East India Co. started trading on Amsterdam Stock Exchange which is considered as the oldest stock exchange in the world.

Amsterdam Stock Exchange in 1602

What is swing trading?

Swing trading is a style of trading where a trader tries to capture the price move from few days to weeks. These traders are primarily focused on technical analysis to find the right moment to enter and exit from a particular stock. In addition to technical analysis techniques, they may use fundamental analysis as well to build conviction before entering into a trade. This conviction is very important when a trader is trading with large capital because he or she wants to use multiple confirmations before investing.

Below candlestick chart represents 4 swing highs, a swing trader can catch any one of them and remain in the trade for few days or more than one swing by remaining invested for few weeks and take advantage of price move on the upside generating good return on the investment. (Don't be overwhelmed by seeing the below chart, we are going to cover about candlesticks and volume bars in the upcoming blogs).

Candlestick chart showing swing highs

What are different types of trading?

Primarily there are four types of trading depending upon the time period between the buy transaction and sell transaction. Tools, methods and mindset used for different trading styles are different, they may find some similarity in between but every trading style has to be approached differently. For an example doctors working in ophthalmology, pediatrics, oncology etc. are all doctors but there area of operation and expertise is different from one another. Let's have a brief overview of types of trading.

1. Intraday trading- In this type of trading, a trader operates between 9:15 am to 3:30 pm operating hours of Indian stock exchanges. They buy and sell the shares within this timeframe. This way the holding period of a stock ranges from few minutes to few hours.

2. Micro-intraday trading or scalping- In this type of trading, the difference in time between buying and selling of a stock is from few seconds to few minutes.

3. Swing trading- This type of trading will be of the prime focus in this series. A trader generally holds the stock from few days to weeks and benefit from the price move or trend on the upside or on the down side in case of short-selling. An important point to note here is, in case of short-selling you can not carry the position overnight which means if you have shorted a stock in the morning you have to square off the position before the end of the day. So, in true sense you can't do swing trade on the sell side as far as rules on Indian stock exchanges are concerned.

4. Positional trading- In this type of trading, a trader holds the stock from few weeks to months and tries to capture a bigger move, if the market conditions are suitable.

You might have observed a common factor among different types of trading style which is- holding time-period which separates one trading style from another. And, as per this time period, timeframe for analysis, tools and methods to trade also differ. It's very important for you to figure out correct type of trading style that suits your personality.

How should you approach trading?

Trading in stocks should be treated just like any other business. In any business you can not become a millionaire overnight or within a week or few months or a year unless and until you are selling drugs. And, when we say business, we must consider real businesses which have been around for 2-3 decades and have shown 35-40% Compounded Annual Growth Rate (CAGR). Similarly in trading, you should think in terms of CAGR because that's what our overall objective is.

Compound the capital over time to generate wealth.

Below is the matrix of some of the good businesses which are publicly listed on Indian stock exchanges which have grown by 35-40% CAGR in last 10 years. The given columns can be overwhelming to digest at this point in time but let's look at the two outlined columns for now: Name and 10 Yrs return to understand our comparison of trading with any other good business that compounds over time.

Businesses that grew by 35-40% CAGR over 10 Yrs.

Let me try to send across my message of treating trading as a business one more time with a different example. This is very important point which will play a crucial role in our journey to become a successful professional trader in capital markets.

The most successful hedge fund in the history

Jim Simmons, a mathematician who founded Renaissance Technologies in 1982 which trades in capital market using quantitative analysis methodologies. It established its fund called Medallion Fund in 1988 which generated annualized returns of 66% from 1988 to 2018. The fund was so successful that it used to charge hefty fixed fee and performance fee, in portfolio management industry a ball park number for these charges are 2% fixed fee and 20% performance fee. But this fund charged 5% fixed fee for all the technical infrastructure that they had built- storage, computation, reporting etc. and 2001 onwards they increased the performance fee to 36% and later 44% and its investors happily paid this fee to the company.

Medallion fund grew by 66% CAGR for 30 Yrs

These are the real numbers, if anyone tries to sell you a get-rich-quick scheme in capital market, he is definitely trying to manipulate you for their benefit. I would suggest to stay away from such people and schemes I hope in this part we have been able to understand what trading in capital market is and what to realistically expect out of it. Thank you for your time ! You can connect with me over LinkedIn and X(Twitter) I'm a student of life, so don't hesitate to send over your views or sources to refer to help me enlighten myself.

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