Blog #30 - Myths About Trading Derivatives

 

Myths About Trading Derivatives

#01 – It’s Too Risky

I would reckon that trading derivatives is about as doing anything else that you do not have knowledge about, such driving a car or flying a aircraft. And until you equip yourself with appropriate knowledge, you have no business to be trading anyway. It is more important to understand that successful trading requires behavior completely opposite to how we normally behave. For example, being a contrarian in one of the most successful strategies in trading. In most situations in life, on the other hand, there is comfort in being part of a group. Averaging downwards, for instance, is a wrong strategy that traders commonly use. Booking losses is yet another difficult area that traders must contend with, something we instinctively shun from.

 

 

 

#02 – It’s Only For Experts

It can be categorically stated that none of the experts are perfect in predicting either the stock trend or prices. Any lay person with some practice, hard work, and by learning good money management is at par with the Dalal Street experts who talk so intelligently on television. Talking and trading are as different as taking a shower and swimming. A one-line description of trading is: trend following and money management. If you can master these two, you can make a better living than most others out there. There is no secret or hidden strategy. The point of trading is to try to get on to a trend, and if the market goes against you, to limit your losses to only a small percentage of your equity.

 

 

#03 – You Can Lose All Your Money

Yes, you can. But so can you lose your money while driving, or for that matter while playing cricket, or even just walking down the road. The most critical aspects which determine a trader’ survival are the use of proper position sizing and money management techniques. When you are driving your car at a speed of 100 km/hr, the chances of fatal accident are at least 50% higher than when driving at 50 km/hr. similarly in trading it is important to use leverage in a manner that does not border on dangerous. It’s important to remember that big money made by having a number of big-win trades. This number doesn’t have to be larger than the number of losing trades; the key is that quantum of each winning trade should be several times each losing trade. The goal of this blog is to help you achieve this objective. Anyone who says there is another secret to making money in trading is just taking you for ride.

 

 

#04 – Derivative Markets Are Manipulated

Most markets of the world are manipulated, including the mother of all markets, the USA market. So, this is generally an excuse trotted out by losing traders. I believe that through a system of proper money management and a working knowledge of charting, investors and traders can see what is going on in the markets. Whether or not the markets are manipulated should not affect the trader. He should have his defined set of rules by which he plays.

 

 

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