Trading Tip

**Stock trading** refers to the buying and selling of shares of publicly traded companies on stock exchanges. Traders aim to profit from fluctuations in stock prices, buying when they believe prices will rise and selling when they predict a drop. 

Stock trading can be done in two primary ways:

1. **Day Trading**: Buying and selling stocks within the same trading day to capitalize on short-term price movements.

2. **Long-term Trading**: Holding stocks for longer periods, from months to years, based on a company's growth prospects and financial health.

    Long term trading is often called as investing when the investment horizon is more than 1 year.

Scenario 1: Normally We begin with a set amount and adjust our investment based on the profits or losses generated from our trading activities. 

    e.g. if one starts with Rs. 50000/- 

            Trade 1: Invest 50,000 + 10% profit = 50,000 + 5,000 = 55,000

            Trade 2: Invest 55,000 + 20% profit = 55,000 + 11,000 = 66,000 

            Trade 3: Invest 66,000 + 10% profit = 66,000 + 6,600 = 72,600

            Trade 4: Invest 72,600 + 20% profit = 72,600 + 14,520 = 87,120 

    

            Trade 5: Invest 87,120 - 20% loss = 87,120 - 17,424 = 69,696.

            Trade 6: Invest 69,696 - 25% loss = 69,696 - 17,424 = 52,272.

Here in the above example, after 4 consecutive profits of 10 and 20%, there were 2 losses of 20 and 25% (normally loss becomes larger than profits due to panic sales). 

After 6 trades, profit = (52,272 - 50,000) = 2,272.

Scenario 2: Now if we keep our investment amount fixed and take out the profit/loss throughout the period, considering same trades as above:

            Trade 1: Invest 50,000 + 10% profit = 50,000 + 5,000 = 55,000

                            profit taken out - 5,000

            Trade 2: Invest 50,000 + 20% profit = 50,000 + 10,000 = 60,000 

                            profit taken out - 10,000

            Trade 3: Invest 50,000 + 10% profit = 50,000 + 5,000 = 55,000

                            profit taken out - 5,000

            Trade 4: Invest 50,000 + 20% profit = 50,000 + 10,000 = 60,000 

                            profit taken out - 10,000

    Total Profit = 5,000+10,000+5,000+10,000 = 30,000.

                

            Trade 5: Invest 50,000 - 20% loss = 50,000 - 10,000 = 40,000.

                            Loss incurred - 10,000

            Trade 6: Invest 50,000 - 25% loss = 50,000 - 12,500 = 37,500.

                            Loss incurred - 12,500

     Total loss = 10,000+12,500 = 22,500

 After 6 trade, profit = (30,000 - 22,500) = 7,500. (This is 10% more than the profit that was made in scenario 1.)

So now the trading tips are -

    1. While trading, its utmost important to have a proper framework and discipline is very much required.

    2. The investment amount should not be changed with every trade. It triggers base effect. Maintain the trade capital fixed for all the trades for a certain period and then as per framework after a certain timeline, increase the investment amount.

    3. After each and every trade, take out the proceeds and invest in a mutual funds, so that over time the return from regular trading(s) can be converted into a sizeable wealth.