In most societies any activity which generates money/income with apparently lesser effort like trading than the hours put in a typical 9 to 5 job, is considered either downright wrong or risky ( dangerous ).
We are used to associate money with hard work and trading in stock market does not appear to be hard work, hence one assumes or believes that it is a dangerous activity.
Well, I start with the statement that trading on the stock markets is not dangerous
Why it is not dangerous? :
We are talking of trading only, not investing. Investing has got far lesser risks than trading and is a sure winner in long term. Trading has some implied risks but to call it dangerous is stretching it a bit too far.
A trader tries to make some profit from the daily movement of the stock prices. The trade may be for a day, for a week, for a month or few months but not for a much longer period.
Money is made when the right price movement happens during the trade period. Money is lost when the desired price movement does not happen.
With blind guess chances of being right in a trade are 50:50.
With proper technical analysis, this ratio can change to 60:40 or better.
Even with 50:50, a good trader makes money. In fact a good trader makes money with 40:60 success rate also.
Money Management is the Key:
The loss happens due to trade going wrong. Some trades will certainly go wrong. What is required is the management of this loss amount.
Cut your losses in a wrong trade & Let your profits run in a right trade.
Take small losses & Try to take big profits: Do not take 1% profit when the market is willing to give you 6% or more. One good trade should be enough to make up for 2–3 bad trades.
I can go on giving theories, but it would be best explained with real trading example:
Nifty Options Trading summary:
As I am a Nifty options trader, attached is my screenshot of my recent trade,
In morning session I was in loss as the market reversed the direction which I least expected, so booked loss of -450 from 8300 CE.
But, at afternoon session when I saw a clear breakout of support and market was falling, I bought Nifty 8000 PE & booked profit of +1440.
From the above example you get a clear picture of money management skills, associated with technical skill & trading experience.
This is taking profit through loss management. Losses were kept small, confidence in the trade is maintained and one right trade is enough to earn decent profit.
Where is the Danger Then?
Markets are not dangerous. The psychology of the trader is dangerous.
Succumbing to fear and greed is dangerous.
Not having a trading plan is dangerous.
But why blame stock markets for the danger.
Crossing the street without looking at the traffic is dangerous. We do not do it.
Then why approach trading in stock markets without caution?
Danger lurks within us and not in the markets. We blame the markets for our own flaws and shortcomings.
Why Very Few Traders Make Profits? :
The question detail states that only few people are able to trade and earn money. This is true. But this is true of any business activity.
Only good businesses make money or rather the business that makes money is called good business.
Whether it is a small grocery store, an ice cream parlor or a car hire company, all work in a competitive environment and earn or lose money based on their business model and efficiency.
Same with traders. They earn or lose depending on their trading skills, trading strategy, capital adequacy and money management.
Only very few have the skills to earn good profits and they do it regularly.
Rest are the ones who make up the numbers, get lucky at times and ultimately pay the price due to lack of trading skills.
The losses of the vast majority of traders are not due to markets being dangerous, these losses are mainly due to poor loss management. Most traders do not have the patience to wait for the big profit. But somehow they have the patience to wait in a big loss.
To master skills of money management & to be profitable you need to first learn as much as you can, Practical learning is more effective than theoretical learning, my blog is concentrated with practical case studies which can better understand the aspects of trading.
Trading in stock markets is not dangerous.
It should be taken up as a business activity and not as a gamble or fun.
An informed trader with good money management will always have an edge over other traders and will perform better.
Individual trader need not worry about computers dominating the trades. There are opportunities for everyone.
Become a knowledgeable trader, start learning.
Markets will be willing to reward you with huge profits !