Tuesday, February 15, 2011

Human Behavior: A source of looting for Big Fishes in market

Almost 100% of the people who started working in stock market as trader, investor or dealer will come to hear very early that only big fishes of the market are earning lots of money in market. It is those big fishes who loot their hard earned money from them in days only. We all have heard that out of 100 only 5% earn money in stock market and they are none other than those big fishes renowned as the so called operators of the market. Exceptions are always there. Do you know why these big fishes earn lot of money? It is not because they are extremely lucky by the grace of GOD or they have lot of capital only. It is because they are more intelligent then us, they know how to manage money, most importantly they know human behaviors, they know how to play with human behaviors for their benefit, how to use their resources available in pursue to earn from human behaviors. Yes, they know what will be the mass decision or approach towards any situation or problem encountered before them. We create opportunities for the big fishes to loot our hard earned money. I don’t disagree with the fact that they don’t incur losses in stock market off course they do. Not because of us (retailers) but because of the fight between them. Now most of us must be thinking that who are those big fishes? Are they really exists in stock market? It must be look like very childish for few of intelligent brains in economy but it is a fact. As a proof, more than half year a back, there was an article in Economic Times that almost 50 to 60% volume of the NSE FNO segment is done by sum 100 odd clients. This is issued by NSE India.

Now I think I know the mass question: - how we create opportunities for them? We are also doing what they are? We also buy or sell stocks same as them? We also know fundamentals & technicals as they know? We also trade in the same software & with same exchange as they do? Exchanges offer same services to us & to them? Then where is the difference? To my knowledge difference lies in Human psychology (which is called as human nature, which includes Action & Reaction, Cause & Effect, Greed & Fear etc) and which further results into money mismanagement. In short, the reason behind the losses of us (retailers) is our thinking process .i.e. human psychology is the cause, which gives birth to the effect of the losses occurred in stock markets.

CAUSE* Human Behavior (Psychology): - Human being is very emotional especially in case of money. Every one wants to make money in truck loads as same no one wants to loose even a single penny from his wealth. Thinking of human nature I have discovered that, “Greed is always permanent but satisfaction always temporary.” It is rightly appropriate especially for traders and investors in market. Those big fishes are absolutely aware of this fact. No doubt this theory also falls on them but still they earn. Reason being powers- a combination of money power, intellectual power and especially power of decision not to follow mass crowd. As per my thinking I assume that most of us (retailers) almost 90-95% always take a longer position in market than on shorter side. So, theory behind human psychology is always being the same. “The more is the stock rates or index rates are increasing, the more is the appetite to own them to earn profits as same as more the rates are falling, more is the fear to loose the hard earned wealth in blood bath.” When market is moving upwards every retailer has a thinking that, “May hay while the sun shines.” But nobody knows where this upmove reverses. So, in upmove it is obvious that you made daily profits by selling older buying newer stocks everyday but don’t know when it will reverse the trend and market will be on blood bath. As always an uptrend is formed in zigzag manner in market everyone has an experience of stop loss getting triggered. A human has nature of cursing the luck that obviously turns into a rigid nature of not booking a loss in any scrip. In short, a retailer will book loss in long side once, twice, thrice but not always. If I know this retailer behavior so do those big fishes.

EFFECT* Money Mismanagement: - We all had heard from our ancestors, friends, parents, sensible reputors that do not go beyond your reach. It means spend only up to your savings, don’t ever look for credit. Credit will always increase your ability to take uncertain loss. But in stock market retailers have a common problem of taking over leveraged position always. This according to retailers thinking is smart, intelligent and cunning approach by using the money of broker to earn more profits then their actual investment ability. Out of 100 almost 90% of retailers are always using the money of broker to make more profits on their actual capital. This according to my sense is the basic mistake of trading in market. It is one of the main reason of being ruined in stock market. When there is greed of earning huge profit based not on your actual capital but on others money, it always ends up at desperation. The reason I am writing this for the fact that human being is the most selfish creature and also cannot control the temptations in case of money being earned. Retailers can’t measure the risk involved by using someone others capital to generate more profits. The movement of market is always sideways. It will never be one sided for too long. After few days of one sided movement it has to reverse the direction. So, there is no possibility of being always stay with the same direction of market for retailers. No doubt playing with broker capital, you can earn for 10-15 days but that habit will become disaster in coming days. You can have narrow escape once twice but not always. Some of us intelligent traders think that they will never hold on to any position with broker capital. But my dear friends only those can do the same, who are not emotional at all and I don’t think that humans are not materialistic. Only 1 or 2% are there rest all are emotional in one & other ways. I am also not ignoring the fact that when there is more risk involved the ratio of making money is also very high. For becoming wealthy, risk is necessary to take. In stock market this theory is also applicable but one thing should keep in mind that fluctuations in profit and loss are very high in stock market comparative to other business profiles. It is fluctuating day to day, hour to hour, seconds to seconds. Decision making time is in seconds always. Moreover the position is calculative & visible at every second in market. Only those can win who set very strict rules and regulations for trading and stick to them in every trade.

The last thing I know is nobody from us can fight against the hold of big fishes in our stock markets but surely we can control the effects of those big fishes to affect the desired results of our investments by properly managing our money and not reacting upon any rumors spread by them in market to avoid their traps.


Blogger Gurcharan said...

Nitin this is a great blog, very articulate and well put togethered. I enjoyed the read and i am looking forward to more updates on your blog.

1:13 PM  
Blogger Gurcharan said...

This comment has been removed by the author.

1:13 PM  

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