The year 2021 saw a record number of new traders and investors. Despite the recent correction, Nifty 50 rose 23% for the year, so it is still very much in a bull market for now.
Nikhil Kamath, Zerodha founder and CEO has shared some of his insights about trading on Twitter recently. He said that the only easy part about trading in the market is starting it. Mr Kamath further explained that active trading is like running a business and only a small percentage of them succeed.
“I’m surprised that, so many are surprised that just 1 per cent of active traders make more than bank fixed deposits over 3 years time-frame. Active trading is like running a business, only a small percent succeed. The only easy bit about trading is starting trading,” he tweeted while sharing his words of wisdom.
Kamath advised traders to have an alternate source of income as it is then that they “tend to do better or have higher odds of winning than those who rely only on trading for a living.”
He added that the pressure to generate profits daily or monthly can lead to more mistakes while also noting that traders should “trust every profitable screenshot that people share to find ways to make money from you.”
The Zerodha founder and CEO earlier wrote in his piece in ‘The Economic Times’, “In all my years in the markets, I've seen a lot of changes, but that one thing that never changes is greed. In the long run, the stock market is probably the toughest place in the world to make easy money. Thanks to social media, countless people are lured into the markets and have a rosy view of trading. But the reality is less than 1% of active traders earn more money than a bank fixed deposit over a 3- year period”.
Among the few wise tips he shared for traders are:
1) Have a hard stop for both your time and money
Make sure to define and stick to a sensible stop loss, an amount you can afford to lose, and a time period you will wait to turn profitable - especially if you are a beginner
2) Stay with the trend
A common strategy among beginners is to buy stocks at their 52-week lows. They think the stock will bounce back because it has already fallen too much. But the reality is stock prices tend to trend, i.e., move up or down in one direction for long periods. The best thing to do is to trade stocks that are trending up and sell those that are trending down.
3) Averaging down leads to wealth destruction
Disposition effect is the tendency of people to sell stocks that have gone up while buying or holding things that have gone down. This affects most traders, and they should be doing the opposite - cut the losers and ride the winners.
4) Leverage is a weapon of mass destruction
While it's easy to get lured by the promise of making outsized gains using leverage, all it takes to blow up your account is one bad trade. This is by far the most common reason why people stop trading. Avoid leverage as much as possible.
5) Avoid stock tips
There's no shortage of people claiming to help you get rich with stock tips, but it rarely works out. What makes it worse is the fact that people are terrible at following advice. So even if they do find a really good adviser, they still don't make money. But the biggest risk is that most of the tips on social media and other groups are pump and dump scams.
He also raised concerns (on Twitter) over the “disturbing trend” of Indian start-ups incorporating outside India. “New start-ups building for India but incorporating outside India is a disturbing trend. While even now startups are largely funded by foreign VCs, there is wealth creation in India through founders, angels and ESOPs. Also, the taxes on realised capital gains benefit India,” Kamath tweeted.
He also quoted a dialogue from Shah Rukh Khan’s Swades to describe the current situation, “Apni chaukhat ka diya, giving light to neighbour’s house”. Kamath also urged the Indian government to take steps to improve ease of doing business and create reasons for foreign investors to nudge founders to be incorporated within India, not outside.