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Problems Of Directional Traders


Date: 15-Mar-2017

Read problems of directional traders when a trend is over.

Nifty At All Time High What It Means?

Nifty is at all time high, and I am sure most directional traders must be divided in the issue of doing buy or sell.
Here is where psychology of directional traders gets confused.

1. Some directional traders are thinking this: Nifty will go even higher because BJP has won people mandate. Obviously they are buying Nifty or Stocks.

2. Some contradictory directional traders are thinking this: Nifty has hit all time high, I really do not think it can go even higher as a lot of traders will book profit. Let me take a contrarian bet, let me sell stocks or Nifty.

3. Technical Analyst: Oh all beautiful charts are signalling a buy, lets buy.

4. Speculators directional traders: I think most of them will be on a buy as they love to go with the trend.
Here is where they are not trading but gambling.

The UP election results has already been factored in, there is nothing more left now markets will do what most traders will do.
And what most traders are doing? Speculating – 50% on the buy, 50% on the sell. As you can see Nifty not moving at all.

Nifty at 2.29 pm on 15-Mar-2017

Nifty at 2.29 pm on 15-Mar-2017

All Call buyers are getting a headache. INDIA VIX (volatility), has fallen taking down the premium they paid to buy calls, but Nifty is just not going up.

All Put buyers are also getting a headache. INDIA VIX (volatility), has fallen taking down the premium they paid to buy puts, but Nifty is just not going down.

What about Future traders?

Same as option buyers or sellers, they just do not know what will happen.

In any case the in the recent Nifty rally 50% of the Futures buyers made money and 50% of them lost? Why? Because those who sold lost and paid money to those who bought Futures.

As you can see directional traders are living a divided life. Some months profits some months loss, but in most cases losses are more than the profits. This happens for years until they quit trading.

If you are also a directional trader please do not live in the hope that one day or one month will recover all your losses. That day rarely comes. On top of that you must also add the money lost due to fixed deposit that you could have done on that money year on year.

Which means compound the losses with 8% per year that you could have made by doing a fixed deposit.

If at all you make a profit, it must beat all the losses and make at least 15% per year on the lost money only then can you say you made a profit, on trading else even if you are making 5% per year on trading, you are actually losing money.

Case with non-directional traders with proper hedging is totally different. History is proof that 70-80% of the times there is no trend in the stock markets. And when there is trend only 50% of directional traders lose money.

If history is proof that 70-80% of the times there is no trend in the market, can you change the future? No one can, that’s the reason I became a strict non-directional trader. See benefits yourself.

I do not care, neither am bothered where Nifty is heading, all I care is how much profit I am making. Means is not important to me, ends are important.

Conclusion:

Being a directional trader is a very difficult job and most of them burn their fingers every day. Non directional trader burn their fingers rarely and do not live on the edge like directional traders. In my experience it is better to be a non directional trader than a directional trader trying to make too much money but actually end up losing it.

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