Industry

Which do you fear: trading or losing?

Long-term investment and diversification are two concepts that are so ingrained in most individuals that thinking otherwise is considered sinful.

Small wonder that many individuals consider learning technical analysis a waste of time; for technical analysis is considered taking concentrated bets for the short term. In this article, we look at other reasons to explain why individuals could be averse to learning technical analysis. We also show why technical analysis could be a useful skill to acquire.

Effort vs. reward

‘Investors’ are supposed to take a lot of effort. Also, ‘investors’ are patient and disciplined. That means they wait for a long time before selling an investment. ‘Traders’ take short-term bets; some even call it speculation. Therefore, individuals prefer to be ‘investors’ rather than ‘traders.’

But, it is not that individuals do not want to trade. It is just that they do not want to lose! Understandably so, because of loss aversion. This refers to our attitude towards gains and losses. For instance, a loss of ₹10,000 can cause us more pain than a gain of ₹10,000 can give us happiness. It is, therefore, not difficult to understand the lack of interest and belief in technical analysis; for ‘traders’ typically know their outcome in the short term whereas ‘investors’ know their outcome over the long term.

So, ‘investors’ suffer pain from losses, if any, only in the distant future. There is also the illusion of control. Many believe they have more control over their investments over the long term.

In the short term, markets are volatile; the chart pattern that gave you handsome returns in one month could prove disastrous the next month. Short-term is indeed volatile, but long term is a series of such short-term movements. So, if your long-term investment carries unrealised short-term losses of 30%, it must gain 43% over your remaining holding period to recover the losses.

Investors vs. traders

A popular understanding is that investors focus on long term returns while traders aim for short term gains. Also, investors apply fundamental analysis while traders use technical analysis. This is not necessarily true. You can use technical analysis for any time frame, but you cannot use fundamental analysis for the short term.

It is, therefore, more appropriate to define investors and traders from a source-of-returns perspective. We define investors as ones who make investments for income returns. For instance, buying shares for dividend income.

Traders, on the other hand, look for capital appreciation. From this perspective, we can conclude that most of us are traders. Why? For one, it is not tax efficient to invest for dividend income. For another, with stock prices at high levels, dividend yield is low.

Now, if you are comfortable calling yourself a trader, then you should consider learning technical analysis. There is a benefit in doing so. The Indian automobile industry, for instance, is quite different from its U.S. counterpart. That means your skill at picking Tata Motors based on fundamentals cannot be applied for investing in Ford Motors. On the other hand, chart patterns are the same across listed asset classes and geographies. So, technical analysis can help you buy Tata Motors and Tesla, trade a currency pair or a commodity anywhere in the world.

Conclusion

Learning technical analysis empowers you with the ability to earn money, capturing short term market movements. This skill is portable; you can trade in new markets if your job takes you to another country.

Unlike an engineer or a doctor, you do not need specialised qualifications to be a trader. So, you can continue to call technical analysis a waste of your time and ignore it.

Or, you can accept that it is, perhaps, fear that is holding you back and take steps to understand how to trade applying chart patterns. The choice is yours.

(The author offers training programme for individuals to manage their personal investments)


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Printable version | Aug 9, 2022 6:34:53 pm | https://www.thehindu.com/business/Industry/which-do-you-fear-trading-or-losing/article65540889.ece