While profits run into lakhs or crores theoretically, over 95% of day traders end up losing money. Success requires tremendous skill, resilience, capital, and avoiding emotion-fueled decisions. This extensive blog offers realistic expectations about stock trading money-making.

What is Stock Trading?

Stock trading involves buying and selling company shares on exchanges like NSE or BSE for profit. Many ask, "How to earn money from stock market?" By providing market liquidity, traders facilitate easy stock transactions for investors. Understanding the techniques traders use to generate consistent profits is key. Major trader types include:

Informed Traders

• Spend years honing their craft using technical and fundamental analysis across asset classes like options, futures, commodities, currencies, etc.
• Identify trading opportunities through assessment of indicators, chart patterns, and trends, as well as economic data, geopolitics, business cycles, etc.
• Employ complex quantitative models and algorithms for automatic trade signals.
• Specialise in market microstructure analysis and high-frequency trading.

Discretionary Traders

• Rely primarily on subjective factors like price action, momentum, investor psychology, and news events rather than just data.
• Use visual stock chart analysis to spot support, resistance, and trends based on emotions like fear and greed in markets.
• Leverage personal experience and intuition cultivated over years of trading.

Algorithmic Traders

• Depend completely on complex mathematical models and computer algorithms for automated trades.
• Require strong programming skills and financial engineering knowledge to build trading systems.
• Strategies optimised through machine learning techniques applied to vast historical datasets.
• Lower human biases but need continual monitoring and enhancements.

Long-term Investors

• Focus exclusively on long-term returns over months or years rather than short-term profits.
• Include mutual funds, pension funds, insurance companies, hedge funds etc.
• Practice portfolio allocation across stocks, bonds and other assets to balance risk and returns.
• Perform fundamental analysis on earnings reports, financial ratios, management changes, etc.

The Potential Profits in Theory

Huge financial upside exists theoretically in stocks. Depending on skill, starting capital, risk appetite, and luck, profits for full-time traders can range from a few lakhs per month to hundreds of crores a year. But that excludes the 95% who lose money in the end due to the inherent volatility and complexity of markets.

Day Trading

• Offers quick profits on intraday price movements but carries huge risk, requiring stomaching losses.
• Needs innate rapid analytical abilities and decision-making skills.

Swing Trading

• Holds stocks for days or weeks based on short-term trends and data.
• Less risky than day trading with more flexibility.
• Profits from broader shifting market sentiment and events.

Position Trading

• Longer-term strategy holding stocks for weeks, months or even years.
• A fundamental analysis of companies is required.
• Potential for substantial returns over time.

Scalping

• Attempts many rapid trades daily to profit from tiny price movements.
• One of the most difficult strategies requires iron discipline.
• Large trading capital is needed to profit from fractional moves.

Algorithmic Trading

• Depends on complex math models and computer algorithms.
• Potential for huge automated profits after costs but significant upfront development skills and technology costs.

Investing

• Focuses on long-term holdings of high-quality stocks.
• It lowers risk but requires patience over the years.
• Utilises mutual funds, index funds and pensions to diversify.

Essential Skills for Succeeding in Stocks

Expert Financial Analysis

• Combine strong quantitative skills with qualitative assessment of business fundamentals and market news events.
• Conduct in-depth analysis of cash flows, financial ratios, management changes, competitive forces, industry cycles, and macroeconomic trends.
• Build financial models projecting future earnings based on historical data.

Mental Resilience

• Withstand wave after wave of emotions, uncertainty, and losing streaks with composure developed over years of experience.
• Stick to trading plans and risk management rules even when in major drawdowns.
• Avoid panic selling at market bottoms or manic buying at unstable tops.
• Review losses dispassionately rather than taking them personally.

Prudent Risk Management

• The balance profit potential on trades with downside exposure through stop losses, position sizing, and portfolio allocation.
• Use options contracts to define and limit risks on trades through hedging strategies.
• Diversify across uncorrelated assets and markets to mitigate risk.
• Monitor overall portfolio risk metrics like VAR, drawdowns, and volatility at all times.

Decisive Execution

• Pull the trigger to open and close positions decisively while avoiding analysis paralysis.
• Balance Conviction with the flexibility to cut losing trades fast when wrong.
• Avoid overtrading by being selective with the best risk-reward setups.

Specialisation

• Master specific geographic markets, asset classes, and sectors rather than jumping sporadically.
• Build world-class expertise in areas like commodities, currencies, and high-frequency trading.
• Understand intermarket relationships between bonds, stocks, forex, etc.
• Concentrate efforts on one or two trading strategies tailored to personality before expanding.

Final Takeaways

Stock trading offers almost unlimited profit potential, causing many to ask, "How to make money in stocks?" But in practice, success demands skills honed over the years, tremendous mental discipline, analytical abilities, risk management skills, and working capital. Develop reasonable expectations before jumping in based on splashy but unrealistic stories. Focus on building expertise, managing risk, and limiting losses over aiming for home runs.