A few years back, I was struggling to make money in trading, and I used to say it to myself –
“If I consistently do what I’m intended to do for a long enough time, I’m bound to achieve great success in trading/life.”
But then, many times, I missed doing what I was supposed to do, and hence, I didn’t see good results.
1 – Pick the Trading Type
There are many varieties of trading – day trading, swing trading, or investment.
Opportunity exists in all the timeframe, and hence you need to pick the proper trading method that compliments your personality and work schedule.
Suppose, if your day job demands more attention and time during the market hours, it will be foolish to pick day trading. It will help if you try swing trading or investment.
Similarly, if you are young and get a lot of free time during market hours, then you can explore intraday trading.
2 – Finalize a Trading System
Let’s say you picked intraday trading.
There are many methods to manage your intraday trades—for example, price action trading, indicator-based trading, options selling, options buying, etc.
Every concept comes with its own style, risk, and reward. I will take an example to explain this.
I have designed an intraday system using RSI, and below are the backtested results (against 10 years of Banknifty):
Accuracy – 40%
Profit Factor – 1.2
Starting Capital – Rs.350,000
Ending Capital – Rs.1,790,000
Maximum Drawdown – 14%
Consecutive losing trades – 12
Number of trades – 22 trades per month
Image – Equity Curve of the RSI Day Trading System
So, if I decide to use this system, I shouldn’t expect an accuracy of 80% or 90%.
Similarly, it generates 22 trades approx every month. Hence, I should keep a check on my expectation about the total number of trades each month. For example, expecting 50 trades each month from this system is foolishness.
3 – Define the Rules
Trading in the stock market is not rocket science. But most people lose money in trading because they randomly make decisions.
Hence, success in trading is all about your discipline action rather than about getting your calls right.
Having well-defined rules helps to sustain this business. Some of the examples are below:
- What is the entry criteria
- Where should be the initial stop-loss
- What is the position size for each trade
- How and when to trail stop-loss
- How to increase the position size
4 – Money Management Rules
“Even a poor trading system could make money with good money management” – Jack D. Schwager.
The key to success in trading starts with good money management. Having clarity on how much money you are willing to lose on every trade is crucial for successful trading.
Money Management is nothing but a set of rules to allocate the required position size to reduce the risk while aiming for good returns in trading.
5 – Trading Psychology
Psychology means the mental factors or emotions governing a situation or activity. So, when we say trading psychology, it implies cognitive factors related to trading.
4 primary emotions revolving around trading are greed, fear, regret, and hope. Please note, all these factors emerge because of a lack of knowledge.
Most people come to the stock market intending to make money. Well, this is not wrong. But most traders set high expectations from the market and that too in quick time.
Most of the fears in mind are created from our past bad experiences in trading.
The only way to eliminate fears in trading is by increasing your conviction in trading. You can do this by backtesting your system with more data, reading specific niche books on trading, or taking a particular Trading course.
In trading, our regrets are never-ending. If you exit a trade and the price keeps moving in a favorable direction, you regret your exit decision.
If you don’t take profits from one trade and then the trade takes a turn into the negative zone, you will regret your decision for not exiting.
So, plan your trade and trade your plan. Please note, it is not possible to catch all the good moves in the market. Focus on learning and improving day by day, trade by trade.
A trader starts hoping for some miracle to happen as soon as he deviates from his trading plan.
For example, a trader plans to buy a stock at 200 with 198 as Stop loss level and book profit at 204 level.
The price moved to 200, and he is in the trade.
After some time, the price moves to 204, but he didn’t book profit as he starts hoping that short covering will come into the market anytime and it will take his position to massive profit.
Now the market takes a U-turn. Our stock price moves back to 199, and now he starts to hope for a rebound.
The price falls below 198, but he doesn’t book the loss as he thinks a rebound is just around the corner. Price is now 196, and he is still living in the hope of a rebound.
What has happened in the above example is that he has lost control of his trading plan.
Pre-decided stop loss and target are the two points where we need to act.
Once we do not reach those points, the situation is not in our control, and the decision we take after that is based on hope, which is a sign of weakness.
6 – Execution is the Key
Execution is the real Holy Grail in Trading.
Do you know why Usain Bolt runs only in 100M and 200M sprints?
Being the fastest athlete globally, why will he not choose to run in other categories such as 400M, 800M, 1500M, 5K, 10K, and other marathon events?
It is because he wants to achieve more in sprints than to become a jack of all the running types.
Suppose you have an excellent positive expectancy system and clear money management rules. In that case, you can make money in Trading in the long run if you execute the plan in all market conditions.