Learnings From The Stock Market - 4 Rules To Live By
Trading is an art that you can master by being disciplined.
The stock market comprises of a broad variety of players, including Institutions, Hedge funds, Automated algorithms, HNIs, FIIs and other retail traders. In spite of having the option to take a position on either the buy or sell side, most of the retail traders like us end up losing money and one of the fundamental reasons is lack of discipline.
Discipline can be defined as a set of rules that you need to train over a period of time, in order to turn it into best practices that you follow on a day-to-day basis. While reading books helps to an extent, there is no better teacher than hands on practice to make you perfect.
The stock market teaches you many lessons, however there are 4 rules that applies to all traders whether intraday, swing or positional traders. All the rules are interconnected and one does not work without the other.
1. Only Risk What You are Willing to Lose
Do NOT trade in money you can’t afford to lose.
Before taking any trade in the stock market, position sizing becomes crucial. Position sizing basically refers to the size of a position, and helps determine how many units of a security you can purchase, which in turn helps you to control risk and maximize returns.
For example, with an initial capital of INR 10,000 I would position size in such a way that I would cap my losses at 1 percent of the initial capital (INR 100) on each trade. Even if most of my trades were to go bad, I would still be OK with it because I had only put up the amount I was willing to lose.
2. Remember you are in it for the short term
The best analogy to explain this point is by comparing a trader to a T20 player. The game is only for a few hours but the pressure is intense and you don’t have a lot of time to think. The only difference is, you know that whether you win or lose, you have to come back the next day and do it all over again.
Be patient and always keep learning from your mistakes. Remember, even a rocket scientist goes through years and years of training before he can make it
Remember 40 percent of all the trades in the market are taken by HFTs and algorithms in India. They have so much fire power that they can move the market. As traders, we benefit from finding that move and join them and not stand against following the trend. If you find yourself on the opposite side of the trend, get out of your position and don’t be afraid to switch sides.
3.Have an Edge
There are over 20 lakh traders in India who participate in the stock markets every single day. They all have access to the same information that you do. They look at the same charts and are observing trends. Yet, over 90 percent of traders lose money in the market. In order to be part of the 10 percent that doesn’t, it becomes imperative to have an edge in the market. What is that edge?
The edge can be one or more of the following: being objective, not letting emotions get in the way having access to market research and analysis that others don’t, having a game plan an the discipline to execute it well.
Simply put, you need to have a strategy which you have validated, and you need to execute it well.
Rule 4: Have a Strategy, Always
Trading without a strategy is like trying to find a needle in the haystack, in the dark. You always need to have a strategy before you make a trade. The complexity of the strategy may vary, you can have a simple price based strategy in mind or a complex one based on technicals, but you need to have one nonetheless.
The probability of making money in the long run becomes higher as you practice the art of creating trading strategies, back testing these strategies and taking them live in the market to see how it behaves under various circumstances. You need to have at least 5 technical indicators that you are comfortable with and use them quite often to see some good results. We created Streak to facilitate this process and make it simple for everyone. If you are using then you can deploy as many as 100 algorithms (without programming knowledge)and wait for signals with zero margin utilised.
And finally,I want to leave you with these thoughts.
The markets have been running for the last 100+ years. Do not take a trade with an unwaverable conviction and don’t marry your position, be it bullish or bearish. Be flexible to switch sides if the need arises and always have a Stop Loss in case the trade goes bad and make sure you only carry trades that you are comfortable with.
Be patient and always keep learning from your mistakes. Remember,even a rocket scientist goes through years and years of training before he can make it. No matter how good you think you are use the latest tools available in the market to sharpen your skills.