We all know that trading is a lot more about protecting capital and managing risk than about chasing returns. Trading therefore is a game of meticulous planning, smart execution and trading discipline. That is very true at a generic level. But, what are the conditions to be successful in trading? How to become a successful trader in stock market? What are the trading strategies that work in practice? It is estimated that out of every 100 traders who start off trading less than 10% survive beyond the third year. What differentiate this small percentage of traders who manage to survive the storm? Let us look at some successful traders’ strategies and how it makes a huge difference in the final analysis..
1. Trading is your business so treat it like a business..
If you want to be successful in trading the first step is to realize that you are not trading for the fun of it. You cannot be a successful trader if you treat it like a hobby to be pursued in your spare time. Trading is a rigorous and strenuous job and requires your full-time physical and mental commitment. A successful trader needs to keep a tab on the opportunities in the market, monitor existing open positions, manage the risk in each of these positions, understand the exposure and risk at each stage, keep reviewing existing positions etc. While the market may trade for only 6 hours, you need to be wearing your trader’s shoes almost round the clock. In short, if you want to succeed, think like your survival depends on trading.
2. Trading is pointless unless you have a clear cut trading plan..
What do we understand by a trading plan? It is your broad framework within which your trading activity operates. You need to define the maximum loss you will take in each trade; you must also define how much capital loss you are willing to take in a day. The trading plan is all about discipline. If at mid-day you have reached your trading loss limit, shut your trading system for the day. Unless you adhere to such a discipline, your trading plan is unlikely to work. So first, plan your trade and then trade your plan.
3. Be clear of what you can afford to lose..
You must have heard the axiom that one must only risk that much as you are willing to lose. If your trading losses are going to impact your other long term goals then you are doing it wrong. At the outset, be very clear about how much you are willing to risk. When you are committing a capital of Rs.5 lakh for trading; first ask what this money is for? If that money is for one of your commitments like repaying loans, retirement planning, home loan margin etc don’t risk these funds in trading. You cannot afford to lose these funds. To that extent, you must treat your trading funds like an option premium that you are willing to lose.
4. Be a smart user of technology..
As a trader, you can use technology for a variety of purposes. You can use it for screening trading ideas, you can use it for simulating the impact of trading, you can use to simulate your worst-case scenario etc. Technology makes the job of a trader substantially user. As a trader, you can get most of your MIS reports done online. As well make the best of it!
5. Trade on your convictions not on other’s impressions..
It is quite common for traders to be carried away by tips and trading advice from others. Remember, only you understand your risk appetite and therefore you alone should decide what to buy and what to sell. There is no rocket science about what to buy and what to sell. You need to combine the power of charts and news flows to ensure that the momentum is in your favour. It is most important that you are convinced about the trade.
6. Plan your exit strategy in advance..
There is a popular aphorism in trading that “You do not make money by taking an entry but only by taking an exit”. To ensure that you actually realize your profits, you need a clear exit strategy. At what level will you book profits? At what level will you trigger stop loss? When will you hedge with futures or with options? When will you hold on the stock with a trailing stop loss? What valuation of the Nifty will impel you to move substantially into cash? These are the kind of questions you must crystallize well in advance. That is the key to trading!
7. Manage your risk in trading 24x7..
This is one the important features that distinguishes a successful trader. It is the ability to effectively manage risk. Remember, there are two types of risk that you are exposed. There is the risk of open positions and there is the risk of missed opportunities (or the risk of not taking risk). As a smart trader, you must conscious of both these risks and manage them effectively. Risk management is not an activity that you only do during trading hours. For a trader, risk management and capital protection is a round the clock activity.
8. When in doubt, take a break..
This may sound a little incongruous but it could have multiple implications. Firstly, there are times when even the best of traders get the underlying market trend wrong. Smart traders realize that things are not working and they just reduce their exposure till they grasp markets better. Secondly, there are times when markets become so volatile that your stop losses are likely to be triggered even if your directional view is correct. That is again a situation when you should step back and avoid trading.
9. What you learn from your losses is more important..
If you are a trader in the market then profits and losses are part of the game. Losses could stem from pure chance but quite often losses stem from a bad trade from your side. You do not need to lose sleep over it. As long as you are able to grasp why the loss occurred and are able to take corrective action, you are on the right track. Be honest with yourself to accept mistakes and take corrective action. That is the hallmark of a good trader.
10. Trading is not the end of the world..
If you really want to be a successful trader, then get a life beyond trading. While you are still a full-time trader, you need to put things in perspective. You have a family, you have friends and you have a life beyond your trading too. All these are your shock absorbers in your toughest days and respect these relationships that actually make your life worth living!