20 things you need to know about Trading

These thoughts are my random musings and there might not be a clear/coherent flow in the points mentioned but nevertheless, i believe these are some important things to keep in mind if you are trading the markets.

1. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker
Everything passes away – both success and failures

2. Chart patterns are as much art as science. If 25 people look at a chart and all 25 of them come to the same conclusion, then it becomes objective. If they dont come to the same conclusion, then its subjective

3. The market kindles your emotions. It pushes all our buttons of fear and greed – it ferrets out all. I found out very early in my career that i was not temperamentally too suited to be a great trader. The way i found to overcome this shortcoming is to have a definite set of entry/exit rules

4. Read a lot, test a lot and dont trade until you have a trading plan. Make sure your trading methodology is objective in nature as you have better odds of success stacked in your favor.

5. Learn to limit your risk – if we can stay in the game long enough, we will learn how to become successful in trading.

I always tell this to folks – if you can trade profitably for 10 yrs in trading and increased size steadily, you would have already amassed a small wealth or would amass it within the next couple of years

6. If one is following a system(mechanical)/methodology(discretionary) consistently and making money, how do we make more money then?

We have 2 options – more leverage or bigger size. My vote is for the latter as the former has decimated more accounts than what we can imagine. It will take a while to build size but it has to be done incrementally (and not exponentially with the use of leverage)

7. Many new traders wonder – what’s the best way to trade. Let me assure you that its an impossible question to answer. Nobody can tell you what’s going to suit you (except you).

Whatever methodology you use, it has to fit your personality. This is why copying somebody else’s system never works (almost) but one can derive ideas from it.

8. Every professional (irrespective of their profession) go through slumps.

Let it be Virat Kohli or Kobe Bryant or Tiger Woods or Lionel Messi – Slumps are inevitable but once we have come out of slump, no matter how long it takes, we know that we can do it again. If something is done once, we know it is a repeatable act. So, embrace slumps as that knowledge of digging ourselves out of slump is invaluable in the long run.

9. It is prudent to focus on exits rather than entries. There is only so much one can do in entries but they can do lot of variations in exits. It is impossible to tell in advance which trades will be the good ones.

Some folks say “take only the high probability trades” and they tend to forget the random nature of distribution of trades. We are better off taking all the trades if we are following a system.

10. You need to be willing to take small losses. Taking a small loss reinforces a trader’s sense of discipline and control. Losses are not failures – please etch this in your mind

11. Two primary reasons for why we focus on being right.

First, we are conditioned to be right by our school system.

Second, everyone in the trading industry gives people what they want – ways to be right (high winrate system is the main culprit) and that perpetuates the myth. The traders who identify this early in their career do really well.

12. The difficult thing for many traders is that we have so many choices on timeframes, different instruments/markets, to trade the trend/counter trend/non-directional(delta neutral) but guess what, we can’t do it all.

So, we have to sit down and decide the type of trading we will pursue upon. A lot of traders (atleast for few initial months/years) are trying to do it all.

13. Many ask me about what books to read – i recommend Market wizards book as it gives an idea to the new trader that there are dozens of traders who were doing different things but still able to do it well.

Think about it – you dont have to be only a 100 meter sprint runner to make it in athletics

14. All new traders will ‘have to pay their dues’ to the market – no exceptions here. They have to learn about excitement, fear and hope in trading. They have to make their own mistakes (I don’t believe in learning from mistakes of others in trading as trading is an experiential task)

15. If you are a trend follower, by and large, having profit targets wont work as the price of your underlying instrument can keep changing over the years and trust me, reframing the profit target is no easy task. So, start with the right thought-process if you are a trend follower (by exiting only when the trend bends)

16. I would highly suggest trading a breakout system initially as it teaches us to do things that are hard to do naturally – like buying high and selling higher or selling low and buying back lower.

17. If you are a pullback trader, check your trades over a long period of time (backtesting) – you will be surprised to find the best breakouts wont give you pullbacks to enter the trade. You are either in the trade or you are not.

18. Big gaps are always a problem – one can expect short term volatility and hence, wider stoplosses (market driven) are possible. In short term trading, if you are stopped out of your trade after a big gap up/down, the reversal trade is usually very profitable.

19. When trading a trend following break out, your two best friends are ‘whipsaws and ‘law of large numbers’. If you dont understand whipsaws are part of Trend following-Breakout trading, then trading will be a mystery all the time

To accept whipsaws are part of Trend following-Breakout trading, one needs to understand the ‘Law of large numbers’.

A quick blogpost on ‘Law of large numbers’ here

Law of Large numbers and its implication in Trading

20. Last but not least – when you have a losing trade, it is ‘just’ a losing trade.

Many have difficulty in separating the reality of a losing trade from the psychological sense of feeling like a loser.

They equate losing with being a loser. This frustrates/depresses/creates anxiety about his P/L so much that it would start affecting his self-image. So, losing is part of trading and that does not make you a loser

Hope it helps someone out there and happy trading all !!

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