Interview titled Mr Consistent returning incredible returns with Nithin, Zerodha published on December 21, 2013
Featured in Hindu Businessline article. How stocks became their bread and butter back in 2015
I have been hearing some stories of traders/investors who have lost quite a sum of money in the last few days. Worrisome part is that some folks have borrowed money for trading and have lost it as well. Few other folks who are managing other’s money (PMS) have also lost substantial amount too.
These kind of losses happen in trading profession (especially for the uninitiated) and all is not lost here. So, thought of writing this post to see how to take this losses in a positive stride.
1. Taking ownership of losses – No one is responsible for our losses except us. Not the market, not the system, not the people who gave us the money to trade. We have to realize that we were wrong, we had taken too much risk, and we were employing trading methods that did not work. Period. No point in blaming outside manipulators of markets or bad luck. We, as traders, need to accept that we have completely and utterly made a hash of things (really no choice here and this is not a luxury we can afford). In a job scenario, we can blame others and get away with it but not in trading.
2. Stop trading right away – a trader might not like to hear it but this is absolutely necessary.
Take the time to process what had happened, figure out what was done wrong, and make radical changes in the approach to markets. Jumping from one system to another will not cut it. Most of us try to tweak our system after a heavy hit. Optimizing the system based on last 6 month of market performance would not cut it. Just a small time-based break would soothe off the mind a bit. Most of the times, this should be enough to come back as a different trader.
3. Refocus and relearn – Use the time away from trading to work on other aspects of your life and career. Create alternate streams of income so that one doesn’t depend on trading income alone. ‘Depending on trading income’ in the initial stages of trading is probably the biggest sin in trading.
Trader should try to focus on building the self-image with other aspects of life not just with trading. In doing that activity, he can remain opportunity-focused and not regret-focused. Please stay focused on what you could control, not on what you could not.
4. See the setback as an opportunity to bounce back – I am sure the loss was very painful. Make sure that you would never go through such an episode again. Try to create a new balance between trading and the rest of your life so that you would never be dependent upon trading results for your happiness and fulfillment.
5. Handling depression – a trader need to figure out how to handle depression. More so, a losing trader. It is better to handle it heads on than brushing the episode aside and continuing to lose money in a state of denial.
Depressed feelings are a normal response to loss: the loss of money, the loss of dreams. Sometimes you have to go through that loss before you can come out the other side as a different person, one who has learned from the experience. So, please stay positive.
6. Get out of need to make money mindset – If a trader gets attached to the need to trade and make money–and once his perfectionistic voice of “I should have bought there” and “I should have sold here” in hindsight kicks in –he is no longer grounded in markets. It’s when those frustrations build over time, becoming self-reinforcing, that traders lose discipline and focus and eventually perish. Mental rehearsals would help in these cases.
By staying physically relaxed in one’s breathing and posture and by mentally rehearsing a mindset in which it is OK to miss moves–there will always be future opportunity–traders can prevent many of these train wrecks.
7. Trading too large for our account size – Swing in the equity curve almost always is proportional to the negative effect on trader’s psyche. Higher the swing, higher the negative effect on pysche and the vice-versa.
When we trade size that is too large for our account size, we subject ourselves to drastic swings in P/L, and that subjects us to drastic swings in mood. In turn, we then make trading mistakes that bring a negative expectancy to each trade, and the size eventually blows us up.
As they say, in trading, if we create drama in your returns, we’ll create trauma–and that’s how trading career end.
8. Understand failure – Knowing the worst-case outcome if this trade happens to fail can reduce the fear inflicted by a previous failure from an unseen event. Black swan events aren’t common, so it’s not reasonable to fear them every time you approach a setup. Weigh the potential for loss, and if it’s outweighed by the potential for gain, the probabilities are favorable enough to participate.
9. Psychologically, it’s healthy to experience defeat and then overcome it – It strengthens you to battle back and win. If you lose the wrong way–by taking so much risk that you can’t come back for the day, week, month, or year–you rob yourself of the victory that could be yours by going from red to green.
10. Make a choice to move forward – All of us have the ability to choose, whether it’s our career or our spouse or our attitude. Maybe your fear somehow gives you comfort right now, because it’s been a habit you’ve allowed. That won’t cut it though, so it’s time to change. Eventually, you either decide to get back on the right path, or you’re completely done trading. Make your choice and get on with it—and don’t look back.
This is Madan and I have been trading for a living for the past 10 years. As I find myself doing nothing most of the time during market hours, I was wondering if I could help/facilitate few traders to take a small account to a big-sized one. I have done this growing ‘small’ account to a big sized one personally and have seen many traders struggle to move up in size for numerous years. I strongly believe that this little activity in twitter would give them a few ideas and the confidence to scaleup in the future.
Is there a way to grow a small account without taking unjustified risk, is the question I wish to address.
Most folks I know do not come into trading the stock market with more than 1 crore. So, it might always baffle a new or even an experienced trader on how to move up to the next level in trading account size. After all, we are not coming into the markets everyday (waiting countless hours tolerantly for our setup to show) to make just 50k per month. We did not come to this profession to keep trading single digit lots (if you trade futures), did we? If our account size does not grow steadily over a period of time, then there is something basically wrong with our trading approach and / or our discipline / psychology.
Having said that, when one starts trading a small account (say 2 lacs), the person has a fabulous advantage over others as he has all the time to make all the mistakes without wiping himself out financially. Many traders take imprudent levels of risk early in their trading career and never survive their learning curve. Trading small account has its own caveats too – one can get comfortable with the given trading size quickly and that might translate into a psychological road-block when we move up in size.
The best way to grow a small account is to ‘gradually’ increase the position size. If one has a positive edge in the markets, growing a small account gradually can be dealt effectively with proper money management.
I will be posting live Nifty intraday trades (as a disclaimer, am not asking anyone to follow my recommendations. This is just for demonstration purpose) So, here are the key points to ponder for this activity.
- The primary objective behind this activity is to demonstrate that someone with an edge can make trading a successful profession. It will also enable the trader to understand that discipline and patience with prudent money management can do miracles in the long run.
- Our objective is to earn 125-points profit per month on an average, by trading Nifty futures intraday. I can hear people mumbling to themselves ‘Is this guy for real? Just 125 points per month’. Yes – am for real and am very serious about it. We don’t need a spectacular system to build a big account, but we just need the grit to follow the system that has an edge (plus acceptable drawdown) and implement practical money management ideas. Some months we make more, some months we make less and some months can go negative as well. But, the keyword is ‘average’.
- As it is a Nifty intraday system, trades can happen anytime from 9:15 am to 2:45 pm. We will NOT initiate new trades after 2:45 PM and as we will be utilizing MIS margin (it is around 25k as of this writing), all trades will be exited around 3:20 PM (or as per the broker requirement) to avoid brokers compulsory closing of trade.
- The Stop-loss will be given when the trade-entry is posted, and target will always be open. If there is no tweet about the exit or if the SL is not hit until 3 PM, then we trail 5 minutes bar low for long trades to exit until 3:20 PM. We will exit the trade at 3:20 PM, if it is still open. A lot of our queries will be cleared once we go through a few trades.
- Average points per year = 1,500 Points (125-points per month x 12 months)
Average number of trades per month = 20 (approx. 1 trade per trading day).
Again, we are talking about the ‘average’ number of trades per month. So, it is possible that we might end up taking 2 or even 3 trades in a day and probably end up not taking any trades on a few other days.This system is not something that can catch every bottom and top. It is a simple/modest price action system that is based on both trending and breakout failures with simple rules. As other parameters are not vital for this activity, I would not get into further details of the system (and its parameters).
- If someone is trading in the markets for more than 10 years, he would have realized that making 1500 points per year consistently in Nifty (on an average) is no trifling task. Reasons are multifold but let us stick to the point that is more relevant here – the lack of consistency in executing the plan and ignoring/not managing ‘risk’ properly are primary reasons for this inability to make 1,500-points per year. As am a full-time trader for almost a decade now, I can safely say that we will strive to be consistent and be cognizant of all the risk we take.
- If a trader can understand that Money and risk management are more essential than the system itself, he can extrapolate this belief into his own trading system and bring out the desired results as well. So, it is essential for us to understand that the crux of the activity is to reap long term benefits.
- By working on building a small account slowly and properly, we will be in a much better position than if we take wild/undue risks. Having a get rich quick belief in trading can decimate accounts more than anything else. Remember, NO CAPITAL = NO TRADING
- As I always say, focus on the process in trading and end-result (money) will automatically follow.
I have mentioned that making 1,750 points can help us scale up from 4 lots to 25 lots in Nifty. Earning those 1,750 points can take us a year or two maybe. But, we are not bothered about how long it takes to reach 1,750 points but rather we will focus on how safely we reach there. We are not fixing any timeframe for our goals as we cannot have static targets in markets, which is dynamic in nature.
I am looking forward to this activity as much as you do and would like to end this post with this departing thought – Being consistent in any activity (let alone trading) is not a one-day/week/month affair. It would serve us well if we view it as a continuous journey. We need to do structured set of things every day to bring that consistency in us. In small ways, every day, we must strive to be the person we want to become until, one day, it all comes naturally.
Happy trading !!