A recent study conducted by the market regulator, the Securities and Exchange Board of India (SEBI), brought to light the fact that most individuals who call themselves traders, do not make money.
Professional and full-time trader Piyush Chaudhry found it quite encouraging to note that 6% active traders are profitable. He compares it to the odds of getting into one of the top 10 MBA colleges (2-3%), Civil Services (<1%), or becoming a cricketer (0.01%).
In Is Stock Market Nationalism a thing? he looked at history to show how the waves of nationalism get reflected in the stock market through stretched valuations over a long period of time.
Here is his advice for those who want to be traders.
Trading is tough.
There’s a joke that drives home the point. When I started trading, I was young and struggled to make money. After 60 years of continuously upgrading my skill, firming up on my psychology and risk management... I’m not young anymore.
If trading was as easy as is envisaged by so many, everyone would be full-time traders. Everyone would chuck their jobs and forget about being entrepreneurs. Trade, and get rich. Right? It really is not that simple.
It starts with Technical Knowledge.
People assume that if they master this aspect, they are great traders. How wrong that assumption is. This is just the start.
I have been trading for the past 15 years. Back in the day, it was tough to become a trader. As the knowledge, information and tools were either hard to source or frightfully expensive. Today, it’s all available. If not free, low priced. But to think that it is all you need is a very grievous error.
Since technical analysis deals with probabilities and not certainties, you have to get the other aspects of the game right.
You can’t win without Risk Management and Mental Toughness.
This is where most fail - trading psychology and risk management. Yes, there are guidelines to follow. But that is all that it is, a guideline. The discipline, mental fortitude and ability to objectively view your mistakes and learn from this is something no one can teach you.
If you want to stay in control, be immensely disciplined. Place calculated bets, in the right sizes, on tried and tested systems. Manage risks at all times. Keep your emotions in check. When you squeeze an orange, what is inside will come out. In this case, it is orange juice. When the market squeezes you, it will test your mettle.
You are not here to prove anything.
This is not about satiating your ego, it is about making money. That means you must be very unemotional. Now this is difficult because thousands of years of evolution has made us emotional beings that act impulsively. So what will this entail? Practise being cynical. Force yourself to be ruthlessly objective. Deliberately stay unbiased. Eventually, you will get the hang of it.
I really like what Denise Kay Shull, author, expert in trading psychology and founder of The ReThink Group, had to say on data. It is not data that is influencing you but your feelings about data: It seems like you decide on the data. You don't. Analyze your feelings about the data and you have an edge. Make a chart of yourself so you more often recognize which group of feelings is motivating your trades.
Can you see the role emotions and feelings play? And why you need to constantly be aware of it?
Be patient.
You can’t become a trader from the word go. Individuals work for years firming up their knowledge and skills in other professions. If they applied the same patience and diligence to trading, by improving their psychological prowess, trading knowledge and risk management, the outcome would be strikingly different.
Start by mastering one pattern at a time and trade with discipline, rather than attempt to make a living out of it from day one.
Don't forget this:
- Tip is a dangerous word. Having a rationale must be mandatory before buying into a stock, be it fundamental or technical analysis.
- Start the analysis with a clean chart. Understand the price structure. Use indicators to time entries and exits.
- Never buy the first dip. Never sell the first rally.
- Love thy patterns, not thy stocks.
- Don’t ignore transaction costs. Random trials and revenge trades cost way too much. The only way to beat that is by having a trading system that has a positive expectancy.
- Don’t ignore position sizing. Control the losses per trade.
- Remember the 3Ms: Method, Mind, Money management. If you monitor all and respect them, you will get rewarded. If you don’t, you will get punished.
- Temperament matters. Let me end with a quote from George Stein, made when he was the managing director of New York-based Commodity Talent: There are different types of traders, but a common characteristic to most of them is a cool head that knows not to fall in love with a market view when the tape runs against you.
Piyush Chaudhry is a trader and founder of Wave Analytics. You can follow him on Twitter.
