Learnings from the stock market — 4 rules to live by
A 4 rule summary of my learnings in the stock market after having traded for 8+ years as a day trader
Day trading is an art that you can master by being disciplined.
If you are a retail trader who wants to trade for a living, then you need to understand that you are trading the markets that comprises of a broad variety of players, including Institutions, Hedge funds, Automated algorithms, HNI’s, FII’s and other retail traders. In spite of having the option to take a position on either the buy or sell side, most of us retail traders end up losing money; and one of the most 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. I believe every trader should have these 4 generic rules and use it to train every single day. Following these rules will bring in discipline in trading and give you a greater chance of success in the long run. While reading books helps to an extent, there is no better teacher than hands on practice to make you perfect.
Lets get to the 4 rules. Remember all the 4 rules are interconnected and one does not work without the other.
Rule 1: Only risk what you are willing to lose
Do NOT trade with money you can’t afford to lose and keep your emotions out of the way while trading. Personally, I think you should have enough margin to take at least 3 trades in a day. For example, I started with Rs.10,000 and took trades with stop losses where I wouldn’t lose more than 1% (Rs. 100) on each trade if it went bad. In the beginning, most of my trades went bad and I lost all of it, but I was OK with it because I had only put up the amount I was willing to lose. Remember 40% of all the trades in the market are taken by HFT’s and algorithms in India. They have so much fire power that they can move the market. Your job is to find that move and join them and not stand against them.
Rule 2: Remember you are in it for the short term
You are like a T20 player and the environment is similar. 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. What matters is to have the courage to do it again and again without getting wiped out.
Rule 3: The edge
If you have to play the markets everyday, you need an EDGE , NOT LUCK because luck runs out but knowledge keeps growing.
You might get brilliant ideas looking at the charts, you might even feel like the charts are talking to you. Your minds starts playing games and tells you this is the best bet of your life and you go all in. You start dreaming about profits before you have even taken the trade.
But how do you know this is the right move? All traders are looking at the same charts and are reading the same moves. What edge do you have?
The best edge for a retail trader is to BACKTEST these ideas/strategies and understand what the result is. If it’s happening now, it has happened before and you need to understand how the stock performed the last time it exhibited these traits.
You also need to understand what backtesting is all about in the first place before you jump in. Go through some tutorials, look online and try backtesting on Streak.
I have seen many traders plotting charts with 1 minute candle interval, taking trades and trying to get in out in a minute. Trust me, the only thing that will get out of your trading account is your money and you will be left with nothing. Even if you end up making some money, you would have lost it by paying taxes and STT.
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 take 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, backtesting 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 the Streak Platform 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.
