5 Things I Wish I Had Known Before I Started Trading
Most people start out their trading journey with almost zero knowledge. After all, how difficult is it really to press the left-click of your mouse and push your trade! The ease with which this digital age allows us to trade makes the process of trading seem very simple. But the financial markets are anything but simple.
How do I know this? Because I’ve been through this stage. I started trading in my late twenties. By then, I already had some experience of working as a financial analyst with a couple of big banks. I had been a straight-A student pretty much all my life. I was what people would consider “smart”. It shouldn’t have been difficult for me to make money trading on my own, right?
WRONG! It proved out to be the hardest thing I had ever tried. My so-called “smartness” was of absolutely no use and the market humbled me time and again. I went through nearly 3 torturous, painful and exhausting years before I started seeing the light at the end of the tunnel. I have been trading for close to 10 years now and I have learned a few things over these years which I wish someone had told me before I dived head first into this profession.
1. Day Trading Is Not Equal to Daily Trading.
Nearly all veteran traders discourage newcomers from starting with intra-day trades. They claim that intra-day trades are riskier and need a certain level of expertise to assess the situation and make quick, on-the-spot decisions. I agree with them for the most part. But they leave out one important thing which most new traders fail to understand and that is — most new traders conflate day trading with daily trading. In my opinion, it is perhaps the single most important reason behind people’s losses.
Most new traders think that trading is so simple that they can simply trade every day and take home some money each day. They get caught up in the allure of day trading and before long start trading on a daily basis and more often than not, market happily devours their money. Every day the new trader logs into his system thinking that today will be different. But since he does not have any trading plan, he ends up losing more and more each day.
An intra-day trade is just like any other trade. It needs proper knowledge of supports and resistances, a good entry point, a safety net in form of stop loss, and an exit point. If any of these things are missing, do not take any trade, let alone an intra-day trade.
2. Process is far more important than outcome.
Everyone can make money in the market. It’s true. But not everyone can make CONSISTENT money in the market. Getting one trade right and making money off it is no big deal. You just happened to be in the right place at the right time. Most new traders experience the “Beginner’s Luck” and make a few winning trades.
Such wins actually fuel their belief that making money in the stock market is quite easy. In fact, nothing can be further from the truth. Your goal is not to make a one-time profit. Your goal is to create a steady stream of income that helps you in achieving Financial Independence. And to make such consistent income, one cannot be blindly jumping into trades without any plan.
So, having a proper plan and then trading that plan is a very crucial process which every trader needs to learn for himself. A one-time successful trade does not make you a successful trader. But if you can repeat that success on a regular basis, then you know you have created a solid process.
3. A Good Trader Is A Creature of Good Habits.
So how does one go about creating a good, solid process? By forming good, solid habits, of course. This is just as true in trading as it is in life. When you are a new trader, it is ridiculously easy to acquire bad habits. Once those habits are formed, it becomes equally difficult to get rid of them.
For instance, I never considered it important to keep a track of my trades and analyze them at the end of the trading session. I always considered it to be a boring task. But after 3 years when I realized that I am not seeing the desired results, I decided to finally assess where I was going wrong. I started keeping a trading journal. I wrote down my trading plan in the journal. I wrote down everything — which stock I would be trading, what the reason was for the trade, what the entry point would be, what the stop loss would be, what the target would be, what quantity I would be trading. After the trade was over, I again went back to my journal to honestly write down if I had followed the plan. More often that not, I saw that I was not following the plan at all. Either I would take the trade too soon or I would exit too late. Either I would trade too much quantity or I would take a completely different impulsive trade. It’s only through this habit of rigorous journal keeping that I came to understand my mistakes and then was able to build up the discipline to correct them.
4. You Will Never Be A Market Expert And That’s OK.
I used to think that in order to make consistent money in the market, I needed to become a market expert. Most new traders think the same as well. But over the years, I have realized that I will never be a market expert. The market is far too complex and there are just far too many factors at play at any given point of time. No one can keep track of all the information and successfully trade. No one can become a market expert. That’s why whenever you ask any experienced trader who has been in this profession for a long period of time, he will tell you that he is a student of the market. Each day market teaches us something new. Only fools and knaves will claim an expertise in such a vast endeavor.
So, it’s ok to not worry about becoming a market expert. Instead, we narrow down our focus on two things which are in our control — a) finding a system that works with a good winning percentage, and b) managing our risk. Let’s briefly touch upon that.
There are multiple ways of making money in the Market. Technical Analysis offers a plethora of tools to choose from. Some may choose a system based on Moving Averages. Others may look for Fibonacci based system. Some others may look for something even more exotic. One should try out all the different options to find out which system suits them the best. One also needs to backtest the system extensively to find out how effective it is. But a point to remember here — The winning percentage that your backtest may throw up does not tell you WHEN those wins may come. That will be completely random. For example, let’s assume that you find a good system with a success rate of 60%. That means for every 100 trades that you do; 60 trades will be winners and 40 will be losers. But the system does not tell you which trades will be winning trades. So just to take an extreme example — one could have straight 40 losing trades and THEN straight 60 winning trades. In that case, would that person have any capital remaining to trade after he has lost 40 trades consecutively? The randomness of wins makes it all the more important that every new trader focuses on managing his risk better.
Instead of trying to become a market expert, one needs to be an expert at managing the risk. So, one needs to decide how much quantity to trade (position sizing) and how much to risk (risk management). Until and unless one understands the importance of position sizing and risk management, they cannot proceed farther in their trading journey.
5. It Doesn’t Matter How Smart You Are, Market Is Going To Humble You.
Market does not care about how smart you are. It doesn’t care about your grades. It does not fawn over your achievements in your corporate job. It does not even care about your last 10 winning trades. Each trade is new and it has to be approached with a completely fresh mindset. There are far too many factors involved in a trade. At any given point of time, any of those factors might go against you and cause you losses in your trade. Failure is very real and it needs to be accepted.
Trading is a very, very intimate and personal profession. It will reveal all the deep-seated flaws in our character. It will take away our confidence occasionally. It will make us doubt our capacity. But every time, it will offer us a chance to build our character as well. Every lesson that we learn in the market is an opportunity to be a better trader and a better person. So, one needs to accept the failures with an open mind and strive to better himself constantly.
(An excerpt from my upcoming book)
