Special Report: Resolutions To Make You A Better Trader

The New Year has kicked off with a bang and the Indian equity market has witnessed a rollercoaster ride as key indices have swung between gains and losses during the opening half of January 2015. Every year, a lot of people across the globe make New Year resolutions. Some view this as a point to start fresh and work hard to accomplish their professional and personal goals. There are a range of popular resolutions - some will revolve around giving up bad habits like smoking or drinking, other typical ones include losing weight and making money. However, there is misconception among individuals that New Year’s resolutions have to start when the clock strikes midnight on December 31. You can always begin the following resolutions as and when need be.

There is no parameter saying that a person cannot make a new resolution any time of the year or restart the one they have already broken. So, to all the individuals who set New Year’s resolutions but are already facing a slowdown or have broken some of them, here’s some pretty good news! The year is still young. There are still loads of days to achieve your 2015 goal. The January Barometer theory states that the movement of the market during the month of January sets the market’s direction for the year as benchmark indices will have made major twists and turns on or around this time of the year and therefore like 2014 this year i.e. 2015 is expected to be a reasonably exciting journey.

So when it comes to making money consistently in trading or investing it’s important to have a perfect road map or a proper resolution to follow. Considering this, Dalal Street Investment Journal, along with several market experts, has framed some important trading resolutions which will help you to have an edge in making money consistently in the stock market.

Crystal Clear Plan

“I will plan my trade well and money will follow automatically.”

Every individual makes a plan whether he or she is a business entrepreneur, filmmaker, architect, or whatever. Sometimes things turn up as we have planned and at times things turn upside down and plans fails due to uncertain events. A proper plan will not ensure a desirable result, but it will help us to minimise the impact of uncertain events. In trading it is true there is no Holy Grail and plans do fail, but a trader following a proper trading plan will be far more likely to succeed than the one who doesn’t follow any plan.

As a trader ask yourself the following questions and refine them until you have a crystal clear framework for moving forward as a trader.

• What is my motivation to become a trader?

• What would be the impact on my life if I don’t give my 100 per cent in becoming a trader starting right now?

• What is my current financial situation?

• How much capital do I need to retain to support myself, my family, and current lifestyle?

The answers should be honest and will help you make a framework to embark on a successful journey of making money.

Discipline is Secret to Achievement

“Having a trading discipline is the beginning; keeping discipline is the progress; staying disciplined is the success.”

Discipline or lack of discipline has a great impact on the outcome of trading. Research shows that most traders fail in the game of trading due to lack of discipline. Here is a classic situation for a trader without discipline. You take a position based on an impulsive decision that is not of your trading plan, and the trade starts to tick up in your favour with a small gain but all of a sudden after a few moments your trade drops beneath the entry price. Since you did not make the decision for entry within the parameter of the trading plan, you have no proper exit strategy.  Now the mind starts to wobble; it will be telling you to not take the loss and that the scrip will bounce and that even if you get out you would be happy but then it drops further. This dilemma in the mind and lack of discipline will wipe out your trading capital. Always remember that the market pays you to be disciplined.

Manage Money and Risk

“I am aware that the more I risk in trading the more likely I am to blow out my trading capital.”

Money management or risk management is the key element that differentiates a successful trader and a loser. In general when people start trading, unfortunately they overlook the risk element that they are taking; they only dream of potential rewards. People should understand that risk and reward are two sides of the same coin. Not risking too much money on any given trade is crucial for a trader or investor. If as a trader you lose a small amount on every transaction, won’t you stay in the game a bit lot longer than taking huge losses in one single trade? This is primary logic and yet people end up with a lot of stress and prematurely end the journey of trading. A thumb rule says that an individual should not risk more than 2 to 5 per cent of his or her capital on any given trade.

Siddarth Bhamre

Head of Research (Equity Derivatives and Technicals)

The following five rules may sound general but actually are the main rules of trading. The irony is most traders still don’t follow them.

Know Your Stock

My personal opinion is that just like you need to be with a person to know him better, similarly you should know how a stock reacts in different situations. You can’t practically understand every stock and hence selecting 20-30 large-cap stocks and 15-20 mid-cap stocks and trading only in them makes lot of sense to me. Being focused always pays off in the long run rather than running around everywhere. So trade in selected stocks only.

Don’t Over-Eat

Trade within limits. Over-leveraging is the main cause of traders losing big money in short time. One highly leveraged trade can throw a trader out of the markets forever or till the time he brings in more money to repeat the same mistake again.

Get Out When You Should

This is said by many and followed by few. We all go wrong and its important to accept that we have gone wrong and move out of the trade. Following ‘stop loss’ is one of the key ingredients of which a successful trader is made up of.

Don’t Be Average

Averaging a loss-making trade has been the prime reason for people to have distrust of this market. Averaging is for investors who strongly believe in their investment ideas and not for a trader, no matter how strong the company fundamentals are. Try averaging a profit-making trade - difficult but effective.

Don’t Be a Stone

Be open to new ideas of analysing this market. The same way of research which people have been doing since ages is not going to give fruitful results in today’s globalised and dynamic market scenarios. Read more. Today, to understand equity you need to understand a lot of other markets as well.

Stick with Trading System or Methodology

“I will think less and keep practicing a trading system which suits my trading style.”

Bruce Lee, one of the greatest action heroes, once said, “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” In trading we have a number of tools, techniques, and studies available to our exposure for trading in different asset classes. Traders keeps on trying different tools and techniques to make profit in quick succession and in this process he or she acts like a monkey who jumps from one tree to another in search of a banana - from one method to another method or from one methodology to another methodology – and this is one of the major reasons many traders struggle to make consistent money as they don’t have a clear direction.

A trader should follow Bruce Lee’s philosophy that instead of jumping from one system to another, try and practice one system or methodology over and over again. An individual needs to commit oneself to 12 months of continuous study of one particular system. Yes, every system or methodology will have failures as markets are not static and volatility will test your patience. However, even in the hardship you need to be committed to your trading system and keep going.

Patience is Key to Success

“In 2015 I will wait patiently for picture-perfect trade and once I get that I will let my profit run.”

Dennis Gartman, a successful trader and publisher of ‘The Gartman Letter’ has this to say about the value of patience: “Proper patience is needed throughout the lifecycle of the trade, at entry, while holding, and exit.”  One of the most useful weapons in the trading arsenal to help fight the most common of trading errors i.e. over –trading and over-leveraging is ‘patience’. All successful traders possess a certain degree of patience. As a trader you have to wait for the right opportunities in the same way a sniper waits to take a perfect shot.

A successful trader waits patiently and tracks every action of his or her trading system or methodology. He waits for a picture-perfect trading set-up. He tempers his impatient urge to make impulsive entries into the market. When the moment arrives he is there waiting to score a home run. 

He has achieved his goal. So this is how a wise trader acts. Exercising patience will help to reach the ultimate goal. The ‘now or never’ mentality is the worst nightmare for anyone who wishes to make money in the market consistently over longer period of time.

Maintain a Trading Journal

“I will write down my daily trading records and I will read them to myself each morning and night to keep myself focused and on course.”

A trading journal is just like a diary; it keeps a record of all your trading actions. It is important to maintain a precise record of your trading results because this allows you to monitor the overall performance of your trading decisions and how effective your methodology or system is. Over time a trading journal will help to:

• Know the number of trades taken

• Risk/reward per trade

• Identify the trade set-ups that are most profitable for you

• Find out the overall success ratio

• Record your experiences before and after the trade.
 
A trader should analyse and review his trading journal each day before he looks at the market as it can be a very good way to keep you focused and on course. It will act as a daily reminder to yourself of what you need to do to achieve success or your pre-defined goal. It’s important for a trader to record correct and accurate data; if he fails to do this the purpose of a trading journal would not be fulfilled.

“I am aware that trading doesn’t start until one makes losses and I will learn from my losses.”

Trading is a game of numbers and volatility and as such nothing is 100 per cent certain; no one likes to lose money and the occurrence can be painful both financially and emotionally, especially if the loss is a huge one. The first step in learning to accept trading losses is to adopt the correct trading mindset. All buy and sell set-ups are based on probabilities. This means that a set-up can produce both results i.e. wining trade as well as losing trade. A loss does not constantly occur because the trader made an “awful trade”. When we look with awareness and analyse a loss it will often tell us something of high importance, something we can learn from. For example, the loss may tell us about the current volatility of the market. Likewise, it may also expose something about our approach and mental behaviour while trading.

From your failures you may learn a lot. For example, the trading set-up has a low probability of success in a particular market condition than any other. It may also tell you that you are trading under stress – this may be personal or professional. In short, a trader ought to learn about oneself and where he is falling short to achieve mammoth success in trading. Always make it a habit to note down every losing trade, take a printout of the chart and study what went wrong. This is one of the approaches followed by modern day athletes. For example, in a cricket match you see a batsman getting out on a bouncer ball and when he walks back to the dressing room he practices the shot he should have played and avoided the mistake. He sits down with his coach and analyses the video and his shot selection and practices hard to avoid failure in the future.

Summary

The above road map of resolution is like a ladder to reach your ultimate objective of making money consistently and a trader should approach it with one foot in front of the other. A trader shouldn’t aim to conquer all the resolutions in quick succession. To be successful for a longer term a trader should do the right things each day, week, and month. If you are serious about this goal, write down all the pointers mentioned above and keep them in front of you, making sure that you follow them religiously.  Over time you will feel confident that you are on the right path of conquering your dream of becoming a successful and wise trader.