There is no Holy Grail of trading strategies in the market!
Every retail trader is on the lookout for a trading strategy that will make them money on every single trade. It is these pursuits in search of the evasive strategy that snake oil salesmen exploit by selling trading strategies that will help them multiply their money in no time.
Some of the best traders in the market are wrong more often than they are right. For example, the trend following traders who make big money when the market is trending is right less than four times out of 10. Show this record to any new trader and they would not like to learn such strategies.
The sooner a budding trader realises that no strategy will make money all the time the faster he will be on a path to being a successful trader. Trading is about managing uncertainties and coming out of them victorious.
Losses cannot be wished away but they can be controlled. Professional traders know that trading means preserving capital and coming back another day to make money. The only way to preserve capital is to restrict your losses.
Ask any professional trader and he will say that strategy selection contributes around 15 percent to his success. Trading is not about strategy at all.
Unfortunately, most retail traders never get it. The game is about money management, risk management, and mindset.
To be successful in trading, the journey has to be taken one step at a time.
Following are some steps that a novice trader should take to reach the next level.
Have a game plan
A trader should have a well laid out detailed game plan for trading which should look just like a business plan. Details from the capital at stake, to stocks and indices that will be traded, and the time frame in which to trade have to be mentioned in the plan.
Decide upfront how much will be at stake in each trade. Professional traders never put more than one percent of their capital at risk. Compare that to a novice who distributes his capital in a handful of ideas.
The trader should have a well-defined trading strategy with clearly defined entry and exit rules including stop loss. The strategy should be back tested with enough data points covering all market conditions.
The back-testing should also include the cost of trading like taxes and other charges, plus there should be room for slippages. Only when the backtesting results are promising should the trader bet his money on it.
When to scale up and when to scale down is an important part of trading. Just as when going on a journey one does not drive at the same speed in the city and on highways, trading with the same amount will take a lot of time to be successful.
When the going is good, and the risks are low the trader should increase his size to make most of the move.
It is said that the most important book a trader is ever going to read is his trading log. Register your trades and learn from the mistakes rather than continuing with the same mistakes. This one book can help you become a better trader than most advice we hear around us.
Losses are the expense of doing trading business. They will always be there. As long as they are manageable, a trader is in a better position and can hope to become successful someday. Losses are the only thing that is holding him back.
(The author is CEO, TradeSmart. Recommendations, suggestions, views and opinions given by him are his own. These do not represent the views of Economic Times)