A question that I am asked time and again by amateur traders is whether trading can actually be taught, or if it is a God-given gift. According to me, it is a science and not an art, so it “can be taught”. But like any learning, this needs serious patience and perseverance. Many traders gave up mid-way, cursing the markets as manipulative, or unhappy with their own skills. But clearly, all they needed was more hand-holding. It’s like if one wants to rise up the order in any field, professional mentoring is needed. Even the best of the companies have an advisory board with experts in relevant fields.
So, when it comes to one’s own money, why refrain from taking professional mentoring before diving in? The cost of such mentoring is a very small part of the money you are risking. To be a successful trader one needs to develop three things:
Content is developing a system of trading. This consists of various models through which you can analyze the markets and base your trades on. Trading in such a way can be scientific and unbiased because the models are based on certain back-tested rules and systems. That’s the primary thing one needs to develop. Not having a system is like driving a car with a blindfold – you never know where you are going.
A rule-based system creates a method to decide when you would trade, how much you would trade, what can go wrong in your trade, when to exit, how much risk you are carrying in a single trade, and the portfolio as a whole. It creates a system which gets smarter by the day, and based on the market structure, is able to initiate trades. To build such a system, one needs professional mentoring.
Mechanics tell you about the market mechanics. How does the market function? What are the rules and regulations governing it? It helps you understand if there are any lacunas, and what one needs to be careful about. For instance, if you bought an option which ends in-the-money (ITM) and you have not sold it, the securities transition tax (STT) would be cash STT on the exposure amount. This amount can possibly be more than your gains. Not knowing market mechanics can seriously hurt your trades. Also, one needs to understand the different types of market participants and their strategies.
This gives a clearer understanding of how the marker functions. Again, such things have to be taught, or relevant information has to be shared, which needs professional help.
Discipline is following all the steps and methods meticulously. You must attain discipline if you ever hope to achieve any level of trading success. Trading discipline is practised 100 percent of the time, every trade and every day. Probably this is one thing which cannot be mentored. It can be stated, and then the onus is on the individual to follow it diligently. You must condition yourself to behave with discipline over and over again. There are some rules which we can share, and you can have it as your standard operating procedure. If necessary, read through the rules every day before the trading session begins.
It doesn’t take more than three minutes to read through them. Think of the exercise as praying – reminding you how to conduct yourself throughout the trading session:
- The market pays you to be disciplined.
- Be honest – if you are not 100 percent disciplined, don’t claim to be so.
- Lower your trade size, when you are trading poorly.
- Never turn a winner into a loser.
- Your biggest loser can’t exceed your biggest winner.
- Develop a methodology and stick to it. Don’t change it day to day.
- Be yourself – don’t try to be someone else.
- You always want to be able to come back and play the next day.
- Earn the right to trade bigger.
- Get out of your losers.
- The first loss is the best loss.
- Don’t hope and pray.
- Don’t worry about the news – it’s history.
- Don’t speculate.
- Love to lose money.
- If your trade is not going anywhere in a given timeframe, exit.
- Never take a big loss.
- Make a bit each day.
- Hit singles, not necessarily boundaries.
- Consistency builds confidence and control.
- Sweat out your winners.
- Make the same type of trades over and over again.
- Don’t overanalyze. Don’t procrastinate. Don’t hesitate.
- All traders are created equal in the eyes of the market.
- The market is always right.
Happy trading. Cheers!
Manish Sharma is Education Director and Chief Trader at Derivative Trading Academy.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)