Moneycontrol
Jul 15, 2017 09:51 AM IST | Source: Moneycontrol.com

Top 5 guru mantras required for successful stock trading; Are you following them?

Many aspiring traders often spend an enormous amount of time trying to discover the “Holy Grail”, which according to popular belief is expected to create abundant wealth in the stock markets.

Top 5 guru mantras required for successful stock trading; Are you following them?

By Karthik Rangappa

Zerodha

Many aspiring traders often spend an enormous amount of time trying to discover the “Holy Grail”, which according to popular belief is expected to create abundant wealth in the stock markets.

The so called ‘Holy Grail’ invariably takes the form of a formula or a strategy, application of which is believed to unlock the money-making machine.

I’ve been an active stock market trader for over 15 years, out of which the last 5 years I’ve spent managing a stock broking firm with over 65,000 clients.

During these years I’ve had the opportunity to interact with many successful traders. With these interactions and my own trading experience I can vouch for one thing – the ‘Holy Grail’ does not exist; it is a mere myth misleading many gullible traders.

However, having said this, what does it really take to be successful in the stock market? Is there a way for one to get profitable in the markets?

Well, here are few things that will certainly enhance your odds of being profitable in the markets.

Realistic Expectation –

Setting realistic expectations about the stock market returns is the key. Many people enter the stock markets with a hope to achieve a 100 percent return on their capital overnight.

This unrealistic expectation leads them to use excess leverage. Excess leverage burns through their capital leaving their trading accounts dry. So, don’t look at making huge returns overnight, instead plan towards growing your capital slowly but steadily.

Remember even if you end up making 1.25 percent a month we are talking about 15 percent return in a year, which according to me is phenomenal (if done consistently every year).

Back Tested Strategy –

Develop a trading strategy. The trading strategy can be developed based on any logic that you think makes sense. However, once you develop the strategy make sure you back test the same on historical data.

It is very crucial to understand how your strategy behaved under various historical circumstances. Some common parameters to look for back testing are – percentage profitability per trade, holding period per trade, draw downs, max loss per trade, absolute/CAGR returns, the risk to reward per trade etc.

You can use your brokers trading terminal to back test (and develop) strategies.

Execution –

Once you are happy with your back tested strategy, you essentially have a ‘trading system’. The trading system will perform as per your expectations only when you deploy this trading system in live markets.

Once the system is live in the markets, it will constantly scout for opportunities in the market which would satisfy the trading system’s requirement.

So, if you think about it – the system has to receive the market data, process the data, evaluate the trading system’s condition and match it with the processed data, and then give you a buy or sell signal. All of this has to happen in the blink of an eye.

Post Trade Analytics –

More often than not newbie traders believe that the work is done after they close the trade and book their profit or loss. But, this is not the case, one has to dissect and do a ‘post mortem’ of sorts to understand how the trade panned out.

Some of the post trade analysis includes – the trade’s effect on equity curve, disruption of winning/losing streak, the effect on P&L, seasonality (time-based analytics), contract wise profitability etc.

Of course, your broker will be able to provide you these details, so make sure you analyze these reports and learn (and gain insights) from your own trading behavior.

Knowledge –

I truly believe the trader’s real edge lies in ‘knowledge’. The really successful traders that I know are voracious readers and they have a constant urge to learn new things.

So, make sure you too develop the habit of learning new things. Learning helps you develop a new perspective, therefore, enhancing your trading style. There are plenty of free online resources that offer high-quality trading education for free.

The contents are neatly segregated under various topics and are explained in a simple to understand format. Make sure you get hold of such resources and aim to constantly develop yourself.

Disclaimer: The author is VP, Educational Services, Zerodha. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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