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How a rules-based system can help you become a successful trader

There are many ways of trading at the market and all of them are good. Conversely, there is no one strategy that can be considered the best over a long period of time. The key to success is consistency.

November 28, 2018 / 04:43 PM IST

Prashant Shah

Moneycontrol Contributor

Most traders start their journey in the market based on recommendations from a friend or a neighbour. After some initial success, he feels that he has found a new revenue source. He increases capital and starts looking for other similar sources in media, analysts or other services that promote "stock ideas".

But when a position goes against him he is left high and dry. Some of these traders then feel that they can still make money with some education and thus take up some reading or attend training sessions. At the same time, equipped with some knowledge the trader sets himself a target for the returns that can be generated every month, quarter and in a year.

But to his surprise, he finds that the techniques that looked great during the training session started failing when he practically traded it.  Unable to meet his monthly goals the trader has added a layer of stress.

The trader then jumps strategies in the search for the proverbial holy-grail.

Also read: Simple DIY techniques to improve performance of your portfolio – biases and ATL

The trader now hides behind conspiracy theories convincing himself that someone is tracking his trades and manipulate prices just to shake him out of the trades. From a trader, he then decides to invest in stocks for long term. But the same scenario is repeated, except in slow motion.

The market is a graveyard of such traders. People pursue trading as a simple avenue to make money without realising that it is one of the toughest profession. Stock market trading is a good business provided you have a systematic approach. Apart from the method, psychology and money management are important aspects of trading. Like any good business it needs a process, or some underlying wisdom to support it.


The reason trading is difficult is because we let emotions drive it rather than process. When we are trading in the markets, buy or sell is just a thought away. Our emotions keep changing with every tick, and most of the decisions are emotion driven. We can overtrade, we can leverage more and commit grave mistakes. Imagine things in life if it were as per our desire and comfort zone. I would have never gone to school in the first place. But practically, that is not possible and it is better to realise this sooner than later!

The process includes defining rules, writing a plan, maintaining records, checklist and tweaking the rules if necessary.

Rules: First thing you need to do is define the rules of your trading. There are many methods of trading the markets, learn them to identify the ones that suit you the most. Remember, you can’t trade based on all theories or opinions. Define a basic philosophy of your trading or your core strategy, continue to refine it based on your learnings, but the basic outline should be defined and should not be breached.

Also read: Three mistakes that can blow up your trading account and how to prevent them

If you observe merit in some rule or information, test it and then incorporate it in your trading process. It can be any branch of analysis and your setups may not be completely objective in nature but your decision-making process should be well defined. No method or rule is magical, but having rules is very important to keep us disciplined.

the biggest advantage to having rules is that you will know when to exit the trade if things go wrong. This simple rule will make you a winner in the long run. Rules should not be restricted only to the entry or exit. Write a trading plan that includes all aspects of trading.

Trading plan:  A trading plan is more detailed where a trader specifies the timeframe he will trade, allocation per trade, maximum permissible risk at any point in time, the number of open positions at a time etc.  Every question related to decision making and execution should be written in the trading plan. Every statement in the trading plan should be specific and objectively defined.

Once you write a trading plan, your job is then to ensure execution.  Don’t trade any observation instantly; it should be written separately for further analysis. Your trading plan will decide the checklist you need to prepare to ensure better execution.

Records: Trade as per your plan, and maintain records of every trade. Every trading plan goes through a process and even experienced traders are often guilty of not following the plan.

Record your thoughts while taking the trade and whether you could stick to your plan. Your trading records will help you analyse the performance of your system and your ability to stick to the rules. Both will improve over a period of time. Though a trading plan might require tweaking the rules, beware of over-tweaking.

A well-defined process will ensure better risk management. You will always be aware of the total exposure and risk open at a point in time. This will safeguard your capital when the tide turns and markets are not conducive for your strategy.

But, sticking to the rules is easier said than done, because more than sticking to them, it is ignoring the rest of the things that turns out to be more difficult.

Focus and consistency

There are many ways of trading at the markets and all of them are good.  Conversely, there is no one strategy that can be considered the best over a long period of time. The key to success is consistency. You will find this common with all successful traders; they are consistent with their core methods. Define your core strategy and practice it consistently. Overcoming all noise and sticking to the one is a key to achieve consistent success in markets.

There are people with great judgement and screen reading of markets – but it takes them years of experience to reach there. It takes time to understand the market, to build perception and to be able to find conviction. Even simple rules take a lot of time to gain a conviction. It needs repeated observation and consistent practice. This is why it is not possible to replicate the success of any trader even if you know the rules of his system.

There are many distractions that will influence you to lose focus. It is very important that you have a set of rules and a trading plan. In the long run, a disciplined trader would outperform well informed or intelligent traders. By setting up a process, we end up managing the risk and the markets will take care of rewards automatically.

The author is the founder of Definedge Solutions. He can be reached at @prashantshah267
Moneycontrol Contributor
first published: Nov 22, 2018 02:02 pm