Stick to your trade plan and adhering to the rules you defined ensures your emotions are kept in check. Similarly, a losing trade should not surprise you.
Trading has very low entry barriers and can be a consistent and independent business if executed thoughtfully. Like everything, there are some rules we ought to follow to ensure we bridge the gap between a ‘Trader’ and a ‘Professional Trader’.
While we are cognizant of the three main price points, entry, exit and stop loss, your position size is equally important. Inter-operability of the following should help you in successfully managing your portfolio.
The importance of a business plan cannot be overestimated. We all thoroughly check and re-check the efficacy of our business plan prior to embarking on our professional careers. Why not go through the same rigour when trading?
Our capital is at stake in both places. The trade plan is a comprehensive document that aims to define and clearly plan a strategy around your capital allocation, risk management and most importantly your short and long-term goals.
It is a pseudo standard operating procedure and the lack of one can get you into serious trouble.
Trading is 98% Psychology – successfully manage your win & loss size
The power of a clear mind when planning your trades is of utmost importance. We are all dogged by some negative information or scenario in our lives, subconsciously increasing the pressure and dependence we place on our trading careers. This is a recipe for disaster.
Building your confidence, drowning the unnecessary noise and sticking to your trade plan will hold you in good stead over the longer term. Given the ease with which information is available, as a trader, it is normal for you to go through a range of emotions when taking your trades.
The fear of missing out, trading to recover your losses, and trading in a shell can seriously hamper your trading portfolio. Always stick to your trade plan and make it a point to drown out the noise.
Position Sizing is defined as the quantity a trader buys/sells. The underlying factors driving your position size include risk, volatility and capital you are comfortable with.
A combination of these factors, as defined in your trade plan ensures your portfolio sizing is optimally executed. Subsequently, once you have entered your trade, periodically reviewing your size during the trade and maintaining a balance is equally imperative.
Some strategies to employ when your trade is heading in the right direction are scaling up and pyramiding. Simply put, the practice involves adding quantity to stocks when in the right direction or peeling of some shares and/or raising the stop loss and thereby reducing your risk.
Sizing strategies help in increasing returns, decreasing risk and volatility and ultimately improve return to risk.
Stop Loss and the importance of adhering to one
The word “Stop Loss” has been overused in the recent past. And rightly so! A stop is loss is a pre-determined amount of risk that a trader is willing to accept with each trade, and limits the loss size a trader is exposed to during a trade.
Overlooking a stop loss, even if it leads to a winning trade, is a terrible practice. Exiting with a stop loss, and in this way having a losing trade, is still good trading if it falls within the trading plan's rules. Using a protective stop loss helps ensure that our losses and our risk is limited.
Human Emotions of Fear & Greed – putting it all together
Your win size builds your confidence, but there is a big difference between being confident and over-confident. Stick to your trade plan and adhering to the rules you defined ensures your emotions are kept in check.
Similarly, a losing trade should not surprise you. It is the cumulative profits that should drive your agenda and ultimately your trade plan. Continuous evaluation of the efficacy of your trade plan goes a long way managing your win and loss size.
The author is CEO at FinLearn AcademyDisclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.