In trading and investing, the only way to make money is by waiting: Dinesh Nagpal

Nagpal traded off and on till 2005.

“In May 2006, there was a sharp correction and traders like us got a jolt,” said Nagpal. His family had decided to shut down their import business because the competition had become too intense and the margins had thinned. Therefore when the stock markets turned tumultuous that year—with rate-hike worries, rising oil prices, taxation policies and the market regulator’s crackdown on an IPO scam--it was a harsh reality check. That’s when Nagpal decided to make an earnest effort to learn technical analysis.

Trading had become his bread and butter.

He started by training himself in Elliot Wave theory and then Derivative Data Open-Interest Interpretation. But nearly ten years later, he found the technical analysis that he has been most comfortable with –Harmonic Trading Patterns and Ichimoku Kinko Hyo system.

Harmonic Trading helps spot reversal of trends, and Ichimoku helps identify a trend—up, down or sideways—how long the trend will run. “In Ichimoku, the USP was that it helped me measure the speed of the move and the direction of the trend. It is a win-win for an option buyer and it doubled my confidence in trading,” said Nagpal.

Once he settled on an analysis style, Nagpal found that there was a bigger challenge, in managing emotions.

“In trading, you are tracking profit and loss minute to minute. There are traders who don’t sleep at night and are tracking Singapore Exchange till 11.30 pm and Dow (Jones Industrial Average Index) till 2 am and then get up in the morning at 7 am and track Singapore Nifty again. You are constantly tracking this (it is hard to pull away),” he said.

“When you book profits, the sensible thing is to step aside, take a day with your family or go for a vacation. But dopamine, which is called the molecule of more, pushes the person to latch on to another trade. The person is now feeling invincible and that’s when he/she becomes careless and does not do proper risk management,” he added.

According to him, that’s why most traders’ profit and loss screen resembles a wave –profit in three trades, then loss in the next three or a loss that wipes out a significant part of the profit made.

Take a break

His first rule is that, if you have booked better than expected profits, then take a break. “Enjoy the break because you are not in a position to take good decisions because you are basking in an aura of invincibility,” said Nagpal.

When a trader is in a loss, there is someone who will caution you. This does not happen when the trader is in a profit, which is all the more reason for the trader to be on guard, he said.

Another equally important rule to him is to control the risk to capital. “I never risk more than 2 percent of my capital on a trade,” he said.

Trust your analysis

Nagpal said that it is important for a trader to trust his/her analysis and for them to work on studying it more in-depth to build their confidence in it. “It is understandable that you feel dejected if your analysis isn’t showing what the rest of the world is saying. You think why can’t I see it, especially when a successful trader who has a large presence on social media is behind that trade. But don’t fall for that and take a hasty decision. Go back to your study (analysis),” he said.

The trader should have his/her stop loss in place, honour it and not tamper with it, and take a break when the stop loss is hit.

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Nagpal said that he never takes a trade that he isn’t convinced about, whatever the rest of the world is saying. To cut out the noise, he logs off. “I shut off my social media particularly when I am doing my Harmonics analysis, because this analysis will give an early sell (or buy) signal,” he said.

Risk management

Before he enters a trade, he measures his risk. If the trade hits his stop loss, then he gets out. “There will be no second thought on it,” he said. As mentioned earlier, Nagpal caps his risk at 2 percent of his capital.

“If I have had a bumper day or a week, then I take a couple of days off. For example, if a trader regularly makes 5 percent return a month and this month he/she has made a 7 percent return, then they should take a break and reward themselves,” he added.

If a trade set-up is showing a high risk, Nagpal suggests that the trader buys the stock and not the derivatives. “If the stock runs the way you thought it would but you hadn’t entered the trade because you thought the risk was very high, then you might feel regret. So control the impulse of greed (which could drive a trader to bet through derivatives since it allows a bigger position on a smaller capital, through leverage) and do the trade through cash,” he said.

In derivative trading, according to Nagpal, your total loss should never exceed 15 percent of your capital.

Setting up a trade

Nagpal does not do much intraday trading and therefore builds his trade over a few days.

To set up his trade, Nagpal first has a list of 30 stocks and then filters it down to 20 stocks. Then, he does the research and set up alerts to track the trade through over three to four days. When the signals show that the trade is going his way, then he enters the trade and waits for it to play out. Meanwhile, he cuts out all the noise that could make him doubt his analysis.

Nagpal appreciates the power of waiting. “In trading and investing, the only way to make money is waiting. Wait for your trade set-up to come in your favour, then enter the trade and then exit only when the target or stop loss is hit. Keep yourself occupied till then and don’t keep checking the screen,” he said.

“For example, if I am long on Nifty at 18,500 with a stop loss at 18,350. If my first target is 18,750 and the next is 19,250, then I set the alert for when these targets are hit. I do not touch the trade after that, that is, I do not try to book some profits in between because of some news coming in,” said Nagpal.

“Waiting is the most important game in trading,” he said.