Three States

No, I am not giving you a lecture on science, neither are we going to discuss the solid, liquid and gas state of a matter. This article will be focussed on the different states through which a traders trading journey pass. It is important to know so that the learning curve shortens and once you are aware of it, energy shall start flowing in that direction.

First State:

This state begins immediately as you enter into the trading world. Your friend, cousin, colleague, brother in law, neighbor or some random person has worked as an influencer for you and has made you open a Demat & Trading account. This generally takes place during the bull period, when people are making money by buying and selling stocks. I am mentioning about buying and selling here because that’s the only thing most of us know. Recently met a friend who was shocked to hear about short selling. Anyways, let us get back to the topic. In this state, we get the script name from our influencer and targets are always multi-fold. The conversation goes like this:

Influencer: Bhai, Buy XYZ Ltd shares of whatever money you have in FD. I am telling you, it won’t see the current price again.

Me: What does the company do?

Influencer: You just buy it, man

Me: arey Bhai, just for General knowledge, what does the company do?

Influencer: I haven’t checked as I got the info from a reliable source. Buy it as many as you can at CMP of Rs. 12 and don’t sell it before it becomes 120 per piece.

Me: I trust you and shall enter immediately.

Influencer: That’s like a good Buoy

Me: Bought 10000 shares at Rs. 12

Influencer: Now relax and don’t look at price daily. I will inform you when to exit.

 

The first state is when your trading is dependent on others and focussed on Targets only. Risk management, portfolio distribution and all other things are not even near.

 

Few months after the above conversation

Price of XYZ is 20 Paisa and influencer never called asking to exit. Now the person does some study and realises that having stop losses would have helped. He reads books and finds out a lot of literature on Stop losses and saving capital. By now he has also studied Technical analysis and has started applying it for trading decisions.

 

Second State:

This is the state where trader gives importance to Risk management. Unfortunately, his knowledge of risk management is limited. Having a small Stop loss is what risk management is according to him. Having a Stop loss is important for trader now after lessons from First state trades. He thinks that his capital invested in XYZ was 1,20,000 and if he would have applied 10% Stop loss then only 12000 would have been lost and he would have saved himself from big loss financially and emotionally.

Now he decided to trade only with strict stop loss. But there is one flaw in his approach. He gives so much focus on Stop loss that he doesn’t even bother to see the direction and strength of the trade. He is only focussed on taking trades with small stop losses. He thinks that’s the way to go about saving capital. Mentally he calculates that I have capital of 100000 so I have 100 chances if my stop loss is Rs 1000 per trade.

Traders in the second state will find out strategies which will have clear stop losses mentioned, for eg; low of 15 min candle, 1% of stock price etc. They will not consider Risk reward ratio. After their first state experience, they are convinced that if stop losses are protected then profit will surely come. But, just after 3-4 trades where profit was seen and not booked as there was no clear exit strategy on profit booking, stop loss got hit and 5th trade was exited with a small profit as last 4 trades went from profit to loss.

To be honest, the second state is more frustrating when compared to the First state. In the second state, traders might go in self-pity mode. They might be found saying that, their luck is rotten, otherwise stock moved in favorable direction and gave huge profit only after taking their Stop loss.

 

Third State:

The Third and the final state is where the trader is independent, understands risk management completely, flexible with strategy, solid with stock selection and clutter free. Most importantly he has a clearly defined exit strategy.

The stock market is never the same, so how is it possible to earn from it with the same strategy. Adjustments have to be made and strategies need to be modified considering the mood of the market. For eg; When volatility is high, 1% stop loss is not a good idea, similarly exiting with small profit is also bad. When the market cools off and volatility is not much then 1% SL is a good idea but staying in trade for bigger profit is not.

Trading index during Volatile market is excellent as the day range is big enough to give sufficient profit. When volatility cools off, trading index for intraday may become highly challenging and unrewarding.

Traders in the Third state are the ones who can identify the type of trading day it is going to be. Basically, there are 3 type of trading days, namely, Trending day, Consolidation day & Reversal day. If someone is able to identify the type of day then accordingly have entry and exit strategies and not regret later.

Trader on a trending day enters a trade and exits with small profits, results in regret

Trader on consolidation day enters a trade with aims of big profits, will be disappointed

Trader on Reversal day enters a trade and does not exit with a small profit or does not reverse his position, results in regret

Understand the market dynamics and accordingly adjust your entries and exits. Have an Exit strategy in place. Do not end the day in regret. Handling losses are easier than handling regrets.

 

– Dimesh Patel

This Post Has 3 Comments

  1. Sir,
    Your this article is truly awesome and I can relate this thing with my own life as I find myself in stage two of trading my winning rate is around 30-35%, profits are small as I exit early, losses are big n thus overall negative position at the end of month.
    You people are doing great job to make us confident, more mature, and of course independent trader.
    I have two three topics which I like that you people write on that too. Like how to select a stock for trading. Yes you people provide daily ohlc sheet and we have to focus on nr 21, nr 7, 3iib, 3ib stocks but some times even if we look for one parameter only to say like only nr7 then also we find that their are 8-10 stocks which are their.

    Secondly how to do basic technical analysis, I follow you people a lot on Twitter also and I find lot of charts by renowned traders saying this and that on basis of chart. So any write up on this will be helpful.

    Thanks a lot for all the things you people are doing.

  2. good read.

  3. This is every novice traders story.

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