Let us start the discussion on this topic with a small story of Martial arts master and his disciples.
Once there was a Temple where a Martial arts master used to live with his disciples. Everyday they use to practise their moves. One day the master noticed a disciple struggling with his move as he was distracted by looking at other disciples. Master asked the distracted disciple to come for a walk with him.
Master and disciples walked out of the temple and the city into a forest till they reached river bank. Master asked the disciple to watch the flowing water and brief on what he sees. After a couple of minutes, the disciple said that water is continuously flowing. The master asked that are there stones in the river? Disciple answered, Yes. Next, he asked, does water stop flowing when he sees the stone in front of it. Disciple said, No, it finds its way and keeps flowing. To this master said, learn from the flowing water to find your harmony. It does not get distracted from the stones around, it continues to stay in harmonised state and move towards its ultimate destination, Sea. Getting distracted by others around you and losing your harmony is just going to keep you away from your goals of becoming a good Martial art player.
The disciple got back to the temple and started practising moves without getting distracted by the surroundings. Eventually, he emerged to be the best disciple of the said master.
Talking from the trading perspective, the only goal that we can keep is about the process. Profit goals will put extra pressure on you and disappoint you often.
Talking about process goals, zero down on the strategy that you would be trading with. Once the strategy is there, find out the stocks/indexes that you will be trading in. Have a clearly written entry and exit points. Do not get desperate to enter if your entry point has not come. Do not hesitate to exit if your pre-decided point has come.
Once you have a clear process in front of you, live with it. With this, I mean, experiment it with all financial instruments, timeframes and different kinds of market (Trending, sideways). Harmonise with it. Be the master of process designed by yourself. You should be able to identify the days when you would not trade, that is more important than trading on all days as compulsive disorder.
Let us also discuss as to what happens to somebody who has only profit goals.
Mr Asantosh was introduced to stock trading by a friend. He found that trading is the simple job as it involves sitting in AC room in front of a screen and clicking with mouse. He started trading on his own with the capital of Rs. Meanwhile, he also resigned from his job which had a salary of Rs. 50000 per month.
Mr Asantosh had a clear goal of Rs. 50000 to be earned in a month. 10% of his initial capital also matching the salary he used to draw while on the job. Considering 20 trading days in a month, Mr Asantosh fixed a profit goal of Rs. 2500 per day and started his trading journey.
Day 1 of trading: Mr Asantosh shorted Reliance future lot at Rs 1100. Reason being, Reliance had a good run from 918 and now it must come down. At 3:15 Reliance was trading at 1115. Mr Asantosh had not placed stop loss as he was sure about his view and he thought that stop loss is for people who have limited capital. Reliance closed at 1113 on day 1.
Day 2 of trading: Reliance opened Rs 4 down and made low of Rs. 1101 before it made high of 1138 and closed at 1130. In 2 days of trading career, Mr Asantosh was sitting on the unbooked loss of Rs 30000. 30000 also meant his profit goals for 12 days.
Day 3 of trading: Reliance opened Rs 5 up and went on making new 52 weeks high and an all-time high of Rs. 1175. At this point, Mr Asantosh had lost 15% of his capital and 1 and a half time of his monthly profit goal.
Day 4 of trading: Reliance was trading at Rs. 1300 and Mr Asantosh thought this is the limit to which a stock can run and so he averaged his losing trade and now he had 2 lots of reliance with the Average price of shorting being 1250.
Day 5 of trading: Reliance jumped to 1350. It was Futures contract expiry day too and finally, Mr Asantosh squared off his position with the loss of Rs. 200000 which is 40% of his capital in just 5 days of trading career.
To be honest, this must have happened to many traders. We can make note of common mistakes that are committed repeatedly by a large number of traders. Making mistake is pardonable but repeating the same mistake is a crime for self and should be dealt with seriously.
We just displayed the financial pain side of Mr Asantosh, do not ignore the emotional and the relationship turbulence that he might have gone through. Not meeting profit goals will disappoint you. That disappointment will be vented out as anger. In anger you would say or do that otherwise you won’t and then finally affecting your relationships with family members and friends.
Now let us see how Mr Santosh approached trading.
Mr Santosh is an engineer by profession and works for a company. He is a passionate engineer. Numbers have always fascinated him and so he decides to learn about Trading. He read a lot of books, attended workshops and webinars. Zeroed on a trading strategy and kept a goal of mastering it. His trading capital is Rs. 300000. He did not even think of resigning from his job. This is how trading career started.
Day 1 of trading: Mr Santosh shorted 300 Reliance in cash at Rs 1100 and kept Stop loss of 1%. On same day Reliance stopped him out and the day ended with a loss of Rs. 3300.
Day 2 of trading: Mr Santosh went long in Reliance as his yesterday’s trade was based on reversal setup but Reliance was still in trend continuation. Bought 300 Reliance in cash at 1120 and kept stop loss of 1%. Mr Santosh exited at 1134 which is 1.2% of the entry price. Profit Rs. 4032
Day 3 of trading: Mr Santosh again went long with 300 shares in Reliance @1140 based on Vwap strategy and kept 1% stop loss from entry price. Unfortunately, stop loss hits and Mr Santosh is out of the trade. The loss was of Rs. 3420.
Day 4 of trading: Mr Santosh waited for the market to settle and did not jump in at 9:15 itself. He then spotted good opportunity to go long in Reliance at 1150. Mr Santosh placed a Bracket Order where he mentioned 300 as quantity, limit price 1150, stop loss Rs. 11.5 and target Rs. 13.8. Reliance eventually went above Rs. 1170 and Mr Santosh made a handsome profit of Rs. 4140.
Day 5 of trading: Mr Santosh had 2 days of loss and 2 days of profit in a week. He waited for the right opportunity and did not chase the price just to enter the trade. Today he again went long in Reliance and made a profit of just Rs.2 per piece as it was 3:20 PM and auto square off time. He had placed Bracket Order when he entered Reliance. But neither his stop loss was hit nor his target and so he wisely decided not to convert his intraday position to a positional one. In the week Mr Santosh was profitable and more importantly, he kept learning from trades that he took. He managed his risk by keeping strict stop loss, using Bracket Order and not converting his intraday trades to positional ones.
Would you like to be in Mr Asantosh’s place? No. Then Just take care of the below things and trust us there will be a reversal in your P&L statement.
- Trade with strict stop loss. Cover order and Bracket order are traders friend
- Never ever average the losing position
- Start with a small quantity
- Increase quantity only after you have accumulated profit trading the same strategy
– Dimesh Patel