If there’s one thing aspiring traders spend an enormous amount of time trying to discover, it is the Holy Grail of the stock market. That is, the formula or strategy to create abundant wealth in the stock markets, or to unlock the money-making machine.
I’ve been an active stock market trader for over 17 years, of which I’ve spent the last five years managing a stock broking firm with over 65,000 clients. During these years, I’ve had the opportunity to interact with many successful traders. After these interactions, combined with my own trading experience, I can vouch for one thing — that the ‘Holy Grail’ does not exist; it is a mere myth, misleading many gullible traders.
However, having said this, what does it really take to be successful in the stock market? Is there a way for one to get profitable? Well, here are few things that will certainly enhance your odds at getting better returns in the markets.
Expectation
Setting realistic expectations about the stock market returns is the key. Many people enter the world of commerce with a hope of achieving 100 per cent returns on their capital overnight. This unrealistic expectation leads them to use excess leverage, which in turn, burns through their capital, leaving their trading accounts dry. So don’t look at making huge returns overnight; instead, plan towards growing your capital slowly but steadily.
Remember, if you end up making even 1.25 per cent a month, we are talking about 15 per cent return in a year, which, according to me, is phenomenal (if done consistently every year). The idea is to not chase the percentage returns but to follow your trading rules. The money will then automatically follow.
Back-tested strategy
Develop a trading strategy based on any logic that you think makes sense. However, once you develop the strategy, make sure you back-test the same on historical data. It is very crucial to understand how your strategy behaved under various historical circumstances. Some common parameters to look for while back-testing are percentage profitability per trade, holding period per trade, draw downs, max loss per trade, absolute/CAGR returns, and risk to reward per trade. You can use your brokers trading terminal to back-test (and develop) strategies.
Execution
Once you are happy with your back-tested strategy, you essentially have a ‘trading system’. This system will perform as per your expectations only when you deploy it in live markets. Once live in the markets, it will constantly scout for opportunities, which would satisfy the trading system’s requirement.
So if you think about it, the system has to receive market data, process the data, evaluate the trading system’s condition, match it with the processed data, and then give you a buy or sell signal. All of this has to happen at the blink of an eye. While this may seem daunting, advanced trading terminal features such as ‘Expert Advisors’, make this effortless.
Post trade analytics
More often than not, newbie traders believe that the work is done after they close the trade and book their profit or loss. But this is not the case; one has to dissect and do a ‘post mortem’ of sorts to understand how the trade panned out. Some of the post trade analysis include the trade’s effect on equity curve; disruption of winning/losing streak; effect on P&L ; seasonality (time-based analytics); contract-wise profitability, etc. Of course, your broker will be able to provide you these details, so make sure you analyse these reports and gain insights from your own trading behaviour.
Knowledge
I truly believe the trader’s real edge lies in ‘knowledge’. The really successful traders I know are voracious readers and have a constant urge to learn new things. So, make sure you too develop the habit of learning new things. Learning helps you develop new perspective, therefore, enhancing your trading style.
There are plenty of free online resources that offer high quality trading education for free. The contents are neatly segregated under various topics and are explained in a simple format. Make sure you get hold of such resources and aim to constantly develop yourself.
Risk Management
I can tell after interacting with thousands of traders in the last 17 years, that the real difference that sets a consistent winning trader apart from those who don’t, is the way he/she manages risk. There is a saying in the market — It is tough to profit from scared money.
Scared money is when your positions are big enough to cause your heart to take over the decision making, rather than reason. So, everything said and done, the lesser capital you risk on a single trade, the higher the chance of profiting from it.