“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”~ George Soros
In general, trading is simple where you buy something at some rate and sell at higher rate and the difference will be the profit. But hold on, stock trading (or any financial instruments) are not that easy to trade, I believe it is one of the most difficult adventure on the earth. It is simple but not easy.
Buy cheaper and sell dearer is the mechanism of general trading, which is exactly opposite in stock trading where professional traders chase the momentum. Means they buy the stocks which are moving higher and sell the stocks which are moving down. Yes short sell is the beauty available only to the stock traders. Stock market is the only place where a trader has an opportunity to make money on both side of the market.
Trading is a probability based game and not a prediction based game. In any probability based game, risk-reward ratio is more important than a success rate. Even with 50% of success rate, trader can make money, if he trades with greater than 1:3 risk-reward ratio.
Example: CMP – 100
No. of trades – 10
Success rate – 50% (5 trades will result in loss and 5 trades will result in Profit)
Risk-reward – 1:3 (on loosing trade 1% loss and on winning trade 3% gain)
Loss is the part of the trading game, trader has to accept this fact and have to accordingly design his strategy to counter the risk of ruin.
From above example 2 points are very clear, 1) To survive in the trading game I have to take smaller risk per trade and 2) risk-reward ratio is more important than success rate.
Why do you want to trade? – Objective based trading.
As objectiveless life is meaningless, objectiveless trading leads to dead end! Novice player approaches the stock trading as a money making machine, and that is the fundamental mistake.
Stock trading is as good as any other business and business start with some objectives. So as a trader I have to be crystal clear about the trading objective in terms of returns. How much return I want to generate from trading activity and to generate that much return, how much risk appetite do I have?
Unless and until I define my trading objective, my trading will be clueless!
Primary objective of trading
Capital preservation and risk management is the primary objective of trading instead of profit maximizing. Novice traders takes much longer time to understand and accept this fact, in a meanwhile losses the account.
Below table explains the repercussion of losses.
Once you make 50% loss in trading, you have to earn 100% on the remaining capital to come back to original level, which is not easy task. But we hardly recognized risk associated with trading, forget about the risk management.
As a concluding remarks…………….
- Never risk all your capital on single trade
- Risk-reward is more important than success rate.
- Loss is part of the trading, learn to manage it. Impossible to mitigate it 100%.
- Trading is simple but not easy, we have to learn it with dedication and focus.
- Successful trading = Right Strategy(20%) + Risk Management (40%) + Discipline (40%)
Let’s learn to survive the trading game, profit is likely to come.
“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” – Jesse Livermore