Trading: More Behavioral Less Technical

Wanna make money? Lets trade. Believe me, making money is really really easy. Oops…Did I mention under certain terms and conditions?

If you are reading this story, I assume you are either a trader, with good technical skills, but still losing money in trading, or you want to enter the stock markets for making money. Don’t worry… a profit streak is about to come. Just read the article!!!

These views discussed below works perfectly for all kinds of financial instruments including Stocks, Forex, Commodities, and even for the newest addition in the portfolio, the Cryptos.

Before moving ahead, I know you would be wondering – Why to believe me. That’s natural. I will not talk much about myself but just let you know that “I own a Masters degree in Data analytics and have years of trading experience”. Well, including continuous few years in losing money and few years in making money. Now, said that I believe that you believe me (at least a bit).

Trading in financial instruments always involves a risk. Being a professional, I manage all risks effectively (and you should also manage such risks…), so here goes the disclaimer, and then we proceed with our trading mantra.

Disclaimer

“ This article is to introduce readers / traders/ students about the behavioral aspects of trading scenarios and doesn’t guarantees any success. Trading is a very risky business and losses can exceed investments. Trade at your own risk”

For becoming a successful trader, you need to have a thorough knowledge of Technical Analysis and Fundamental Analysis. If you are not familiar with these analyses, please go through web articles or read some good books related to these topics. These skills serve as a good base for becoming a trader. However, you need much more than that to be profitable.

Have you ever wondered why there are so many books on technical analysis or fundamental analysis with the objective of making money? Why the author is not busy making money and instead of writing books on how to make money. And if the author is so confident about that mathematical analysis, why isn’t he/she is making profits and selling the books for free. Some charity is expected if you make millions.

I tell you why…. One is the risk attitude, the other is because none of the analyses can make you profitable unless you have the mental strength to stick to the “rules”. Yes, you read it right. Rules. Like everything, trading also requires rules to be followed. You have to be strong enough to enter or exit a trade only when your system signals.

System: To be a profitable trader, you need to develop a system (Algorithmic or Manual) that generates signals which you can trust. And yes, don’t invest a penny in markets unless you have a fully back-tested system. Backtesting helps you to apply all your ideas and confirm whether the idea, in a long run, will be profitable or not. Generating signals is out of the scope of this article, but you can easily refer to various materials available online or thousands of books available.

A famous quote

Trading in stock markets without knowledge is worse than gambling

Even after so much information available, still, most of the traders lose money. If so many analyses/signals are available, why do people still make losses?? When you will backtest a simple strategy based on Technical Analysis (for example Buy /Sell at crossovers of two simple moving averages), you will find that this strategy gives you descent profits and is still profitable. But traders lose money even in this setup. Why?

Here comes the behavioral aspect of trading. Novice Traders are so desperate to be in a trade that they don’t follow the rules. They just enter or exit a trade when the time is not right. Most of the trades are based on gut feeling and are dominated by previous trades. They don’t maintain discipline. And, believe me, this is one of the major factors for losing money in markets. For this reason, Algotrading evolved and gained much recognition; but there are traders, who, due to their behavioral nature, change the algotrading setup also, and keep on losing money. I have witnessed accounts that went from monster profits to a burst in just a few trades and all due to indiscipline.

Now, not making the article long and coming to the core of the article. Here are the few rules which will help you maintain discipline and make money in the markets.

  • Find a Strategy: Backtest the strategy and find a profitable one( for example, “Buy” when 50 moving average crosses over 200 moving average). You can also make a portfolio of strategies.This can be based on Technical Analysis, Fundamental Analysis, Arbitrage or Statistical Modeling (Machine Learning / Deep Learning for generating signals). The strategy should be properly risk managed.
  • Make Additional Rules: You can write your own rules which supplement the above strategy. (for example, Don’t go long if market is bearish). Enter or exit a trade only when time is right.
  • Mental Strength: Focus on trading only as per rules. Let the price touch the target or even the stop loss. Many traders exit early when the trade is in their favor and do not exit when the trade is against them. You need to be mentally strong. Build control on your emotions and remove the fear and greed out of you. Always keep the bigger picture in mind. This is the most important aspect of trading. Easier said, but really is the toughest part.
  • Believe in your strategy: These strategies are for long term and therefore, don’t tweak the strategies too early. Wait for your strategies to generate profits.
  • Trading Breaks: Give your trading a break ,if running through continuous losses. Remember that markets are not going to close forever. Markets will open tomorrow. A zero profit is much much better than losses.
  • Learn: Always try to keep a track of what trades you made and what were the learnings. Improve on next trade based on past trades. A point to remember is that markets keep on changing patterns and you need to capture the current trend.
  • Maintain Discipline: Last but not the least, no trading out of the “Rule”

These rules can be modified depending on your trading style. However, once made, need to be strictly followed. On a closing note, I would like to mention that this setup is applicable to and works perfectly for a manual / semi-automated, medium / low-frequency trading style where human intervention is required. These rules become a little different when the setup is fully automated. You can contact me to know about the high-frequency, automated trading.

Although the above rules seem so easy, it’s pretty hard for many traders to follow.

If you have the firmness to adhere to the rules, making money is just a few rules away. Wish you All the best. Happy Trading !!!!

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