Trading Rule – “Always put your trading activity in perspective”

WHEN YOU ARE TRADING IN THE MARKET IT IS VERY ESSENTIAL TO KEEP YOUR TRADING ACTIVITY IN PERSPECTIVE. TRADING IS ESSENTIALLY A WAY OF PLAYING THE VAGARIES OF THE MARKET MORE AGGRESSIVELY AND USING THE VOLATILITY OF THE MARKET TO YOUR ADVANTAGE. ESSENTIALLY, TRADING ENABLES YOU TO CAPITALIZE ON THE SHORT TERM TRENDS AND MOMENTUM IN THE MARKET WHICH IS NORMALLY OUTSIDE THE PURVIEW OF INVESTING. AFTER ALL, INVESTMENT IS ABOUT THE LONG TERM AND IT IS BASED ON PEREIVED VALUE AND UNDERPRICING. LET US UNDERSTAND TRADING PERSPECTIVE

THE BIGGER PICTURE WHEN YOU ARE TRADING

When you are trading you are not essentially operating in isolation. There is capital outlay involved and capital has a cost. There is a risk element in trading and the risk has to be managed. You trade with finite capital and therefore your risk of capital loss has to be deftly managed. Above all, trading is one of the methods of making profits in the market. If you realize that your passive investments are earning you better returns then you must not be trading anyway. As a trader you are not overly worried about the direction of the market. You focus should be more on what is the best you can do to churn your capital without compromising the safety of capital beyond a point. The most important reason to put trading in perspective is that trading entails investment of capital and a lot of time. Ensure that it is the best way to allocate and utilize your time resource.

CONSTANTLY BENCHMARK YOURSELF WITH PEERS

One of the best methods of putting your trading activity in perspective is to constantly benchmark with peers in the trading business. Have you been consistently under performing your peers across all kinds of market situations? Obviously, you need to seriously rethink your trading strategy. You are apparently missing out on something. Have your trades given extremely good returns while others are getting market returns. That may appear to be a good problem to have but you may be missing out on something. You are probably too aggressive on stocks and your returns have come at the cost of a very high level of risk. Alternatively, you have been plain lucky and that is something that may not last for too long. Remember, being a contrarian may help you as in investor. For a trader, a contrarian strategy may not always work. The trick is to be as close to the market momentum as possible. Also benchmark your trading performance (in post tax terms) against the performance of other lower-risk asset classes in the market.

“The funny thing about stock markets is that each time a person buys another person sells and both of them believe they are astute” – William Feather

6 CASE STUDIES OF PUTTING TRADING ACTIVITY IN PERSPECTIVE

  1. Trading is considered to be a zero-sum game in the long run. It basically implies that it is hard to make money in the long run. While this may or may not be true, the reality is that it is extremely difficult to be consistently right in trading. Hence the focus must be to terminate loss making positions at the earliest level possible. Invest more time and money on winners than on losers.
  2. Short term performance means nothing in trading. We say that for 2 reasons. Firstly, with the same strategy and same macroeconomic conditions you can be amazingly right today and awfully wrong tomorrow. So, don’t ever try to annualize and project your trading returns. Secondly, it needs a lot of trades to make money but one bad trade is enough to wipe out all your profits. Keep that point in perspective.
  3. You are as good or as bad as your last trade. In a way, you must be extremely self-critical. It does not matter if you earned 30% in the previous month. If your most recent trade has bombed then you need to get virtually paranoid about it. Always judge yourself by your last trade. All previous trades are history!
  4. You are operating in a relative environment and you must never forget that. Firstly, you are one among the thousands of traders in the market. So constantly try to understand what are others are doing right which you are not. Secondly, trading is one of the methods of capital allocation. You must constantly evaluate if that is the best method or you are better off being a passive investor.
  5. In trading there are no “Ifs and Buts”. Once you have taken a decision, don’t worry about whether you should have taken that trading decision in the first place. Your immediate priority must be to consolidate your gains if the decision is working in your favour and look for an exit route if the decision is not working. When it comes to trading decisions an ounce of action is worth a pound of analysis.
  6. When it comes to trading there are 4 important decisions to be taken. You need to focus on when to enter, when to exit, when to hold on and when to stay out. Unfortunately, the last two decisions are extremely important but most traders do not give adequate weightage to them. Surprisingly, you do not make the most money in trading by timing your entry and exit. On the contrary, you actually make money in trading when you are able to decide when to hold on and when to stay out.

START PUTTING THE TRADING ACTIVITY IN PERSPECTIVE

The success of your trading strategy will largely depend on your ability to put the same in perspective. You do not operate in a vacuum and hence it becomes critical to put your trading activity in the right perspective!

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