Stock market is not made for retail traders to win. It is made for them to lose and that is the only way professionals can make money. They will drift retailers out in a shake out and force them to commit on the wrong side of the market. And trust me or not, this is the only way they can make money in the stock market.
There are a few reasons why the professionals are ahead of retail traders in this game.. Firstly Its not possible for retail trader to have an information edge that the professionals have. So let's just ignore this factor and stick to the charts.
The professionals trade on the 'right' side of the market. Means they trade in the direction of trend. When I say long term trend it is the higher time frame charts like weekly or higher. They would leave no stone unturned to keep retail traders out of the market, untill they are already sitting on huge profits. They would either stop retailers out or they will push the price too fast for late retail entries. Later professional exit on retail buy orders.
They might trade pullbacks but from a short term perspective. When most retail traders are convinced that the trend is down and shorting, professionals start accumulation. Then on a very fine morning the price opens gap up and game over.
Second reason is that professionals are experts in money management and risk management. They know how much they are risking on one trade and how much on the whole portfolio. This is where most retail traders fail. Retail trades are overwhelmed with emotions such as greed & fear and keep on losing more and more. They would not book small loss and keep on averaging down losing more and more.
Its important to follow a plan and identify the risk involved in the trade. As per my view no retail trader should take more than 1-3% of their capital as risk on one trade. Similarly, the profit target should be at least double the size of risk and this is for all type of traders.
Ex if your account size is 100000 then risk on one single trade should be between 1000 to 3000 rupees only. Target should be at least 2000 to 6000. You can always trail your stop loss for higher targets, depending on the market conditions.
Lastly the stop loss should never be kept too tight or the volatility will kill your trade. If stop loss is wide, you can reduce the number of stocks to manage risk or just pass-on the trade.
Hope this approach will help a few traders to be good money managers. Regards
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Your position size is a factor of your stop loss which in itself is a factor of your average percentage wins (APW) In order to find your APW you should have historical data of your trades. Let's say for the last 10 trades you have APW 10% This means that for a 50% success rate and 1:2 risk reward, max u can lose on a trade is 5% So in this example if u take trades with 5%risk and 10%profit target u will maintain your win loss ratio and would not blow your account. Of course you will have to adjust average loss for maintaing same success rate.
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It's not that u take a trade anywhere and put an SL at 1per. This is where ur strategy comes into play. Buy or short only when ur strategy asks u to do so. Then follow ur plan for trade execution and money management. If ur strategy gives u a buy flag, first and foremost look for an optimal SL point. When u find it, only then calculate the quantity u should trade. Note that ur risk on any trade has to be fixed.
Say for a capital of 100000 and 1percent risk, ur risk per trade will be 1000. Let's say ur strategy gives u a buy for a stock at 500 and ur SL fits at 495 as per technical analysis. So u r risking 5 points in this trade. Therefore Max shares to trade=risk per trade/risk in points=1000/5=200 shares Ur profit target should be at least 5 points or more.
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For Long term and Swing trading, risk per trade should be fixed. For day trading in particular, there is need to fix risk per trade as well as risk per day. Ex if ur risk per trade is 1000 and risk per day is 3000 then u can afford to take only 3 trades at a time. If u lose all 3 trades then its day over for u.
Most traders follow discipline for a couple of trades/days but then they start deviating. They say to themselves that let's 'break the rule this one time' and gets into this web where they keep on breaking rules and lose.
The idea is to develop the habit of following discipline and not of breaking it under any circumstances.
Many traders make money whole week and then lose it all in Thursday BN option betting. This is really bad. Its true that some beginner traders have made some money by this method but only for short term. That's because they risk beyond there capacity. In the long run money can only be made through risk management.
There is need to realize that there is no shortcut to success in the stock market. You don't just have to follow discipline, you have to follow it consistently.
Assuming that ur trading with a single lot of Bank nifty and Risk should not me more than 3 percent. Suppose lot value of 10000, and maximum risk is 300. When we say that we must not set a tight stop loss, it would result into rising more capital ..ie more than 3 percent . If ur stop loss is hit you would have lost 5 to 10 percent
i didnt understand the logic behind risking 3 percent and setting a far stop loss. kindly eloborate
Bravetotrade
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@Saiprasad03, That only means that the trader does not have enough capital to trade this instrument.
As a solution if the stop loss do not fits into 3percent criteria then simply avoid that trade and wait for such opportunities.
vanathi
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Very useful post. It shows the reality of share market.
True guide for retail... But you know now I understand your advice wheb I really gone through all the pain you said your advice.. basically without your own mistake you can have that vision .. last 14 years I am trying to make a consistent profit...still clueless where I am falling.
Bravetotrade
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@craviraman, Perhaps u r committing same mistakes again and again. You need to take drastic changes in ur strategy ang forget lottery trading. Trade small, win small, build capital and then gradually increase position size.
craviraman
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@Bravetotrade, yes you are right, 2008 made me perma bear until I saw 2020 recovery , I am just trying to digest these events, going forward I will try not be biased as bear or bull..
Bravetotrade
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@craviraman, Bias at the right time is not bad. Anyways u can join me at t.me/jjsingh_2020 for live updates on market. It's a free channel for the traders.
iincognitioo
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Out of curiosity..."Approach your risk First" words out there <--- Is that the fall you indicated ?
When we say that we must not set a tight stop loss, it would result into rising more capital ..ie more than 3 percent . If ur stop loss is hit you would have lost 5 to 10 percent
i didnt understand the logic behind risking 3 percent and setting a far stop loss.
kindly eloborate