The bad part is, the anomalies to this hypothesis adversely impacts more than 90% of time. And the so called 'better business' turns out to be a losing affair for more than 90% of our trading community.
Let's first discuss about our losing 90% trading community:
A beginner takes his first trade on hunch and wins.. beginners luck..builds confidence..takes second trade and wins..no fear..may be he wins a couple of more and the beginner increases the trade size..over confidence and greed..he starts losing and bursts his account in aggressive attempts to win back profits at first and regain the losses lately.
What went wrong with this beginner?
Greed prevailed rationality
Lack of strategy or Edge in the markets
What about the remaining less than 10% of the trading community?
The most successful ones start with a predefined strategy..primary reliance on trade management..patterns and techniques come next..backtesting the strategy..paper trading..followed by real trading..flexible approach as far as the edge in the market is concerned..no fear..no greed..just exact plan execution.
So what makes these 10% better over the others?
The answer is..some important traits.
Let's briefly discuss some of these important traits.
Pros are always ready to miss a trade not qualifying the pre defined risk to reward ratio. Normally 1:1 RRR is good, 1:2 is better and anything higher than that is the best. Not only RRR but trade management also involves trade sizing which is a subset of RRR . Suppose I want to take max. risk Rs . 1000 on a trade. On a particular set up, my stop comes out to be 2 points on a 200 Rs . stock. In this case my trade size would be 500 shares..just an example.
Edge in the market
OR the strategy which tells where, when and why to buy or sell. It could be a pattern or a combination of patterns. It could be an indicator buy or sell signal. The key here is to have patience for the signal. If there are multiple confirmations confluencing at the signal, it would be a high probability setup. Our Edge in the market and trade management then go hand in hand to make our day.
No fear no greed
According to best practitioners it's good to take some profits off the table at first predefined target. B'coz no matter how high probability the set up is, there are always some chances that it could turn out to be a loser. Remaining position can be trailed for substantial bonus gains. If a trade does not go in favor at first instance, just get out at predefined stop without extending losses. Suppressing greed would definitely improve win to loss ratio.
Greed kills but fear is a psychological breakdown. Fear bores over-protection in the trader. The trader may miss several best setups due to fear of failure. A beautiful trade missed is as painful as a losing trade. It has been observed that simple breathing exercises have significant impact on our cognitive functionality, which helps in overcoming fear of taking calculated risks.
So who can teach the trader the cannons of best trading practices?
No one but the trader himself. Of course a good mentor can make things less difficult but it all comes with practice and experience. However, the fact is that, most of us would not learn unless we lose some or most of our hard earned money.
Although I deliberately missed some concepts due to time and space constraints yet I hope the brief discussion highlighted important points concerned to share trading.
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Trade safe, be healthy.
Greed and fear is taking a toll on them. Discipline is something they need to put into practice.