Thread by @swing_ka_sultan

Some truths about trading

How I see trading after 6 yrs of experience

Warning: A very long thread! Keep patience!

This is the message I wrote couple of days ago in my Momentum Masters Group where we were discussing distractions emerging due to skipping on varied strategies. With the noise all around us, specially on SM platforms where people keep on sharing big MTM screenshots to lure (1/n)

gullible people for their commercial interest, it is too easy to get distracted. Apart from fat profit screenshots, there are also such people who share illogical strategies, without bothering about explaining why they'll work. On the other hand, people who aspire to make (2/n)

their future little better by trading in stock market are also responsible for this. I observed that there is a very huge percentage of people who don't have a system to trade, they don't know why they are making trading decisions, or they are just following some non sense (3/n)

process of buying & selling something just because some RSI or Stochastic keeps on doing something on their chart- which is as per the so called 'strategy' passed to them by some celebrity trader as 'helping gesture'. No one bothers to ask/question the logic behind the (4/n)

strategy from that 'kind hearted' celebrity trader. Most such people even don't know the difference between a strategy & a full fledged trading system, they believe that the strategy is enough to start trading with. Such people are stuck in process, they don't know why do (5/n)

they are doing what they are doing, they don't know what's the logic behind the trading decisions they are making. Their is no difference between them & a brainless machine which does the process it is made for doing. While machine can execute the work successfully, because (6/n)

there is a human mind which knows how & where it can be best used, but sorry to say this can't work in the Stock Market, a place which is highly subjective, a place which lure people from its potential to make & break fortunes, a place where you can make insane amount of (7/n)

money which is impossible in any other business in the world, a place where there is no fixed way of making money, a place where people have to deal with extremes of their emotions- fear & gread, and a place where some of the best human brains of the world might be (8/n)

operating on the opposite end of the trading decisions you are making without knowing the reason of making it.

I had also seen people, who keeps on altering their system without knowing the reason to do so, they are totally unaware of what they want to achieve by doing (9/n)

this! They don't know why they need this & whether they really need this alteration or not. But one thing among all the above mentioned situation is very clear- they are unsatisfied with what they are doing, they believe there are ways to make more money than what they are (10/n)

making right now, that too without taking losses, and they believe that pros know this method- if they don't then how some 'Mr. M' posted that bloody 1 Cr. MTM screenshot last Thursday. And they are totally unaware of what they need to do to get that all money they're just (11/n)

day dreaming about.

I never felt any such distractions in my career as a stock trader. During my career I observed that there are few TRUTHS in the stock market which you need to need to know & accept, and once you accept them you'll never feel any such distraction. These (12/n)

are the truths which remain the same for the novice & the professionals. Am sharing those truths with you, rest is upon you to convince yourself with them and work accordingly.

1) Trading the trend is the most common way to trade in the stock market. There can be numerous (13/n)

ways to trade with the trend. Every trend following technique has similar types of pros & cons.

2) To ensure that market a trend is going on in the market, we need confirmation. Confirmations always comes from the data, you need data to prove that a trend is going on. (14/n)

This data is accumulated only after market moves in that direction for adequate time.

3) When you give this time for the confirmation, you always have to let go the move required for confirmation. No trend trading technique can give you entry without this confirmation (15/n)

though every technique has their own way for this confirmation. Hence every trend trading system is LAGGING though due to their different approaches of confirmation, the lag can differ. But at the same time pre matured confirmation comes with higher risk of failure. (16/n)

4) We believe that market will continue moving in that direction for some more time after the confirmation of the trend. This is the basic premise on which all trend following systems work though there are no guarantees of this. Market can acquire a new trend in any moment (17/n)

5) Apart from Trend, you can only trade extremes of greed & fear. The basic premise behind this is extremes can't last long, and market has to balance the extremes. Mean reversion techniques helps us in trading the extremes. All mean reversion techniques too have same (18/n)

pros & cons.

6) It is POSSIBLE to catch the exact reversal points- the Tops & the Bottoms with Mean Reversion techniques.

7) Opposite to the trend trading techniques, mean reversion techniques don't need confirmation, instead, they anticipate the move, hence offer (19/n)

higher rewards comparative to trend trading techniques. But at the same time mean reversion involves higher risk of failure.

8) Even after confirmation of a trend, you can't just jump in. You need confirmation that the existing trend is not at its extreme and prices can (20/n)

continue moving further in the same direction. A trading setup helps you know the probablities of trend continuation. Again there can numerous types of setups.

9) Apart from probablities of trend continuation, setup helps you find such an entry point from where you have (21/n)

the quickest probablity of trend resumption, and with least risk.

10) Regardless of whatever amount of confirmations you have before planning a trade you can't achieve 80-90% success rate, it is NOT POSSIBLE. It will always average around 50-60%. Uncertainty is the (22/n)

underlying nature of the Stock Market, the feel of certainity always proves to be the silence before the storm!

11) Now when you only have 50% success rate, what generates the return is your Risk vs Reward ratio. The better RR your trading setup offers you, the better (23/n)

edge you'll have.

12) Risk & Reward are always in proportion. Reluctance towards taking risk costs you in terms of rewards- not only monetarily, but in terms of expectations & opportunities as well. Anything where RR are disproportionate, consider it either as fake or a (24/n)

fluke.

13) Apart from the ratio, Risk & Reward is involved in every decision you make- in life & in trading. Thinking in terms of Risk & Reward will help you make quick decision in your trading career with lot of clarity, and obviously without regret when it doesn't (25/n)

work as per expected. Let me share you a few examples of thinking in terms of Risk & Rewards-

a) Price moves between two states- Decisiveness & Indecisiveness. Decisiveness offers less risk but at the cost of rewards. Indecisiveness offers higher rewards but it offsets (26/n)

with higher risk. The ultimate result of making trading decisions with decisiveness & with indecisiveness will always offer you almost similar average returns.

b) A trading decision after confirmation is trading with decisiveness. Trend trading techniques involves (27/n)

confirmation. A trading decision in anticipation of a move is trading with indecisiveness. Mean Reversion trades- trading the extremes are trade taken in anticipation of the reversal.

c) Trading breakouts are trading with decisiveness, after confirmation. Trading a (28/n)

pullback is trading with indecisiveness, in anticipation of move. Breakouts cost in terms of buying at higher price.

d) An early entry has higher reward potential, it comes with the risk of not getting a proper trend resumption. It can also cost you in terms of time, (29/n)

hence opportunity loss is also possible. Buying a pullback is a way of early entry, it offers high reward potential with above mentioned risks.

e) A confirmed entry, after breakout of a proper resistance will cost in terms of rewards, as you have to buy higher. But the (30/n)

risk of not getting a proper trend resumption will be lesser.

f) A confirmed exit, on breakdown below swing low or hitting a trailing stop can cause you lose some profits. It is decisive. This is called 'selling into weakness'!

g) An exit in anticipation of a reversal, (31/n)

at extremes, is 'selling into strength'. It offers you the chance to sell at highs, hence is highly rewarding, but risk of losing further upmove is present.

h) An exit taken looking at weakness in price action, prior of hitting stoploss is a trading decision taken in (32/n)

anticipation of price hitting you stop. Can offer better exit price but your risk is the loss of a trade opportunity in case trade works later as per planned before hitting stop.

i) An exit taken after hitting of stoploss involves decisiveness, can give a confirmed exit (33/n)

but costs in term of bigger loss.

j) Holding a position in profit, specially after initial target met, is risking the existing gains for higher reward. You take risk of losing existing profit for every rupee of additional gain. Booking a part of profit reduces your risk, (34/n)

but cost in terms of losing potential reward.

k) The stoploss is the cost of getting an opportunity to have a potential winner trade. The deeper the stoploss you take, the higher risk you take for that opportunity but higher the room you give to your trade to work out. (35/n)

l) Coming on the most important part, the allocation part. The higher you allocate in a stock, the greater chance you have to make a big killing from a winning trade. And this opportunity to make big comes at the cost of the risk of higher loss. The more diversified your (36/n)

portfolio will be, the chance of a meaningful gain reduces accordingy but the risk also adjusts accordingly.

In trading we have to make decisions consistently, even when you don't realize making one. Your success in trading highly depends on one thing solely- how good (37/n)

you are in analyzing & balancing the risk vs reward equation in your business decisions! This sole thing will have a very substantial impact on the outcome of your decisions. Every situation is subjective, it has different RR equation, and no one can tell whether taking (38/n)

decision on confirmation will be right or a decision on anticipating a move will be better. Unless you have the final outcome of your decision, even you don't know which one was the best, but you are the best person to analyze the situation & decide accordingly. And as we (39/n)

take countless decisions in our career and we operate in situation of uncertainty, a favourable or adverse outcome of a trading decision is not going to have any significant impact your trading journey, so there is no need to overemphasize on the outcome of a decision.
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Now this is all how I see trading today after 6 years of experience! I hope this will help you too to understand this business! Have a great trading journey ahead!

End of thread. Thanks for reading patiently! (41/41)