Thread by @theBuoyantMan

Successful trading is mostly execution.

But let's not be kidding.

Strategy is very important.

If you don't have a profitable strategy, even if you have top notch execution discipline, you won't accomplish P&L worth a damn.

You'll only end up losing money.

So, if someone tells you "Strategy is nothing. Focusing on strategy is futile. Obsessing about strategy, backtesting, all that is useless."

ask them to share their strategy's exact rules.

If they hesitate, well you have the answer.

Even the most experienced and successful traders (on and outside twitter also) who go on and on about trading execution and discipline, will NEVER share their exact strategy with you.

You should execute with discipline, yes.

Execution discipline is of paramount importance, yes.

You shouldn't meddle with the system, yes.

But there's just one big elephant in the room - "SYSTEM".

No amount of discipline, waking up at 5am in the morning, doing pooja 3 times per day, bathing 5 times a day, working out 10 times a week, eating clean food,

and

sitting at your terminal at 8.30am, logged in and prepared, and looking at all the tickers, ready to execute

none of that will get you trading success.

Coz there's something missing.

Yes, you don't have a strategy or a system.

The guys who say strategy isn't important, it's execution you should be focusing on -

it's similar to saying to a business owner,

"Your business model, go to market strategy, your product pricing strategy, distribution - none of that is important. How you execute is!"

Do you realise how absolutely senseless and illogical that is?

That's what most people on twitter keep propagating and believing in.

Off twitter at least, people don't seem to yap about such b.s notions.

Trading or even Investing is a form of business.

You invest capital. You want to get back more than what you invested. This part is simple.

Any business must have a way where their cash inflow is more than their cash outflow.

That is their strategy.

Without it, no amount of business you try to do will lead you to profit.

Treat investing and trading as a business and stop listening to those who say focusing on strategy is useless.

Your first and foremost goal in business is industry analysis:

- proper ground research
- understanding your competition
- learning about how the industry works
- what kind of products are there
- what kind of businesses are there
- what different business models exist
and more.

In trading & investing, this means

- learning about the capital markets
- learning of different products available
- what kind of instruments are there to trade
- different segments to trade in
- different ways to trade/invest (TA/FA/Math)
- different methodologies (Swing/Intra)

The second thing you do is competition analysis.

You look at the industry currently, and see who are your major competitors, and ask

- What are their strengths
- What are their weaknesses
- What are your strengths relative to your competitor
- What are your weaknesses

With respect to trading, this means understanding what kind of traders you're up against.

Don't for a moment think these twitter clowns posting few lakhs MTMs are your competition.

These are posers.

There are traders making crores every week/month in India.

That said, you have to analyse the ladder also.

Competition differs at every level of capital in this industry.

That said, there are professional traders who do this for a living with utmost discipline, a bigger edge than you have, and turf they fiercely protect.

What maybe possible to you, may not be possible to those pro traders.

You can trade in a very low float stocks. Those pro traders with crores, may not be able to do.

At the same time, they can execute in under 2ms latency, which you can't.

Figure out your strengths.

The next step you take in establishing a business, is to figure out a business model, a strategy, in which you'll be profitable over time.

If I get peanuts for 120 rupees, and sell Peanut Butter for 200 rupees, and my total Cost of production is 160 rupees, I net about 25%.

But if I can only sell 2 or 3 kg per week, it's absolutely useless. I can't make a living out of it. Can't create a business out of it.

So, I have two options.

1) Do higher volume - which requires higher capital
2) Ditch the strategy, find some other product with higher margins

Likewise, you have to figure out, with the capital that's available to you, what's the BEST method to extract maximum returns from the market.

You'll have to analyse market from different ways, get to know different methods of trading/investing, and analyze potential returns.

The next thing I'll do as a potential business owner is first try and understand my risks.

- What kind of risks am I facing?
- Am i underestimating the capital size that will be required to run the business?
- What are the different costs associated - fixed vs variable

The same applies to trading as well.

You get to know the different risk profiles of each method you explore for adopting as a potential business strategy.

In my case, B2C and retail felt like a lot more capital intensive. So I decided B2B is a better approach.

Likewise, with your available capital, you decide what's a better approach for you.

If it is 5 lakhs, you could probably focus on equity swing trading in low-float stocks.

If it is 10-25 lakhs, you could focus on Index futures based strategies.

If it is 25-50 lakhs, you could trade both index futures and probably do option buying.

If it is above 50 lakhs, you could trade index futures and do option selling also, conservatively.

If it is above 1 crore, you could adopt a hybrid approach, and start thinking about a portfolio of strategies approach.

If it is above 10 crore, you wouldn't be here reading this post. So you shouldn't be taking advice from me.

So, once you have a business model in place, by now, you should know that whatever you have done is theoretical analysis, no matter how practical it is.

There's bound to be many glaring holes in your assumptions.

All those liberties you took, you have to validate.

How do you validate?

You do a proof of concept.

You do it at a very small scale.

If I wanted to do B2B selling of nut spreads, I'll start with one city first. I'll see if it is feasible, if the economics work out, if I am profitable, if I can scale it well.

Also, it may be easy for me to sell in one city. I'll have to figure out what would be the challenges to sell in multiple cities - logistics wise, and infrastructure wise.

Similarly, in trading, you start with the lowest lot size, and verify if your strategy works.

When you find that your strategy works, you also check if it is scalable.

If it has to scale beyond a certain level, what infrastructure and logistics you'd need, what kind of execution is required, will you need any help? All these come into the picture.

Once you have verified that your business model works, then you start scaling, and solving scaling challenges along the way.

And yes, you'll make mistakes here and there, so it's better to conservatively scale, make as many mistakes as possible in the small size testing phase.

At every level of scaling, you'll make certain mistakes that you keep fixing along the way as a business.

The same applies to trading as well.

The mistakes you make are natural to running the business, and these have to be considered cost of running the business.

Also, efforts should go into making sure these costs don't exceed beyond a certain % of your operational income. Otherwise, there's no point running the business with such hard work if you're losing a lot in mistakes.

So, you see - this is where the execution discipline, and focusing on making execution top notch comes into play.

Not in the first step where you do market analysis. Not in the second step where you do competition analysis. Not in the third where you figure out a business model.

Quite a long explanation on the importance of a profitable strategy with a positive expectancy.

But I hope you got the point hammered well.

Also, know that you can't just think of ONE model and test that alone and scale it.

Most of the times, after you figure out a business model and when you test it, in the testing phase - it may prove to be inefficient, it may not work, may introduce challenges you didn't foresee.

So, another thing about system hopping that's continuously talked about - that doesn't apply if you're just starting out your trading business.

You need a system with positive expectancy. You also need basic understanding of statistics to know if your system works or not.

But if the model you figured out using testing and analysis doesn't hold the ground in forward testing, there's no reason why you shouldn't hop and test another system that shows potential.

It is after you understand whether your system has statistically significant results that are in line with the expectation it set from backtesting, that you begin scaling up.

Until then, it's absolutely fine to try different backtested things to see what works well.

Also, make use of Interactive Brokers demo platform to forward test your ideas if you don't want to stake real money.

I am forward testing my automation code in their sandbox system (paper trading version with live data) and it's been a darling.

Anyway - that's it for today. If you have any questions, feel free to post your comment here.