Saturday, March 6, 2010

The Successful Trader

Learn or you will stop trading

Many beginners feel that they can just jump in and start making money. Some think they can learn trading in 2–3 months. Can you imagine any serious profession that could be learned in such amount of time? Trading is certainly not the easiest of professions.

Quite a few traders have never even tried to learn. They thought they could use stock-picking services or newsletters, and trade their picks without deep understanding. I don’t know any of them who could make money consistently.

When new traders come to the marketplace, ready to trade stocks, they buy here and sell there based on opinions or systems they don’t really understand. It is easy to make profits in trading without any effort. You just have to get lucky. Then comes either the big loss or a string of losses.

Conclusion: Traders must go through a process of learning before they can start making money consistently.

How do you Learn?

The basic requirements are the same as for every learning system - Books, web resources, technical analysis software, seminars, courses, certification. There is one additional requiement: Practice. While practice makes perfect in every profession, in trading it is an essential requirement.

Can retail traders be successful in Trading?

Yes, of course. Most successful traders are retail traders. When you go through the learning and practice process, you get transformed from an amateur to a professional.That's when you reach success.

When I write about retail traders or amateurs, I am referring to people who enter the trading world without adequate preparation. Often, I have mentioned that beginners should not rely on trading for a living. This is the reason. When you are learning, you do not expect education to actually provide you with an income stream. That comes after your learning s over. Moreover, thanks to futures & options it is possible for beginners to overtrade using the leverage provided by derivatives. That becomes a deadly combination - beginner + leverage.

I receive calls from novices (like Housewives or retired people) who have taken on large futures positions. (They call me when mark to market losses start). Should they be dabbling in derivatives? Answer is - NO.

Final conclusion

Trading is a joy. Like all professions, you have to give your dues to trading (time spent in learning and practice), then you get the rewards.


pranav said...

Dear Sir,
Thanks for writing on this topic. Especially, mentioning that retail traders could also be successful through learning and practice.I think this sentence is enough to motivate retail trader like me!!!


Thank you, for this topic.

Swingtrading said...

Dear Sir,

Thanks for bringing up the topic of " Perils of trading in Futures " for retail traders. In my 10 years of trading life I have seen many novices going bust by trading in Futures.Most of the novices treat futures as investment .
Lot sizes of Individual stocks is also skewed and is not in favor of novices

Being a quant trader I trade very less in futures and that too only when to initiate short positions in Nifty in downtrend as the lot size allows flexibility to suit my trading system.

Its very difficult to understand for novices to know about Sharp ratio while taking leveraged positions. And when and how to reduce the size of bets in case of draw down by using the Kelly Formula. Even sometimes professionals likes us find it difficult to use a three month look back to calculate the sharp ratio.Its a struggle to evaluate performance every three month and then determine if a strategy should be scaled back or eliminated altogether or investing more capital or increasing leverage if the sharp ratio is high.

Thank you once again for advising novices not to dabble in Futures .

Anuj Joshi said...

Hi Sudarshan ji
Great article...every single words is so true regarding trading as a career

"Moreover, thanks to futures & options it is possible for beginners to overtrade using the leverage provided by derivatives. That becomes a deadly combination - beginner + leverage."
I have use the above deadly combination ...and experienced death!!!...however the problem doesnot lie in Futures and Option,problem lies in lack of undersatnding for risk involed in these financial instruments over trading or trading more volume than the capital you have and not knowing that you are making that mistake is deadly
Keep up the good work

kaustubh said...

very well said sir.thanks for this eye openner for biginners.