Trading Lesson Learnt From my Trading Guru

The day I started trading I hoped to make lot of money, and ultimate goal of every trader is to trade for a living. My Guru asked me how you are going to make “a lot of money”, I said some blah blah but Honestly speaking I did not had any concrete answer.  Somewhere in the back of my mind I secretly hoped I will catch the one big move that will make me enough money to trade like Big boys. Unfortunately the odds of catching the “big one” are probably the same as those for winning the lottery.

I hope many traders who are trading or willing to start trading will be facing with the same dilemma and confusion so today am sharing few fundas i got from my trading guru. Use them and see the change in your trading.

Have a realistic trading goal

First and foremost thing my Guru told me  “I should have a trading goal“. The goal did not have to be a large one like being a millionaire in 1 year, Trading goal should be simple and realistic. Having a trading goal would help me focus better on the markets. I would come to see better opportunities (note this is not the same as “more opportunities”) as well as managing my money better. Since I did not have a very large trading account at that point of time ,My Guru suggested to start with a goal of netting 2500 per week out of the markets. So If I could do this consistently for four weeks, I should be able to net Rs1000 a month which is almost 10% return on capital.

I told my Guru “Sir its not possible for me to live of  Rs 10000 a month !”. He laughed at my innocence and told ” Bramesh ”  If you could consistently net 2500 a week, using single contracts, for the next 12 weeks, theoretically there would be no limit on the amount of money I could earn by trading.”   Still confused I asked how this was possible.

He said that no trader, who trades for a living, does so trading just one contract at a time. The power of making money in the markets comes through the use of multiple contracts. If you can net just 2500 a week using single contracts out of your trades, then with four contracts you should, in theory, be able to net 10000 a week, or 40000 a month. However, trading multiple contracts like this without first being able to trade consistently would be financial suicide.

The Key here was able to get 2500 for a week using single contract, so after your commissions and losses you should be able to get 2500 at the end of the week.

Now here is the tricky part: while you should never enter a trade with the hopes of making up losses, the fact remains that if you are going to make consistent gains from your trading, your winning trades will need to surpass your losers (plus commissions).

So after giving lot of thought process finally came to realize this is possibly the best advice for cutting losing positions quickly that I had ever heard!Basically the consequences of keeping a losing position too long,Hoping it will reverse back to my cost would always  break me in the long run.

My Guru further added Your focus was on a profit goal, it was important to maintain a proper risk/reward ratio. If there was too much money at risk, given the possible reward, then it would put too much pressure on the following trades to make up for losses that were incurred earlier. However, by keeping losses to a minimum, the following trades would have a better chance of adding to the weekly profit goal.

My Guru again emphasized , having a smaller trading goal, I would be more inclined to book profits when I had them; rather than hold on too long thinking I will make more in the move and finally watching the market eventually take the profits away.Thousands of traders have given up maximum  profits because they thought the market would move just a little bit more.

My Guru clealry mentioned during starting of your trading career when your account size is small always use  exit order to book profits, rather than using a trailing stop loss to exit the market. As my trading goal was on weekly basis so it made more sense to use exit order rather than TSL.

As your account grows and you can afford to trade with multiple contracts, you will simultaneously be able to book some of the profits from a portion of your open contracts, while still leaving a few contracts in place, with a trailing stop loss order, to take advantage of further market moves. Yet before you can begin trading like this, you first need to build your account and develop your consistency.

He reminded me that this was just a goal however and that you can not make the markets give you more than they are prepared to give. This means that you must be constantly prepared to take a profit; rather than sacrifice the profit you already have, in hopes of gaining more, even if you are shy of your goal. After all, if the market continues higher after you exit, you still have the option of re-entering the market again if the trade still looks viable.

To conclude To develop your trading consistency you first need to decide on a weekly goal. If you are like most small traders, a goal of netting 2500 per week using single contracts is a good place to start. While it might not seem like a very challenging goal on the surface, you might soon discover, through your  trading, that it is not be as easy as you first believed. Remember, your goal is to gain 2500 per week with single contracts, net of commissions and any losses that were incurred earlier in the week. Once you have set a weekly goal for yourself, see for how many weeks you are able to attain it. If you can reach your goal for 12 to 16 consecutive weeks you will be doing very well. If you are doing any less than that, then you still need to practice.

Start each week fresh. There will be some weeks where you will not fair very well at all. You might find yourself with a string of losses and a cumulative loss for the week that seems insurmountable. If you are unable to attain your goal for that week, do your best to learn from your mistakes and make a new start the following week. Remember that you are performing the exercise to learn to trade consistently, so don’t be too hard on yourself.

While you might be comfortable trading one contract at a time, trading multiple contracts can put a lot of pressure on the psyche. If you can consistently earn profits with one contract then add another. If you continue to earn consistent profits with two contracts add two more contracts, and so on.

One final tip: Take care choosing the markets you wish to follow. Since your goal is consistency you might be best off to avoid the more volatile markets. Due to their volatility, these markets normally have higher margin requirements as well; however it is not usually a problem as there are plenty of less volatile, lower margin markets that offer plenty of potential for the small trader.

Take your time and remember that consistently earning profits is the real goal.