How To Become A Successful Trader?

In my previous article, “The Life Story of Gen-Z From The Eyes of Gen-X" I promised to guide youngsters on how they should approach trading.

So, here I go.

This article is penned down for beginners in the stock market. Hence, the content is very basic and fundamental. However, it is also a must-read for new investors who wants to learn to trade in the stock market.

This article is also a good eye-opener for those who have already traded in the past and burnt their fingers. This will help you to look at trading from a business-like approach and not as a punter or a gambler.

Before arriving at the final checklist, it is prudent to understand a few basic concepts.

1. Trading is tactical whereas investment is strategic. Trading is for the short term, and investments are made for the longer duration. Investment decisions are based on fundamental analysis, whereas technical analysis is used for trading.

Trading is classified under three broad categories:-

• Intraday trading

In intraday trading, you buy a stock or index and sell it on the same day. Alternatively, you can also sell a stock or index and buy it back on the same day. During intraday, the stock/index prices gyrate viciously. It is tough to predict this movement. Hence the probability of winning is very low. This makes intraday trading highly risky. Therefore, I will suggest that all prospective traders stay away from intraday trading. Do not even try this out.

• Swing trading

In swing trading, one holds the position for a few days to a few weeks. Here, we try to identify a pattern to enter the trade and exit in profit.

• Positional trading

In positional trading, one holds the trade for a few months.

2. Trading Strategy

A trading strategy is a setup by which we decide when to enter the trade and when to exit. This is based on technical analysis. Technical analysis provides us with hundreds of trading strategies. Many beginners, spend a lot of time on YouTube searching for the readymade 100% successful strategy. Please be warned that there is no such strategy available anywhere.

One has to master the trading strategy which suits your requirement. It is a very time-consuming process and takes years of effort. Before finalizing your strategy, you must backtest it on the past five years' data and document these results with observations. This is almost like undertaking serious research. The selection of a particular trading strategy is the first step of trading.

A few of the trading strategies are:-

• Moving average strategy

• Candlestick pattern strategy

• Dow Theory

• Price action

• Range breakout

• Strategies based on technical indicators

Checklist for trading

Trading is a vast subject. It is difficult to cover all the aspects in one article. However, I am sure, the following checklist will help you to become a successful trader:-

• Never indulge in intraday trading. As a beginner, start with positional trading and slowly progress towards swing trading.

• As a new trader, strictly avoid trading in the future and options (F&O). Start in the cash segment and experiment for one year. Depending on the results, decide if you want to go for the F&O segment or not.

• Study and backtest strategies before finalizing the one you are comfortable with. Do not blindly follow YouTube Channels and start trading without doing your homework.

• Risk management is the most crucial part of trading. Before taking the trade, predefine your risk reward ratio, risk per trade, and stop loss.

• Your entire focus should always be on defending the capital rather than making a profit.

• The psychology of a trader plays a pivotal role in success and failure. One has to master the art of controlling emotions of greed and fear.

• Before taking each trade, write down the trade in a trading journal. Maintaining the trading journal will let you know your mistakes and help you in improving as a trader.

• Follow this process meticulously over one year. Evaluate the results and decide whether you are successful or not.

• If you think you are not making any progress then stay away from trading and focus on your mutual fund portfolio.

How much return one should expect from trading?

We all are here to make money. So, let’s address this most fundamental question.

If you can achieve 2% returns per month then you should consider yourself a successful trader. Do not expect more than this. Greed and fear will ruin your aspirations of becoming a successful trader.

Be it trading or investing, it is all about psychology and discipline. We like to believe that we have an edge over others in addressing these two skill sets. At “Defensive Investments” our main focus is to build the psychology of the investor and induce discipline in his investing behavior. In the next article, we will take a look at the psychology of a trader.

Till then hang on there!