Why traders should never attempt to predict prices…

Stock Market | Published on 15th May 2018 | 359

Ask any stock market trader why they lost money and the standard answer would be that they got their price prediction wrong. But is it really possible to predict stock prices? Prices are after all a series of random movements and believing that you can predict prices is audacious; to say the least. The answer to the question must be that he got his trade wrong. Remember, when you trade your focus should be on being profitable and not on getting your call on the market right. Here are 7 things you need to know if you really want to be a successful trader.

Trading is not just about predicting prices

If you believe that you are not qualified to become a trader because you cannot predict prices, then think again! Trading is not just about predicting prices. Be it the Nifty, the Sensex or any particular stock; prices are generally a random movement. The market, after all, is the aggregation of many market views. That means you need to understand the story that the market is telling you and trade accordingly. Gauge the momentum of the market and trade accordingly.

Trading is about getting the small things right

When you trade, your focus must be to understand the language of the market. But, more important get your small things right in the market. Ensure that your stop loss is put at the right level. Ensure that you reach the charts right. Ensure that you keep booking profits at regular intervals and keep your capital as liquid as possible. Learn from your mistakes when you trade by documenting and incorporating them into your trading manual. Once you take care of these small things, the bigger things will automatically take of itself.

Just focus on the market momentum

That is the golden rule of trading. A value investor with a 5 year holding period has the luxury of trying to outsmart the market. That is his job, after all. He will find that rare gem that is underpriced and buy it when everyone else is dumping it. The value investor will try to buy in the midst of panic and sell in the midst of greed. That is not what you can afford to do as a trader. You need to play on the side of the market momentum. As the greatest trader of all time, Jesse Livermore summed it up, “There is no bull side or bear side to the market. There is only the right side”. The right side is all about momentum and that is what you need to focus on.

Focus on what is controllable, not what is beyond your control

As a trader what is it that you can actually control? You obviously have no control over the RBI’s rate decision or the Fed action on rates. You also have no control over the inflation or the fiscal deficit. In fact, you do not even have control over corporate performance and stock prices. Then what do you really control? You only control how you can prepare for these eventualities. When the market is bullish, you trade on the long side. You use every dip to buy as long as the undertone is positive. You use every rise to sell as long as the undertone is weak. Then you have a plan B in place in the event the RBI hikes rates or the Fed hikes rates. There is little you can do beyond that. Focus on the things that you can control and don’t obsess over what you cannot control.

Take care of your risk and discipline

Take care of the risk and the returns will take care of themselves. Define, how much you are willing to lose in a trade, how much you are willing to lose in a day and how much capital depletion you are prepared for overall. Once these risks and limits are defined, just trade within these limits. What you require is the discipline to ensure that you don’t breach these rules and stick to your trading book.

Don’t deviate from your trading plan

More than predicting the markets or the stock prices, your focus should be in ensuring that you do not deviate from your trading plan. If your plan says that a risk reward ratio of 1:3 is good enough, then maintain the discipline of stop loss and the discipline of profit targets. It does not matter if your view is that the stock will go up further. Irrespective of your own views on the stock, your trading plan must always prevail. That is the only way to ensure sustained outperformance as a trader.

Maintain a trading diary to recapitulate your trades

Finally, it is very essential that you maintain a trading diary if you want to be a successful trader. What is this trading diary all about? The trading diary essentially captures the gist of your trades and then you use the trading diary to review if your approach to trading worked or did not work. Over a period of time the trading diary helps you to fine tune your trading strategy and also helps in gradually improving your trading performance.

That is what trading is all about. It is about discipline, risk management and evaluating your trades. Do not obsess yourself with trying to predict prices. That is not what you need to do!