My Trading Concept # 6
The Trading Edge
Over last 1 decade business of trading has been undergoing an evolution in terms of technologies and facilities from Brokerage houses. Today, there is easy access to improve tools for technical analysis. Similarly a vast knowledge-base is available over the web.
On top that, Discount brokerage houses made it possible for even retail traders to come out profitable by winning very few pips compared to what it was on days of high brokerages.
But still there is no lack of losers on trading - probably this is the only thing that did not change (and will not change).
Keeping aside basic ingredients of a successful trader - e.g discipline, skill etc, what actually makes the difference: is The Trading Edge.
There is no magic ingredients once again. It depends on the trader and his/her trading style. I will discuss mine (Both for daily timeframe, swing)
Edge 1:
The key edge that I feel I have - I know how to disconnect my emotion from my trade (there are times when I violated this, and I failed miserably, not because setup was wrong, but because I panicked).
And I do it by my position size.
I know it may sound very silly and naive (that, what is new on this), but let me ask you a question: How many of us actually follows it Consistently? If you are doing it and still you are losing trader, then there is a problem with your trade setup - there is no second doubt about it.
Don't try excessive leverage - best recipe to enrich your broker by higher brokerage and
Smart men go broke three ways: liquor, ladies and leverage
Consider if you have just 1.5 Lakh to trade with (on Nifty), how many lots will you buy? I guess most of the brokerage firms will allow you to buy 3-4 lots. So 3 lakhs around 5-6 lots.
My take is:
1 Lakhs = 1 Lot of Nifty (yes, thats it)
2 Lakhs = 2 Lot... so on.
I will show you an excel based scenario later.
What generally happens, with a big position size, a 50 odd point overnight gap against my position would have made me so nervy, I hardly could have stayed in my setup. My SL used to be tighter as the lot size was higher, giving market lesser room to flow around my entry and SL points before it finally moves in my favour.
Another related issue is: Most of us will jump into trades once we get the signal - crossover or say the index is coming out of overbought / oversold zone or some pattern (channel break or Bulls Flag etc)
There are a group traders (And they are big) who intentionally miss out these opportunities - simply because these setups are well known in the public domain. They give it a twist.
Once enough fishes are in the net, there is just enough liquidity pool for them to hit, they will simply infuse a decent amount of money against that setup to create the panic. And then after a majority of the folks are out - they will let the market take the due course- sounds familiar?
Now you can actually hold on to the trade (as you have sufficient believe that this setup works and your SL is still valid), only if you are risking very less on your trade.
But ofcourse, that does not mean that you don't have a SL. You should know where your setup fails.
Now how many points can you net on Nifty on monthly average - 200 a big ask? Anyone. 200 points per month.
Ok lets make it smaller 100 points? Ok now? I am asking for positional trading (forget scalping and all).
Rule is, once you are in profit, you are not trading without very good quality entry opportunities & R/R for rest of that month. And you have just 1 shot every week. If you miss it, no more trading that week (Swing).
Now see this what you can do with 1 Lakh. Consistency? yes, with a smaller lot size, it is far better. As you are disconnected to your emotional quotient in a decent way, now you can manage your trade better.
Monthly 200 points (my preferred strike rates):
Monthly 100 points (One can get it without much pain unless he/she is something very extraordinary ):
No risky trade if monthly target achieved. And for each trade your SL is fixed 100 points (trail once in profit). Book fixed target (anything 50+ is good for TSL @ Break-even) and get out. No need to let your winner's run in this method.
Please note, in both the cases you let your position size grow only up to a limit, then afterward, you start keeping aside profit to safer investment. Now what is that limit, you have to see.
As you will make it a habit of consistently hitting a fixed target every month, it will boost your confidence, till a point when you start taking little bigger risk out of the newly gained over-confidence and then start panicking -then that size - 1, is the threshold, your consistent new position size for may be next 1 more year before you can scale it up. Our Psy system needs time to adjust to risk. That will come to you with time.
Remember, your risk taking capability undergoes a gradual increase with a growing capital. You need to give yourself time.
I tried mathematical models (risk of ruin, win rate etc), but when it comes to overnight carryover trades - this is what determines your position size. Does not matter you have 5 lakhs or 5 Crs, the market can absorb everything if you don't do this properly
Edge 2:
The early bird gets the worm, but the second mouse gets the cheese.
This I will not explain, you need to see it on chart yourselves, open up 3 years daily chart and mark point of reversals. How many times it happens that market, before making a top or bottom, tries to reclaim the level once more, then finally reversing.
When a market is looking too good to short or buy, stay aside - you are not alone watching that. So are the big brothers. Always remember that. Don't go long when it is too good to buy or don't go short if it is too good to short. Wait for 1 failure to happen on the chart.
Let the first set of retail traders enter and get kicked out, then on the next attempt Enter.
Yes there will be times when it does not come back for the second time, but still, this edge is much more rewarding on positional trading.
Hope this helps.
On Edge - 1: This was not mine. This was something suggested by a person whom I had met in a trading workshop during my early days. The same person who told me to focus on limited instruments. He also suggested one thing - which somehow I did not follow (He told : 'Remember, we always buy. Retailer does not short' not sure why he told that or was that only meant for options)
I was a losing trader till then. The journey of last 5 odd years from the deep pit was frustrating. But trading with small size during one's learning day with a constantly growing account is the best thing to have.
Last edited:
