The A to Z of trading career - musings of a professional trader !!


Market participant
Dear all,

Thanks for letting me open a thread here in TJ. Hope we can learn and interact with each other positively.

As noted elsewhere, i will be posting one post per week (or multiple posts sometimes) and we can discuss on that post in another thread.

Am known among my family members/friends as an hard-hitter and usually will not sugarcoat words to make others comfortable. Will call a spade a spade and some posts might be too straightforward to make some folks cringe. Thats a boon sometimes and a bane some other times(depending on the situation). But, please do understand that the intention is not to hurt anyone(or group) but to share things based on my perspective(our opinion on anything is strictly based on the filter we wear every single second).

This week will be an introduction post on the basic tenets of trading- the ones we tend to ignore easily.

1. Trade Plan - In order to be successful, you must have a detailed trading plan that you trust, respect, and most importantly -- follow (easier said than done, right? :) ). You wouldn't decide to build your next home from scratch without blueprints/floorplans, why would you step into trading without a plan?

Firstly, you need a written plan that goes over rules. I repeat - 'written plan' covering every scenario of your trading profession. These are when you will, and when you will not trade. I am not just talking about technical analysis, I am also talking about "I will not trade when I am not 100% focused and in the zone". "I will not trade when am traveling or my dog is sick" The trading plan also needs to describe, in detail, your trading methodology. Describe your setups. What actions do you take when you get stopped out? What actions do you take when a trade is going against you?

Secondly, you must be ready to execute your trade when your setup shows up and meets all of your rules. If you hesitate as the market unfolds, you can/will lose money.

Hope you all have written rules and read over them everyday to make it second-nature. After few months, you should be able to say if you have a setup or not in 20 seconds(looking at any chart).

2. Focus - Trading must be respected. You must be focused. Disciplined. No two ways about it. You can't have constant interruptions and distractions around your workplace if you expect to be a good trader. Many traders say it is like war, you are literally doing battle for life or death in the trading world. This is the only profession i know ,wherein you put a part of net-worth on line every singe day.How can you expect to win if your phone is constantly ringing, or if your kids are playing in your office, your dogs barking, or if you are replying to emails/forum posts. I don't think those things would go over well in a real battlefield. The amount of respect and diligence we give to a profession is directly proportional to the level of success in it (Work is Worship)

Your trading environment needs to be calm, private, and comfortable. Turn your cell phone off(or atleast put on silent), close your email, and explain to your family that you cannot be interrupted. Make yourself comfortable, relax.Buy a nice office chair and comfortable table. You need to be "in the zone".

Many of us enjoy the ability to work from home, but it must be treated with respect. If you can have a few uninterrupted hours/make great trades and earn a living , then have the rest of evening to devote to your family( am not sure what to say to folks who trade equities and commodities in a single day - work/life balance is the biggest factor in determining happiness but you do get the point, i believe)

3. Education - It is interesting how many traders believe they can make 50 lacs/year after one year of looking at charts and reading books. Why would one think that trading requires less education than say a lawyer or a doctor? These professionals spend years, many many years, learning their trade. A successful trader should expect to spend years as well.

Education is not free. Most successful traders blow out their account at least once or twice before they went on to make money. It might help to think of this as tuition, instead of as losing money. Education is expensive in other ways as well, not just financially but also mentally, emotionally, and time consuming. You have to devote yourself to it in the same ways a professional athlete would before running a marathon. They don't just wake up one morning and grab something at a restaurant to eat before they run the marathon. No, they train for months to condition their bodies, have strict diets, follow rigorous training day-in/day-out. etc.

You need to condition yourself for trading, and to do that you have to educate yourself. Books, videos, classes, the Internet, and probably most important -- first hand experience...which takes us to the next point.

4. Experience - Education is important, but experience is key. Why do employers prefer candidates with not only college degrees but also on the job experience? Simple, experience is the most powerful way to learn/hone your skills. Putting what you've learned into practice is not easy. The experience of actually trading, not just reading about it, is what will really motivate you to learn and be successful.

You can read about support and resistance, or read about taking the emotion out of trading. But until you experience a trade that stops on some value because of support/resistance, and then furthermore it stops you out of a trade that you were confident would be a winner, then you really can't fully understand the importance of what you read about (support/resistance and emotions). Beast analogy i can think of - reading 100's of books about swimming and dream to be a great swimmer. Unless we jump into the pool, real swimming can never be learned.

With experience comes wisdom, and wisdom is required to properly assess your trading. I think most successful traders had that "ah-ha!" moment when they realized they were the problem (ie: look yourself in the mirror, the problem is you not following your own rules). You cannot have that epiphany if you lack the experience and wisdom to be a proper judge, even of yourself. Very important point to remember.

Everyone will recommend that new traders do 'demo-trading' until they are profitable. But they also realize that 1) they didn't follow this rule themselves, and 2) even if they had, they would not have learned the same lessons until they traded and lost 'real' money. Demo trading is great (am not striking that down), but it is more like being on the outside looking in. It is not until you've placed cash trades and lost enough money to be "painful" that you will start to change your ways, your rules, yourself. That is because you are gaining experience by learning from the past.

5. Tools of the trade - The proper tools are essential for making money in any profession. Tools can range from your computer, your software, your internet connection, backup facilities (more on this in another topic). You need to probe your tools for weaknesses and if it is displaying a major flaw, correct it. For instance, don't trade if your Internet connection is unreliable. You need to correct that. Don't trade if your computer is too slow and your charts freeze during heavy market volume. Don't trade if your broker terminal freezes during busy market hours(seems to be a popular topic in TJ nowadays)

Indicators are also tools and many traders have way, way too many indicators on their charts. Some trades have none, trading strictly based on price action. If your chart has too many indicators, you will get conflicting signals. How is this useful? I suggest starting with a clean chart, and then adding only the absolute essential tools to it.

Also want to emphasize the importance of picking the right broker(w.r.t cost) and data feed, not to mention charting and execution platform. Official data feeds are not expensive nowadays and am sure you would not let your head go into a MRI machine if you know the lab is using unauthorized MRI machine to image your skull. All these things matter in the long run!!


So, to end this post, take what I have said to heart. Trading is not for everyone, so if you are having trouble accepting the above-mentioned information, then you might want to consider another profession (now, you might be wondering what kind of post is this...but truth hurts. Lets not kid ourselves) It would almost certainly be a lot easier on yourself, your family, and your bank account. However, for those of us who push onward and conquer our demons, the benefits of being a successful trader are endless (more on it later). It is, after all, the near-perfect job - in my opinion.

Force yourself to realize there is no Holy Grail. The way to make money in trading is not by having the perfect indicator or automated strategy or the perfect AFL. No, no, no. The way to make money in trading lies within your ability to understand yourself and become an expert in the market you are trading. There are no short cuts.

So, lets have a discussion on this post(if any) in the other thread. Discussions are the places where we get the real thought process of other folks.

This post might look too verbose but am not sure how to convey the information more succinctly than this.

Hope it helps !!


Market participant
We had a wonderful discussion for the first week. Nice pointers and positive contribution from everyone in that thread.

Week 2 – This week we will discuss Starting funds needed for trading and its implications on our trading success

Disclaimer : This whole post is written under the assumption that trader is trading fulltime(for a living) or aspiring to become a full-time trader eventually.

So, lets not steer this topic towards the regular route of discussing in terms of absolute capital(10 lacs, 20 lacs, etc..) but approach it in a mathematical basis first. We will discuss other reasons (like edge, drawdowns, undercapitalisation, borrowed money) later.

1 A – Minimum amount needed to trade 1 lot

1. What instrument (or multiple) instruments are you trading?
2. Volatility of the instrument? (as this will determine the depth of P&L see-saw in the equity curve and in-turn, in our minds)
3. What is most you are going to risk on any one trade? (conventional number is 2%)
4. Do you have a strategy that fits the 2% rule?
5. What is your account minimum? This should be calculated on the smallest account size needed not to exceed 2% of capital on any one loss. Using NIFTY as an example - if your stop is set up to lose a maximum of 1500 rupees, then the minimum account size needs to be 75000. (75000 * 2% = 15000
6. How many consecutive losses would it take before you have a margin call or reach the account minimum? This is an important question. For example – my system has 40% winning ratio and statistics says that I can expect 5-6 trading losses in a row on average and 15-20 trading losses in rare situations.So, I should be able to lose 20 trades in row before my account blows up (or before account is down by 50% - assuming that is the max loss am willing to take before throwing in the towel)

Let’s insert all these numbers in NIFTY:

1. What instrument are you trading? NF

2. Volatility is to determint he P&L swing…more the volatility, more the swing in P&L. But this is not needed for our math calculation.

3. What is most you are going to risk on any one trade? 1500

4. Do you have a strategy that fits the 2% or less rule? Yes

5. What is the required margin (for futures) - Rs.65000(we will keep it as 75000 for calc purposes). We are using overnight margin here. So, 75000 it is

6. What is your account minimum? 75000. Using the 2% rule as explained above. (75000 * 2% = 1500)

7. What is the minimum consecutive losses your account can endure before hitting a margin call or account minimum is hit ? 25(lets assume 25 instead of 20 – conservative calculation)

So, minimum account value = (maximum loss per trade * maximum consecutive losses) + Margin or Account Minimum (whichever is larger) = (1500 * 25) + 75000 = 112,500

Commission and slippage is not included in the calculation. This number should be added to maximum loss/trade

1 B – Amount needed to be a full-time trader

Once we know the minimum account value needed per lot, we can move on to the subjective part (depends on individual's needs) of withdrawing money for expenses from the trading account. Sooner or later, a FT trader will be doing a withdrawal on a regular basis.

So, without going into further details, one should take his average yearly returns into account and calculate his family expenses (it’s better to adjust it for inflation and multiply it by 1.5..we always need more than we think..actually it should be 2x or being conservative here). Once we have these numbers, its simple math to determine the account size needed. For example, if I had to pull 1 lac from my trading account every month (it doesn’t have to every can be once in a quarter or 6 months), then I need 12 lacs net(after taxes) per year. Let’s multiply it by 1.5 and it takes us to 18 lacs. As we need to pay taxes, we should approx. make 24 lacs to have 18 lacs net income. If your system has made 50% every year for the past 10 years, then capital needed is 50 lacs to trade full time. One important point to remember here is that you can trade only 5000000/112500 worth of lots (from the previous section calculation) here and calculate your returns accordingly. So, number of lots comes to 44.

I understand that this might not fall in line of understanding for many but math does not lie. We need to plan this profession like any other business and accounting/ledger/contingency planning/expansion ideas is key to survival and long-term success. This calculation is the starting point before considering trading for a living.

2 – Other important factors related to this topic

1. The amount needed is very relative and will change from person to person. Am talking w.r.t experience, discipline, execution. So, it really helps to focus on the trading process and become a better trader than focusing on P&L when we start.

2. Trading strategy - If you have a strategy that is successful but is subject to significant drawdowns, then the capital at play needs to take that into account. So, if someone starts out small and looking for some help from ‘compounding’ to grow the account big, this DD part will play a big role..Smaller DD will allow faster compounding (with relatively reasonable risk of ruin). We could have discussions about this in the discussion thread.

3. Size of the capital – Outside of money needed for expense, large capital is favored because of ‘Risk of ruin’. Your risk of ruin goes down a lot when you start with 10 lacs vs 5 lacs. Even if you have an edge, you still need a big enough cushion to stay in the game during inevitable drawdowns.

Here is a simple example... Say you start with 5lacs or 10 lacs. Your system trades once per day (so 20 trades in a month), wins 10000 fifty percent (50%) of the time, and loses 8000 the other fifty percent of the time. Over the course of a year, on average you'd return double your money (around 10 lacs profit per year) - in other words, you have a solid edge. Let's say your quit (ruin) point is 3 lacs (2 lacs loss from the 5 lacs start).

If you start with 5 lacs, you have a 32% chance of falling below 3 lacs during your first year of trading. In other words, 32% chance of being ruined.

If you start with 10 lacs though, you chance of ruin drops to 2%. (example is based on 1 contract but if one trades more contracts based on account size, this calculation is moot). But this ‘risk of ruin’ point brings a wonderful concept into the discussion risking less. One should strive for risking less capital (say 0.5 or 1%) as they move on in their trading career. This will tremendously reduces risk of ruin and also risk of losing our minds.

4. Eventually, one should move on from trading 2/5/10 lots to bigger lots as this is where we will reap the real benefits of trading. Trading capital/number of lots traded is no different from lemons. You could probably open a lemonade stand quite affordably with 1/5/10 lemons, but why would you?

3. Undercapitalization and borrowing money to trade

- If someone is under-capitalized, it generally stems from having too little access to money and trading is seen as a way to increase their money. I mean Richard Dennis turned $400 into $100 million, Ed Seykota $5k into $15 million and Michael Marcus $30k into $80 million. However, it does not mean that I or any other trader can accomplish that same feat. Accepting that a dream is unrealistic is difficult for most. It touches on emotions we quite often don't want to face. Saving up to be properly capitalized is probably one of the best moves one can do. But still does not guarantee success at trading - it merely means we can survive longer.

- Never borrow money to trade – two things happen. 1. Pressure builds up to make money (to pay it back) and our performance can go awry. This can lead to blowing up the account 2. Eventually, people will start asking the money back and if we are not in a situation to pay it back (as it is tied to the account or it is lost), that relationship is gone forever.

To summarize this topic, calculate your minimum money needed/lot and base your ‘money needed to survive full time’ decision based on that number. This is the hardest easy money in the world (money from trading profession) and while the successful consistent result attained by a VERY few looks glamorous, this is a bare knuckle back alley way to earn a living. The fool hearty, the unprepared, the arrogant, the easily discouraged, the thin skinned, the expert programmer with all the answers and no experience, the pop psychology trading author devotees, the demo trading heroes and awesome indicator groupies led to their demise and financial ruin.

Get a clue (education through experience) and build confidence with risk capital (money we can afford to lose). If that means trading one lot with 1 lac capital, so be it. If you can trade you will find a way. Build that account and routinely pay yourself. Keep your day job until you build your account to the optimum size (and keep some for rainy days as well ) and never ever bring borrowed money or money required to operate your household to the table.

This took some time to write but i hope its worth it. So, lets have some fruitful discussion in the other thread.

Happy trading !!


Market participant
As am a bit busy this weekend, let me post the next topic a day in advance. It is a lighter topic but an important one.

Week 3 - Common trader problems (both novice and experienced)

I would like to talk about this topic (even though it’s almost a cliché to even discuss about these things) as any number of repetitive readings does not seem to clear out these things from a trader’s mind. So, would like to analyze these things one more time before we dwell into much deeper topics. I am gonna be pretty straightforward and blunt in this post. Please bear with me.

By the way, TJ has a limit of 10000 characters in a post and I easily went above it in the last 2 posts. So, edited 10-20 percent before posting them – just a fun fact :)

1. Trading for thrill or excitement

If we are trading for the thrill of it, we trade when the conditions favor our method and we also trade when the conditions don’t. Essentially, we will be reckless, to say the least. As we are trading emotionally, we overtrade, which is an inevitable outcome of thrill trading. We also tend to overstay our welcome on trades that are not going our way and that’s a disaster in making (after all, we are focused on thrill and not sound trading practice). It might work for a while, but after some time, emotional trading will wipe us out – plain and simple. The other side of this is those people who trade for the adrenaline rush but are subconsciously uncomfortable with risk (I have seen many traders who say they accept risk in every trade but they don’t accept it mentally. They just do mouth service and this reflects nicely in their trading practice when we analyze their trading log. Numbers do not lie). If we are one of those people, we tend to under-trade or place our stops too close, and this is a recipe for disaster as well. So, if one cannot condition themselves to assume risk of a leveraged market (F&O), then please place your hard-earned money in FD and sleep peacefully :) Under-trading is just as fatal flaw as overtrading.

2. Revenge trading

We have just been stopped out for a loss (maybe an adverse gap against us) and it was a large loss. It is early in the trading day and we feel like we must take it back. After all, how can we go home with such a large loss? The market owes us money, it will pay us back and it has to do that in the next trade. Have you ever had this feeling? I have been a victim of this feeling many times earler and trust me, nine out of ten times, it leads to disaster. As our state of mind is unstable, trading angry will lead to bad decisions. So, next time when we get this feeling, best bet is to take a step back and get out of the trading desk. It is a natural human trait to get emotional on a financial/relationship loss but it almost always creates havoc when we take decisions during that time. Best solution – step out and come back later.

3. Not respecting sample distribution and money management.

When we trade, do we enter a trade if it does not look good or fall under your system rules? Probably not. But, we will never know which one is the big winner and which ones are scratches/small losers/small winners. If we knew this, then we would take only those ‘big winner’ trades. In my experience in trend following systems, only few winners make up the year and they are usually not the trades I thought would be big winners. So, we need to have a sound money management plan to be able to capture those big moves. Otherwise, we will be long gone. Goal is to understand that trading follows random sample distribution and we need to preserve our capital to get that home run once in a while. This means that we need to take those small winners and consistent hits on the many inevitable small losers. The goal is to still be in the trade when that mega trade materialize.

On the same line of thought, if we have a MM plan that reduces position size when we lose and increase it when we win, is it falling under our belief of random sample distribution? What if we have reduced our size and market gives that ‘once in a quarter’ 500 points NF trade? So, it is imperative that we create a MM plan in such a way that we never have to reduce our position size. This is crucial when we build our account (not when we are in comfortable size). My second post in the members only thread can be a good start to create this MM plan

4. Having an obscure trading plan

This topic has been beaten to the pulp in many books, forums, articles and discussions. But, it’s still worth the space here as many of the traders I have talked with do not have a well-thought out written plan covering entries, exits, MM, contingency plan, backup plan/pointers for hardware and unusual gaps, SL order jumps (would you put a market order immediately or wait for your TF bar close), etc.. So, when another person looks at your plan, he should be able to replicate all your activities in trading. Meaning – every detail should be there..No ambiguities. Period !!

5. Ability to act without hesitation or lack of it

When we backtest or papertrade, we would have realized how easy it was to take a loss or profit. In the heat of the battle, sometimes even experienced traders don’t pull the trigger when the planned risk point is reached or when the trade shows up (I do understand that we keep SL in the trading terminal and there is no question of not taking the loss. This phenomenon occurs when we get a series of losses. Every subsequent loss will look very heavy and even experienced traders second-guess the distribution. They hesitate). This tells us that we all are human.

It is human nature to not to be able to admit that we were wrong, and it is seductive to wait just a bit longer to enter/exit or take just a bit more risk, hoping the market will give you few favorable points. But let me assure you, more often than not, it just exacerbates the pain.

Easy fix – trust your plan, put a SL in the system and let the sample distribution play your system’s edge out. We know our trading system will prosper over time. Our account just needs to be alive that long to benefit from our edge.

6. Market winners are humble

With apologies to great philosophers and coaches – contrary to popular belief, winning is not everything and it certainly is not the only thing. Numerous traders fall into the trap of picking tops and bottoms but it is almost an impossible task in the long run. Who cares whether we are successful in analyzing the market moves (top/bottom pickers and where its gonna go) or any one trade makes money or whether one has more losers than winners? The name of the game is not how many winners we have but making money at the finish line. This is the ultimate triumph – winning consistently.

In my personal experience, to have a winning month, we need lot of small losers. Opinions about market has to be left with the slippers outside the door as strongly opinionated traders tend to take too much risk, fights the market, end up smashing all kinds of MM principles and eventually perish. It is always better to follow the market rather than predicting what the market would do in the next hour or day or week – because we all know who is going to win eventually.

Not able to admit that we are wrong will also enable us to take our profits too soon as it is 1 more winner. This is completely against the core of making serious money in the markets. Am sure we all were taught that perseverance will ultimately lead to triumph but in trading, we need to lose repeatedly to win. We need to wrong multiple times to make money. This takes deliberate conditioning to make the mind to act in manner contrary to what works outside of trading.

7. Burning out

Healthy body = healthy mind. Exercise regularly as it seems to improve our cognitive thinking. If we don’t feel well, then it is wise to close out the position and take rest. It is also a good practice to get out of markets completely and take periodic vacations. Burn-out can be very real in mental game like trading. If we stick to something too long without rest, our judgment becomes warped. Most of the successful traders take regular vacation and they come back rejuvenated. Vacation means not checking quotes or your trades from mobile.(it is also an injustice to the folks we are vacationing with. Even if we are alone, its an injustice to yourselves). Vacation means completely out of the markets :)

To summarize this topic (albeit a lighter one), please do remember that we are in a competition and the competitors on the other side (majority of them) are not well-informed as we are. Thousands of traders with loser mentality are sitting on the other side of your trade. They might not realize it today, but their actions in the marketplace attest to this fact. So, it is imperative that we tilt the balance to our side by serving our best interests all the time (by being in a positive state of mind). How do we do that? By reinforcing these pointers in our mind and if we do it right, trading will be fun and not filled with anxiety like so many face.



Market participant
Had a conversation with a fellow trader recently and we were talking about an issue he frequently encounters. Not sure if he got what I said as he was very new to trading but nevertheless, it was worth the try.

This guy have the issue of closing trades too soon. Infact, many does. Especially, as it gets closer to their intended target (or trail too close if they dont have targets). Once the stock/future reaches certain level, they seem to trail the stop much closer only to have the market take them out and then reverse to their target (or taking its original path). This seems to happen over and over (in varied intervals). They are afraid to give any back and have seen traders going for counselling for this behavior in western countries. We all understand this is a problem but a little background will help us see it more clearly.

Analysis of the problem:

This is a classic example of ‘prospect theory’ which states that people are willing to settle for a reasonable level of gains (even if they have a reasonable chance of earning more), and are willing to engage in risk-seeking behaviors where they can limit their losses. In other words, losses are weighted more heavily than an equivalent amount of gains. An employee thinks this way every time he/she looks at the paycheck and sees how much money has been deducted for taxes. He/she doesn't want to work anymore, and earn more money, because he/she does not want to pay more taxes. Although the employee would benefit financially from the additional after-tax income, prospect theory suggests that the benefit (or utility gained) from the extra money is not enough to overcome the feelings of loss incurred by paying taxes. It is also one of the reasons the current bull market in equities, will be missed by most (am kind of predicting that the markets will continue its run but you do get the point, I assume). I find that many people who missed the market rally so far would rationalize the opportunity cost and inherent risk of "chasing" the market by thinking that the people who participated were "wrong". The rally had been "engineered" by the ‘unknown’ hand. The long term fundamentals didn't support the expectations. It's going to end badly and blah-blahs..

Cleansing thought:

Many traders wonder why consistently being profitable in stock markets is always elusive. The above mentioned problem is one of the main reasons that inhibits consistent profitability in trading. Learning what to do, and actually doing what you learned under pressure are two different things. And once again, it goes back to one's desire to maximize the chance of gain, not to maximize the gain itself. Getting out of winning trades prematurely, is an obvious manifestation of this phenomena. All it serves to do however, is make one feel better at that moment in time. In reality, it is to the severe detriment of long-term performance. One has to realize that trading is a big-picture endeavor, and what feels good in the short term, is most likely counter-productive in the long term. Quite simply, leaving a large amount of money on the table, or worse yet; missing a major winning trade, is just as bad, if not worse, than a losing trade. The market however, lulls us into complacency, and even reinforces this natural behavior, because it spends more time in ranges than in trends, where small profits quickly vanish. We then learn to instinctively cover trades before they return to our entry point, or turn into losers as we would have seen this behavior many times selectively.

What makes matters worse, is that that our exits command top priority in the trade decision hierarchy (for obvious reasons), followed by trade size, and entry point. Liquidations are far more important than initiations, and harder to get right. When you enter a trade, it is the most hopeful point in the trade cycle, but come exit time, stress, cognitive load, emotions and bias, have reared their ugly heads, just in time to distort your expected value of the trade. Having a predetermined target and sticking to it is not the answer, in my opinion. In most cases, people are going to get out early anyway, and it is tantamount to trying to predict the market. It is more important to concentrate on projecting losses, risk management, and finding signals that produce trades that are well defined, have a proven edge, and are reproducible, rather than trying to out-guess the market.

Essentially, if price action or your expectation dictates the market should continue in your favor, why get out ?And, why use a target, that you're not going to allow yourself to hit as your exit point? Exit the trade when price action/signal tells you the trade is not good anymore.

Parting thought on this topic:

Imagine that trade management is like grilling a steak. If you like your steak well-done, you're not going to take it off the grill after 4 minutes, because you're hungry and can't wait for it to fully cook. And you're not going to take it off the grill at some arbitrary time, because some cookbook said a well-done 2-inch steak should be cooked for 10 minutes. Instead, you are going to observe the steak, maybe poke it with your finger, or cut it open a little to see if it’s done. And only when it is cooked to perfection, do you take it off the grill. This applies to EVERY steak you cook. Apologies to vegetarians here but wanted to put a point across with a practical example :)


Market participant
Post # 1 of Week 4 - Role of mentors/coaches in trading profession


Along with filling my tires with air and the tank with petrol, I always wash my car before embarking on a road trip. Not only is a clean machine more pleasing to the eyes, but a clean windshield is more transparent to the eyes. This pristine condition however, is about as ephemeral as that freshly filled tank of petrol. Between the smoke and dirt, to pollution and oil, it is amazing how quickly, dirt and gunk can collect on a clear windshield and morph it into an opaque sheet of glass. Even after, I generously apply my windshield washer fluid, I cannot attain the level of transparency I had achieved at the car wash.

Just like car windows, we go through life, and as we progress, we all collect some level of gunk on our souls and subconscious minds. This gunk consists of misinformation, prejudices, conflict, trauma, and myriad other experiences that form negative layers on our psyches. These layers form an opaque film that prevents us from seeing the world in the way it truly exists. And being unable to see reality clearly, will severely limit one from fulfilling their true potential.

This obscuration and its destructive effects, are often exposed and magnified when trading. Negative habits and emotions cause more trading losses, than misreading a chart or misinterpreting market fundamentals. It is often said that the eyes are the window to the soul, but anyone who has ever traded, knows that trading can expose one's weaknesses, and open up a Pandora's box of vulnerabilities, that are there for all to see and quantify.

The only way traders are able to shed this fabric of filth is through self-discovery. You can read as many books on trading as you desire, and create new indicators and ways of looking at, and analyzing the market, but if you don’t look at, and analyze yourself first, it will be difficult to find success.

The road to self-discovery inevitably leads to the path to success, but you must first be able to chip away at the layer that obscures you vision and clouds your view of the road. By determining and eliminating your weaknesses, negative habits, and negative emotions, you will then be able to trade with a clear head and clear vision. But, this is easier said than done. To ease out this ‘chipping away rough edges’ process, we tend to look out for a much more experienced/able person to teach/coach/mentor us. This is exactly where the process of mentoring can be extremely helpful (if not inevitable) in our trading profession.

This week topic has not been confabulated much in the trading books/seminars and articles but nevertheless, a very cardinal topic. As trading is a performance endeavor, it’s natural to think that a mentor can enhance a trader’s performance. Lot of folks actually say that they 'mentor' traders but it is actually just trader’s education. The fatal shortcoming of most efforts in trader education is that they provide teaching but not mentoring.

Difference between a mentor and coach

First of all, as we see trading as a performance endeavor, we need to understand the difference between a mentor and coach. In trading perspective, Coaches are people who help traders with the mental/emotional/psychological aspects of trading, including techniques for improving self-control and trading consistency. On the other hand, Mentors are people who help traders with the actual mechanics of trading - the ‘how-to’ aspects of defining setups, setting stops and price targets, position sizing and risk management and sometimes, play a role of a coach as well. So, a mentor can be a coach but a coach can never be a mentor.

The difference can also be understood with the fact that the mentor should be an open book to the mentee (opening up his trading logs, entries, exits, failures, money made, return, lessons and letdowns) but a coach does not have to be an open kimono :) With this thought in mind, we can define coaches function as counselors for traders and mentors function as trading teachers.

Benefits of mentorship/coaching

1. As mentors are dedicated to our success, it is an assumption that we can see him trade live. When we see an experienced person do it live in front of us, one automatically picks up clues on intangible things. Like a child learning from his parents or a observing a mechanic at work when his listens to an engine running. Mentor can shorten that learning curve dramatically but no mentor can completely replace live experience of seeing things unfold for ourselves :)

2. It's almost guaranteed that the nuances that a mentor has picked up over the years while looking endlessly at price action and patterns can never be observed/learned by a trainee reading a book or trying out himself until it’s too late.

3. The reason we see mentoring as a key ingredient in success across disciplines is that the right teaching guides learning trials toward optimal development. Great athletes don't just exercise daily - they perform the right exercises. That is equally true for developing traders.

4. Think about this scenario – we can spend a lifetime browsing trading forums, online articles and reading thousands of threads, books. If you are lucky you stumble upon the right material, recognize its value and stick with it. But a mentor/coach can build a solid base of knowledge and reasonable expectations. They can also give that gentle push if one is lethargic, minute course correction when we go off-course and much more.

Many a times, people wander from one moving average crossover system after another, buy one useless indicator after another or spend years deciphering the code left behind by W.D. Gann (no disrespect to Gann followers), figuring out the influence of Neptune, Uranus and Jupiter on the Nifty and blow up account after account to end up with debt, job loss, a divorce and drinking problems.

5. This game is just too difficult and too challenging that if we are not tenacious, it will be only a matter of time before the market chews you up, swallows you up whole, and spits you right out again (like that scene from Anaconda where that big snake spit out people after swallowing). The only way we're going to achieve great things in the markets, is to be tenacious to overcome these challenges. When times get tough, how will we gather our senses and get up? A right mentor can do that with ease. Think of a personal trainer in a gym. They will correct the exercises we are doing and introduce new ones. They will help us sustain effort when we lose momentum. Over the course of our gym workouts, we don't just improve our exercising skills. We also become a stronger person, someone more fit, and someone who feels better about themselves.

Problems faced by mentees while choosing a mentor

1. Mentee can never be sure about the success of a prospective mentor (especially, in an online world full of posers) before submitting himself fully into the relationship. And even if they are successful, they probably trade in a very different style and we would have to either relearn or get very aggravated and it would ultimately be a setback. In that sense, a coach is much easier to find than a mentor. But that is aggravating too because most of us just want someone to tell us when and how to trade.

2. If we are successful in identifying someone who is capable of mentoring and/or coaching, it would still be difficult to convince him/her to mentor/coach us. He might be able to do it for his friends/family but not for complete strangers online or someone we met in a coffee shop.

3. There are not many tools (more in the later part of this post) to evaluate a mentor.

4. Finding a mentor in a trading forum/social media is like finding a needle in a haystack. All of the information that a new trader needs to be successful is out there for the taking. But there is a thousand times as much useless and misleading hogwash than there is actionable/logical information.

5. Having a mentor will not guarantee success. It still comes down to the individual sitting in that chair, clicking that order into the market and keeping their cool no matter what happens and doing this day in and day out. So, no guaranteed success can lead to discouragement in searching for the mentor/coach

As TJ does not allow more than 10000 characters in a post, am splitting this voluminous post into two. Please continue reading the second post.


Market participant
Post # 2 of “Week 4 - Role of mentors/coaches in trading profession”

Ten essential qualities of a good coach/mentor

1. He cannot be a teacher only. His primary occupation must be a trader (albeit a consistently successful trader - how to figure that out? No idea :) )

2. He does not have to give it away for free (if you ask me personally, it’s just pie-in-the-sky).

3. If I show him my screen (a must), he must be able to identify with something I never thought of in one moment.

4. It is not important to me whether he shows me his trading statement (no one will do that). I want to see immediate value in his analysis of my trading shortcomings.

5. Pro traders often share similar traits, they are humble to the market yet enormously confident of their ability to stick to a stop and target/TSL.

6. He should never get into useless egoistic arguments as successful traders never indulge in petty ego fights.

7. They have very little opinion on ANYTHING under the sun.

8. Anecdotally, they are boring people - because they are actuarial in not just their trading but to everything in life.

9. He must be able to identify trends, pull-backs and all price action with logical reason. If he can't, he must not commit any risk to the market. And he must wait as long as it takes. All day, all week if necessary.

10. He should be willing to dedicate a specific amount of time looking at my weekly/monthly progress.

Looking at the list, one might think it’s inconceivable to find a mentor/coach. Such people do exist, they are not chimeras. It takes time and effort to uncover gems. Why should stuff reveal itself to us unless we are willing to sweat blood for it?

Final thoughts on ‘mentoring’ – points to ponder

1. No a mentor (or a coach) is not mandatory to be successful. The key word is 'mandatory'. It should be rephrased as "A mentor is not mandatory for everyone to be successful". However, since 95% of traders are not successful might be a clue that something else is necessary?

2. If you have children - let me simplify this - would we let them out on their own, let them pick up knowledge on an unstructured basis? We wouldn't. Skill is only developed through prodigious practice and there is no use of talent with unstructured practice. We all are not Mozart, and based on statistics neither is 99% of society. Of course, the best way to learn is to learn by doing, but there is such a thing as ‘deliberate practice’. Geoff Colvin (author of the book ‘Talent is overrated’) will give a thousand scientific and real examples on why this approach works.

3. We do not have the leisure of learning at our own pace or structure (even though that is the best option available). Trading is a ridiculously competitive dog eat dog world. Any endeavor worth undertaking is worth doing well, especially when it has unlimited potential like trading.

4. Trading is the last bastion of true capitalism. So for us to compete at our own level of possibility, we want the best tools and the best environment that we can get. Then it is up to our ability to use those tools, think on those terms and eventually expand beyond to get bigger, faster and stronger.

5. If someone is charging heftily to mentor you, time to take that 'proverbial' run in the opposite direction. Typically, good mentors don’t advertise. Human nature what it is - once you have made a substantial amount and understand how to protect it (unlike Livermore, who despite being the greatest ever, was never able to protect himself), then trading by itself is boring. Inevitably some pros start teaching, finding those pros - that have made it, been able to keep it are the ones to search for. Not easy, not supposed to be.

6. As I've said before, many come into trading with no formal training or background in this field and expect to make leaps and bounds in a relatively short period of time which is completely fatuous. Working with a "mentor" whose full time job is trading would be very beneficial for many traders. What people don't understand is a mentor can't instantly make someone profitable. Any that lay that claim should be avoided. A mentor should serve as a person that helps the trader develop a solid foundation to their trading and provide feedback as the trader continues to develop. He should also assist with developing a realistic trading strategy and attainable/measurable goals. So many get lost just in this area alone and begin the futile search for the perfect trading method.

7. If your only refuge is some online forum and/or social media, reach out to those people you admire/get inspiration from. Don't 'worship' them. EGO has no place for real traders and the fact that one trader wants to worship another makes no sense. They are just people who are wrong 60 to 70% of the time anyways. Build some rapport with them over time and they will begin to trust you and ask them to help you a little here and there. Again, don't WORSHIP them.

Good luck with your search for mentors/coaches and happy trading !!


Market participant
Week 5 – Backtesting an idea/system

With the recent discussions on backtesting in the other thread, I naturally gravitated towards posting the ‘backtesting’ topic this week.

Without further ado, let me jump into the groove. As you all know, backtesting is to gauge how a set of trading rules performed on historical data. But, many folks who come into trading just do data mining. Data mining simply scans historical dataset for rules that would have worked in the past. We have read this disclaimer various times that ‘past performance does not guarantee future results’ But still, the professed value of backtesting is based on the premise that historical tendencies/patterns repeat.

So, the popular question is if ‘past performance does not guarantee future results, why backtest an idea/system in the first place? One could very well save the time, effort and sleepless nights right?’ This is an argument that has some validity, up to a point. It is definitely true that past performance is not indicative of future results. But does it therefore mean that historical testing has no validity? I don’t think so.

Here is a case in point. Let’s say you want to build a model of the sun rising. Every day for a month, you get up before dawn, and wait for the sun to appear. Every day, it rises in the east. So, you build your model, run it for tomorrow, and it “predicts” that the sun will rise in the east. Will it? Who knows for certain? Some strange axis switching or earth rotation reversing could occur overnight or a cosmic phenomenon might occur (which could be understood only by Stephen Hawkings :) ) and the sun could rise in the north, south, or west. Highly unlikely, yes, but so was the financial crisis of 2008 and Nifty flash crash in Oct 2012. Outlier and unexpected events can and do happen.

If such a calamity occurs, does it mean that the model is useless and never should have been built? No, but certainly you would have to now take into account that the world you modeled has changed significantly. So, having a model based on history is much better than completely guessing. With guessing, you are likely to be looking the wrong way when the sun rises tomorrow morning.

Before getting into the nitty-gritties of BT, I would like to clear few hitches of system development. It is imperative that the trader should come up with a system to BT based on his/her risk tolerance, goals and traits. If a trader cannot digest 5-10 losses in a row of a trend following system, there is no point devising one and backtesting it. If your goals or risk tolerance do not match what the system can offer, then you shouldn’t be trading that system. Manipulating the rules because you are intolerant with the results can turn a winning system into a big losing one. If you can’t live within the anticipated parameters, then you need to develop or find another system. If one is devising a system for intraday to backtest and he is known to hesitate on taking quick decisions, then it could prove costly in live trading. If a trader vacillates for even two minutes to enter a trade in an intraday system, then that could be the deciding factor between a winner and a loser. With a longer-term trading system, the entry is generally not so critical and hesitation errors are forgiven usually.

Ways of producing backtesting results

1. Historical backtesting – this is a kind of testing done by most of the charting software nowadays. You create a few lines of code and they spit out the results with myriad of statistical parameters. This kind of testing also encapsulates the major problem in BT – over-optimisation and curve-fitting (did not get into the definition of these terms as they are commonly known). There is virtually no chance that the results in the future will be close to the optimized results. The results are just too “tuned” to the data used in the test.

If a system has indicators (with parameter numbers) incorporated in it, there is higher chance of optimization and curve fitting. Once can play from 1 to 500 as value of the moving average and the s/w will spit out results in seconds. A trader will be tempted to choose the best MA (say 283) out of 500 MAs and guess what, real trading would suck big time as curve-fitting has been done nicely with the past data.

2. Out of sample testing (OOS)

If one is persistent on optimization in backtesting, this kind of testing can be a savior. So, here a trader can test 3 years of historical data testing (automated) and run numerous iterations of optimization but run the following year bar-by-bar. Of course, nothing can beat bar-by-bar testing of a well formed idea (with zero optimization) but this will help those folks who are a bit lazy in backtesting bar-by-bar.

3. Walk forward testing

Walk‐forward analysis is simply the aggregate of many out‐of‐sample periods, stitched together. So, 2 years of automated testing + 1 year of OOS testing followed by 2 years of automated testing followed by 1 year of OOS testing. Once we have a set of 4-5 years of OOS testing, we put them all together and create the statistical parameters. In this testing method, we can get the best of both worlds – a bit of bar-by-bar testing and optimization (if needed)

Importance of data in backtesting

For an accurate evaluation of any system, the data must be impeccable. Without correct data, system testing is useless. It is better to have the same data vendor for both backtesting and live trades. Different data vendors receive different data feeds and this could be a problem for short-term systems or systems that use dynamic value on every price tick (like OBV, VWAP bands)

Purity of data is another very crucial requirement. Any anomalies or mispriced quotes will have a direct impact on the system’s test results and can skew the results extensively. Cleaning of data is not an easy task and often must be relegated to professional data providers (please do remember that the data provider should take splits of stocks into account, methodology used for continuous contracts to even out price differences of current/near month contracts and things of that sort)

Parameters to look out in backtesting

As most of these terms are self-explanatory, I would just like to list out the most important parameters to watch out for.

Profit factor, Percentage profitable, Total number of trades, Max consecutive winning/losing trades, Return of capital, Annual rate of return, Maximum drawdown, average drawdown, average time taken to come out of DD, max time take to come out of DD, Ratio of average yearly profit to max DD (discussed in one of the posts on compounding in the discussion thread). Max loss and max profit are not that important to me as they are singular events.

Sharpe ratio is also not considered for 3 reasons – 1. It does not include the actual annual return but only the average monthly return. Thus, irregularities in the return are not recognized. 2. It does not distinguish between upside and downside fluctuations. As a result, it penalizes upside fluctuations in the same way as downside fluctuations. 3. It does not distinguish between intermittent and consecutive losses. A system with dangerous tendency towards high drawdowns from consecutive losses would not be awarded as high a risk profile as others with intermittent losses of little consequence.

Optimization of backtested system

Once we have a trading methodology and an initial set of parameters, it is time to fine tune our approach. The principal folly of optimization is the tendency to curve fit. The problem is more pronounced with systems that involve indicators with numbers (like moving averages, RSI, etc). So, if one is dogged to optimize using a software, use the walk forward testing technique discussed earlier. By doing this testing, one can easily assuage the apprehension of curve fitting to a large extent. Word of caution here – fine-tuning a system just increases the level of false confidence that eventually will be dashed in real time when the system fails. I have backtested numerous systems in the past and have always followed this route - take a solid idea and test it bar-by-bar without optimization even a single time. Yes – it is an arduous task but in my opinion, it’s well worth the effort and time.

Final thoughts on backtesting

Traders are especially captivated of the percent profitability, or accuracy of a system. In practice, we should not target a specific win/loss ratio - the goal is to create a profitable system in accordance with the trader’s psyche. It doesn’t matter whether you get there via relatively few but comparatively large winners, as is the case of trend-following systems, or smaller wins with a tendency to compensate losses and much more. It also could be a combination of the above. Eventually, the totality of the system is all that matters.

This is not to proclaim insensitivity to percentage profitability. All things being equal, more winners are easier on the psyche than less. Each win reinforces our faith in the system while every loser is a potential confidence shaker. This is not the way it should be as losers are an inescapable cost of doing business. Still we are only human after all :) But again, a high percentage of wins compared losses is not the only road to a profitable system. Several trading luminaries have owed their successful careers to unembellished trend-following systems. These systems tend to produce winning trades close to 40%. And there is almost always some giveback of profit before a winning trade is closed out. A position’s equity high is never anticipated and profit targets are not used. It’s therefore easier for a trade to wind up as a loser. So essentially, the cardinal parameters of a system (with positive expectancy) could vary from trader to trader but search for the holy-grail system has to stop sometime.


Market participant
Topic # 6 – Psychology of trading and the misconceptions around it

How many times have we heard this word ‘psychology’ getting associated with trading profession? Innumerable times. To the uninitiated, it seems to be an over-rated (probably abused) word. I will make an attempt to give a different perspective about psychology’s part in trading as there are lot of literature that talks about clichéd topics like ‘handling fear/greed and discipline issues’. We will not focus on those items in this post.

To all the readers reading this post, have you ever had any of the following issues? :

1. Not taking a trade in your plan because you did not think it would work (after a couple of losses in a row)?
2. Taking a trade immediately after a loss that is not in your plan? And then after another loss, another trade not in your plan?
3. Chasing a price move because you are afraid it is going to run without you only to see it reverse after you jump in?
4. Averaging into a losing position because you just believe you are right and price will come back to where you bought?
5. Moving your stop further away from your original stop to give the trade more room or moving to breakeven too early?
6. Continuous counter trend trades because you feel price has moved too far and you expect a reversal?
7. Refusal to close out a losing trade and holding it until later in the day or the next day taking a bigger loss than your original stop?

If you haven't had any of these issues, please stop reading this post further - you are either a master/legendary trader or have never traded before!! Chances are if we have had several of these happen to us, we either have no trading plan or should not be trading or our mindset around trading needs some work. We can call it psychology, call it mindset, call it mental discipline, or whatever suits our fancy. My guess is that is what needs work if we are doing any of the items very frequently above and they are not specified in our trading plan.

The difference between unsuccessful traders, net profitable traders, and big money making traders is smaller than we think. It usually boils down to a small but perceptible edge, and while it can be related to poor money management, inadequate funds, or a bad methodology, it is usually an internal factor - a lack of discipline, emotional control, patience, and especially an improper attitude about losing and risk. Mind you, all these factors collectively called as ‘trading psychology’. So, it does not matter what we call it, but the intrinsic difficulties are real and they reflect in our trading P&L.

But to understand this phenomenon more deeply, we need to understand how mind works and how it relates to trading profession. Let's start by dividing the mind into three divisions - inner subconscious mind, the subconscious mind and the conscious mind. We're not going to talk about the inner subconscious mind (it’s function is to run our organs automatically) and the conscious mind (as our emotions are not relevant to them). Our focus will be on the ‘sub-conscious mind’. On a daily basis, we spend about 1-5% in the conscious mind. The rest is spent in the subconscious mind. The conscious mind perceives about 40 bits of information per second and on the contrary, the subconscious mind about 20 million bits of information/second. As they say -”your brain (subconscious mind) sees even when you don’t”. And it's never dormant. In fact, it has been awake and recording since the time we were a fetus.

Subconscious mind and the way it works

Subconscious mind can be divided into 3 subsections -

1. The Memory Mind - It has recorded all your memories, all events, and actions, everything that ever happened in your life since the time you were a fetus. Think of it as a video camera with five senses. All of your memories, since ever are there and they are there constantly in every moment of your life.

2. The Emotional Mind - It's the part that contains all of your emotions. Whenever we act, react on an emotional basis, the subconscious mind is involved. Have you ever thought of that situation when you reacted so silly, and you asked yourself later, why in the whole world did I react like that, or why did I say that? It's because of the emotive information that's stored in our subconscious mind. Remember, that conscious mind has no role here – analytical brain cannot even start processing yet.

3. The Protective Mind - It has the role of protecting you against what it perceives as dangerous.

The basis for sub-conscious mind is created from day zero of your life till the age of about 7. That's because, your brain waves, in that period are in a kind of hypnotic state. They move very slowly, and your whole subconscious is very much completely open. You lack the critical factor –the analytical and rational mind. And that means that every little thing that's put there (not that it stays there) creates the fundamentals of your character, and your outcomes in life.

Who's putting in the information? Well, most of it comes from our parents or the people who raise us up. They are the ones in charge of our lives. One of our primate need is the 'need for security'. As I have a 4 month old baby now, I can give an example w.r.t to a baby. Normally, when a baby starts crying, it is taken up by the mother, it continues to cry. The mother checks the diaper, changes it. The baby keeps on crying. The last step - the one that always works - is to bring the baby to the bosom and feed it with breast milk (or stick a bottle with milk in its mouth). That's when the baby finally stops crying.

What's actually happening? The need for security is fulfilled. Being brought up to the bosom, the baby feels the warmth and care from the mother and the need for security is fulfilled. The only problem, is that it creates an association. The brain creates that association to food. In other words, when I get food, then I'm secure. We grow up, and every time, we had a stressed day or we feel depressed, we find ourselves putting something in your mouth. If we start to abuse food, we give birth to obesity. But remember it has to do with the need of fulfilling ones security. Other quick examples are classical as well. Just think of how many parents out there are telling their children, things like "you're not worthy", "you can't do that", "you're bad", "you'll never be able to" and so on and so forth.

The real us, is our subconscious mind, because we're spending there about 95% of our daily lives. The subconscious mind is this device ‘playing on’ the program we got and it is put there by our parents and by society.

Ok great!! But, what does all this has to do with trading then? Have you guys ever heard of, fear of success? We do want to make money, we love money, we love trading but we’re still losing money. What we're experiencing here is a conflict between the conscious mind and the subconscious mind. Remember, who the real you is! We're actually the sum of all our programming. Funny thing right? We got a lot of programmers in here :) So, being the sum of all our programs and subconscious mind has the role of protecting us - Bingo, we got a great recipe!! It doesn't allow us to make money. Because somewhere in the program, you've got a bad experience that has a negative charge and it keeps holding us back from getting hurt again.

See this innocuous looking statement – “In order to earn money, you have to work hard”. It has probably been put there, somewhere between the age of 0-7. Unfortunately, our parents became parents without getting any instruction manual on how to raise kids and we have the social construction as well in the picture. Nothing against the parents here but just wanted to put the facts across. Our parents inadvertently created ‘reward and punishment’ mechanism. They punish us when we're not following their instruction and reward us when we do as we're told. The kind of reward we get is, acceptance. When we get that acceptance, we then fulfill one of our basic needs. Remember- the need for security.

This creates a dogged association here –‘In order to earn money, we have to work hard’ which in turn equalizes to ‘safety’. We grow up, and start to work, and eventually we find out that, working hard equals earning money. And the safety need is fulfilled. Now, fast forward few years and you enter the arena of trading. We get into situations that can make us money easily, without having to work hard. BANG - That's when we blow it!

It is very difficult to buy this concept. Personally, it took me a while before, I finally had the courage to face it, and to understand that, it doesn't matter how I take it or perceive it, by my conscious mind. The subconscious plays the lead here. And no matter how much I refused to accept that, it wasn't that way. Any amount of self-talk and affirmations were not helping here and the subconscious mind just snickered back at me by decreasing my account. This was of course a very basic example but am sure you get the drift. There are various ways of overcoming this obstacle – NLP (Neuro-linguistics programming), Hypnosis and many more. I do not want to dwell in to those vast topics but I hope I have enabled the readers to think in that direction.

Bottom line, discounting psychology is the same as discounting your mental health. Psychology doesn't mean seeing a shrink. It means being aware of your mind and its behaviors. Surely, we are not going to try and make an argument that mental health is unimportant. Skill is composed of more things than just physical prowess. There is also mental aptitude. And in order to exercise our mind, we must at least accept that psychology is not a "prank".

Happy trading!!
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