How to be successful at Trading ?

Trading strategy

There are numerous courses on Trading Success . I have covered many strategies and books in the past. People think it’s free lunch but like all business it works best for those  who manage it with discipline .Learning to trade can help you to generate above average returns and also an additional source of income. It’s no cake walk to to be successful but with time and dedication you can hone the skill.

Even before start trading you need to believe market are not fully efficient and there is an opportunity to make money.

Why markets are not efficient ?

Efficient Market Hypothesis

Efficient Market Hypothesis joke goes something like this ” An economist never picks up a coin on road because if it would have existed someone would have picked it up” .Arguement against efficient market Hypothesis

  •  Information is perfect -.Latest Archegos fiasco happened overnight. Tesla stock has rallied within days. If information was perfect such jumps would have been impossible! Information is always incomplete, often asymmetric, and too large to ever be able to interpret perfectly.
  •  Rational Behtesla Efficient Marketaviour – No 2 humans behave in the same way. People are optimistic , pessimistic and can also make unexpected choices which might seem bizarre to others.
  • Common goal-  The theory says that everyone is working to maximize the risk adjusted returns but which is not true ; some companies have mindset of privatizing the gain ,democratizing the loss( Yes bank ,DHFL fiasco), some traders have bonuses on short term profit, some asset managers are risk averse to get red flagged by managers.
  • Different Time Horizon – Someone saving for retirement has a totally different time horizon compared to a HFT trading firm or Intraday swing trader
  • Trading costs and regulations- Different cost and regulation can create imbalances which create opportunities

How to Improve Trading 

Trading is like betting on an outcome and certain aspects and trait can improve your performance. Three factors will determine the success in trading .

  1. Find Trading Edge
  2. Risk Management
  3. Psychology

Finding Trading Edge

An edge is simply defined as you using your greatest personal strengths and skillsets in the most efficient and effective manner to trade better than other people.

It can be in the form of some system driven edge or style . Example a system predicts market direction based on macro data. It can be in identifying when volatility will high or low in option trading.

You can have different strategy which suits your personality and Trading style such as

  • Trend following
  • Mean reversion
  • Arbitrage
  • Value etc

Regardless of strategy you need to see if the edges exist which can be broadly calculated as

Trading edge = Win% *Avg Win% – Loss% * Avg Loss%

You should calculate mathematical outcome of your strategy rather than just guesstimate .If in your strategy you can see that in the long run you make decent positive return it is worth pursuing. You need to test your edge for multiple scenario

Risk Management

Paul Tudor Risk Management

Risk management is the most essential requirement of trading. You can guarantee failure if you do not have a sound risk management plan.

Large losses are forever in trading. If you avoid large losses with a strong defense, the winnings will have every opportunity to take care of themselves. Mostly large losses are always caused by trying to get too much by taking too much risk

Think about an option selling strategy which is very profitable. You keep increasing the trade size and make lot of money. For you a black Monday kind of incident is history.One day suddenly due to major government shifty or Macroeconomic shock market tanks and you end up with blowing up your account. Now who is to blame?

Psychology of Trading

Psychology is paramount for success in trading. It is rarely discussed though very crucial for success.

There are 2 parts to it

  • Daily stress of Trading
  • Handling Losses

Daily Stress of Trading

If your position size or style gives you sleepless night then you should quit it .Nothing is worth losing peace of mind. I quit trading crypto options because market is always open and I used to be worried about volatility when I was sleeping.

Handling Losses

Conditioning yourself to losses is very important . Keeping emotions out of trading will help to make rational decision. It’s not uncommon for people to forget risk rules or start doing trade to get back losses under stress.


Trading like any other business needs a plan and disciplined approach. People who are able to do that ,enjoy the profit which comes with it. There are downside like stress which is unavoidable to an extent as market can always behave irrationally. All individuals needs to decide for themselves if it is good avenue for them.

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