How you can become a successful trader

Apurva Sheth
A successful trader is one who consistently makes money from the markets irrespective of market conditions. And for you to make money on a consistent basis it is very important to follow these two rules.

"Rule No.1 is never lose money.

Rule No.2 is never forget rule number one."

I cannot agree anymore on this investing philosophy by Warren Buffett. The world thinks of it as one of Buffett's mantra for success but I consider it as a cardinal principle of trading. Once you forget Rule no.1 you will soon find yourself on the dark road which leads nowhere and coming back from there is next to impossible. You know already how difficult it is to recover from a drawdown.

Have you ever thought why people forget such a basic and simple rule?

There are a couple of reasons behind it. First amongst them is lack of awareness and importance of this rule. Each and every market participant knows this rule subconsciously but somehow everyone does not accept its importance. Even if they understand the importance then they don't know how to put this rule in to practice.

Nobody wants to lose money in the markets but you and I know it very well that every trade/investment we make will not be profitable. For every gainer there will be a few losers as well. Just because you will come across losers while trading/investing doesn't mean that you should avoid it completely. The key here is to ensure that your losers doesn't lose more money than your gainers make. You should be able to manage a balance between the risk and rewards. After all that's what trading is all about, isn't it?

Last but not the least is to have these 3 competitive advantage under your belt.

  • Informational Advantage - It refers to knowing more than the other guy knows but obviously within the legal limits. 

  • Analytical Advantage - It refers to the skills required to process the information that you have access to.

  • Behavioral Advantage - Finally, the most important of them is what you do after you have processed the information. That's where the real money is made. You have to act more rationally than others.

There is an inverse relationship between the informational advantage and the time horizon you trade/invest with. As your time horizon becomes shorter and shorter the criticality of informational advantage increases. For example HFT or High Frequency Traders pay a hefty price just to keep their servers closer to the exchange's servers. So that they get the Bid-Ask quotes a few milliseconds before others.

You can beat the informational advantage by building up an analytical advantage for yourself and by avoiding the time horizons where the informational advantage is against you. We at Profit Hunter work towards providing this analytical advantage to our readers and subscribers. I am currently working on something which will provide you with an analytical edge over others especially in the short term trading arena. You can look forward to communication from me in the coming week.

When I was working on this, I noticed that to succeed in trading, having an analytical edge isn't enough. Having behavioral edge is also equally important. And that's where most retail traders fail, they do not have access to tools that give them the behavioral edge.

I took this as a personal challenge.

First to empower the retail traders with an analytical edge and second to develop tools along with our technology team to give you a behavioral edge.

The Profit Triggers guide has been downloaded by 24,088 unique readers so far, is already solving my purpose of giving an analytical edge. Those of you who have downloaded this guide have already received an invitation by me to activate the portfolio tracker service. I have specially designed a section in the portfolio tracker along with our technology team which caters to traders needs and gives them this behavioral edge.

Now let me show you how this section of the portfolio tracker works.

Step 1: Add Equities Trading Portfolio

Once you login to the Portfolio Tracker on the equitymaster.com you will get an option to add new equities trading portfolio. When you click on the Go button a page which looks like the image below opens up.

Adding Equities Trading Portfolio
Source: Equitymaster.com

You will have to add details like name of the portfolio, its status and exchange. You will also have to fill in the notional amount you wish to allocate to trading. You will have to consider factors like your current financial status, risk appetite etc. before you allocate a portion of your total wealth to trading. Remember, that trading should only be 'a part' of your overall asset allocation. You can also refer to the Equitymaster Asset Allocation Guide before you dedicate an amount to trading.

Once you have decided your allocation to trading you have to decide the percentage of your starting account balance that you are willing to risk per trade. This fix % can be anything from 0.5% to 1%. One can start on the lower end and as one gains confidence in trading one can move higher. You can refer to one of my earlier article that I wrote on position sizing to know about this in detail.

You can fill in the remaining details on brokerage and STT applicable to you and complete this step.

Step 2: Add Equities Transaction(s)  

As soon as you fill the name of the stock you want to buy, you will get its current market price pre-filled in the Buy Price column. When you fill in the details about the stoploss it will automatically calculate the quantity that you should buy and suggest that number in the Buy Quantity column. You are free to overwrite it and enter a quantity which is more or less than the one mentioned in the box. It's completely upto you. But if you were to follow the fixed % loss rule on each trade then you should be buying quantity which is suggested here.

Once you have filled the quantity, the brokerage and STT will automatically get calculated and fill their respective boxes.

You will see a box titled entry notes. Here you are supposed to write 'your' own logic and reasoning for buying this stock in brief. I have written my reasons for picking a stock that I had recommended in economictimes.com.  

Adding Equities Transaction(s)
Source: Equitymaster.com

Step 3: Check Holdings Report

As soon as you 'submit' the details, the holding report page opens up. This is a summary of stocks that you are currently holding. Key fields to watch here are the Buy value which is inclusive of brokerage and STT. The gain/loss is calculated by deducting the buy value from the market value.

Also note the titles above the table. The starting account balance is the total capital you had allocated for trading. The current profit/loss shows the actual realized profit booked so far on your trades. This is zero as of now as we haven't closed this position so far. The current account balance is the sum of the starting account balance and current profit/loss (realized). You can see all these values across all the reports. You can get to know the mark to market gain/loss value in the grand total row below the Gain/Loss column.

Checking Holdings Report
Source: Equitymaster.com

Step 3: Square off Transaction

The next step is to square you're your trades. Once you select the stock you want to square off or sell after you have bought, a page opens up like the one I have illustrated below. You can enter the rate at which you sold and the quantity you want to sell. This time again the brokerage and STT will be calculated and prefilled in their respective boxes.

Squaring off Transaction
Source: Equitymaster.com

But! Hold on a second before hitting 'Square Off' button.

There's a notes column with 'Add' mentioned below it. Once you click it a screen pops up which looks like this.

Making Exit & Trade Notes
Source: Equitymaster.com

You have to fill in 'your' Exit Notes and Trade Notes. You can add comments about exiting the stock. Just like you enter your reasons for entering the stock you can now write reasons for exiting the stock. Trade notes are your overall observation about the trade, the lessons you have learned from it, things you would like to improve etc. If everything has gone as per plan you can pat yourself on the back! ☺

Step 4: Check Transaction History

Now you can check the transaction history of the stock that you have sold. The gain/loss figure shown here is adjusted off brokerage and STT on both buying and selling transactions. So this is the net profit you have actually earned on the entire transaction.

There are a few other taxes and cost apart from brokerage and STT as well. Most of them are charged on the total turnover so you can add them up and increase the STT % by that value.

Checking Transaction History
Source: Equitymaster.com

Step 4: Check Profit & Loss Report

Let's come to the profit & loss report now. This report now shows you the sum total of all the net gains realized so far. Notice the current profit/loss figure in the picture below. Now it shows Rs 1,708 which is the actual profit we realized out of the above transaction.

Checking Profit & Loss Report
Source: Equitymaster.com

Step 5: Check Risk Reward Report

The risk reward report shows what level of risk you are taking to earn the profit. In our case the reward/share was Target price (160) - Entry Price (125) = 35. And the risk was Entry price (125) - Stoploss Price (105) = 20. Hence our Reward v/s Risk is 35/20 = 1.75. Thus on 50 shares bought we are taking a risk of Rs 1000 to earn a profit of 1750 which is reasonable. Take note that the expected reward does not take brokerage and STT in to consideration.

Checking Risk Reward Report
Source: Equitymaster.com

You can check this report as soon as you are about to enter a trade and check whether it makes business sense or not whether the reward is sufficient enough for the risk that you are taking. I would suggest a minimum ratio of 1.5 for entering any trade.

Step 6: Check Trading Journal

Every successful trader manages and more importantly reviews his trading journal on a regular basis. That's how you monitor your behavior and keep it under check over a period of time. The picture below shows the entry notes, exit notes and trade notes that you had entered during the transaction. You can refer the journal anytime from entering the trade, during the trade and after the trade as well.

Checking Trading Journal
Source: Equitymaster.com

I know you will find this tedious and exhaustive in the beginning. But when you start using this tool while trading and see your trading account growing in size you will realize the importance of this tool. And then there's nothing that can stop you from becoming A Successful Trader.

Have you started using the Trading portfolio section in the Equitymaster Portfolio Tracker? Share your views in the Club or share your comments here.

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10 Responses to "How you can become a successful trader"
Lakshmi Narasimham, N
12 May, 2015
Please advise early raise shares with good returns and advise please.Like 
kashmir singh
26 Feb, 2015
I could not down load "Profit triggers " due unavoidable events. How can i do so now..I would like to go through the above before proceeding further. With best regards, Kashmir SinghLike 
kriss
26 Feb, 2015
thanksLike 
Kamlakant Kulkarni
22 Feb, 2015
Thanks for sharing "Profit Triggers". I have downloaded and read the same entirely. Whereas I really appreciate the content, I would like to understand if this will be followed by actual trading investment ideas by way of trading recommendations of stocks or will that be a training articles on trading. I would appreciate and happy if it would be the former (actual trading ideas in terms of trading stock recommendations. Thanks, KamlakantLike 
BISWESWAR GHOSH
21 Feb, 2015
1. Trading can be Iday or BTST or Short term. 2. STT % is lower for Iday and higher for BTST/Short Term 3. Additional cost on holding is Intt at Min. Bank Rate Therefore, there should be space for identifying which are Iday and which are BTST/Short Term trade. For example Rs.100/- Buy should be sold at min Rs.100.077 to equalise in I-day. Anything above Rs.100.077 is net profit after Brok.+STT+otr chrges. For Rs.100/- Buy and sqared off at BTST Rs.100.66 is min. required to be equaliser. Here No. of days holding also incurs cost as Intt. on min Bank rate. The Form for entry is very good but little moditfication may be made to differentiate between Iday and BTST. Part II. Whern trading is entered through this model whether Consolidated Holding will show only Holding position?? There where will the Net Trading Portion will be shown for all scrips entered under Trading Zone.???Like 
BYK Rao
21 Feb, 2015
I read with interest `How to become a successful trader.`,the importance of this approach cannot be stressed enough. A frequent trader tends to forget the entry & exit prices .The step by step guide is very beneficial for both short & long time investors. A fellow trader used to buy high priced shares & sell with marginal profit & used to feel happy . When he was told about 2 way brokerage & other charges ,realised that he was incurring marginal losses., I am sure this is going to help make trades more systematic. bykLike 
Raviraj
21 Feb, 2015
Thanks Apurva for sharing details on the new features of Portfolio Tracker. Seems the new feature is not yet available for me (at least for my current portfolio), not sure if this will take some more time.Like 
bangalorewala
21 Feb, 2015
Excellent Guidelines.Simple and easy to understand.Well,an eye opener to me on many aspects of trading.!Like 
Sadanand Joshi
21 Feb, 2015
Its really very good tool you have provide. Disciplinary usage is a challenge. But Great efforts done .. very good.Like 
Ramesh Kumar
21 Feb, 2015
Hi Team, I read the information on this series and it is very useful. It gives a fair idea how to work on stocks and how to keep a track of the investments. It also highlights some of the mistakes which I did when I started trading over the past 6 months. I hope by following this series of information and the forthcoming series, it would be an eye opener for becoming a successful trader. Please keep up the good work. RameshLike 
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