Trading is a fascinating job, As a trader there is no need commute to work place, No Boss to Nag you, no project deadline. You are your own master and you decide when to work and when not to. Many people heard stories of traders make million in short frame of time, and get attracted to make trading as full time career.
Movies Like Wall Street have portrayed traders trading from home for few hours and enjoying holidays in exotic location.
Well this might be reality for few traders , but majority of traders have a different reality. They put in a lot of time and money, spend countless hours in front of their computers and yet their trading account is not growing. In fact, it is said that the majority of traders LOSE money.
As i discussed yesterday Are you trading on Luck or trading Skills ? Traders has to go through school of hard knocks before he can be profitable on consistent .You won’t become a trader overnight. In the beginning, trading will be grueling and frustrating. Your results will not match your efforts and that’s the reason an average trader have trading life will not span more than 3-4 years. But once a trader get used to this he is opening doors for unlimited opportunities.
So to make money as Stock trader is not easy as discussed, You can’t just buy “the magic system” that automatically puts money into your bank account overnight. It doesn’t exist!
Lets discuss the approach which can help you in making a good trader with consistent profits.
2. Focus on small, but consistent profits!
Trading is a function of risk and reward. The more you risk, the higher the profit potential. Or in “traders language”: The larger the stop loss, the higher you can set your profit target.
Let me give you an example: A good reward/risk ratio is 1.5 to 1. This means that you are willing to risk Rs 1000 trying to make Rs1500. If you start with a Rs 50,000 account, your stop loss of Rs 1000 would be exactly 2% of your account. Most of traders use the “2% risk rule.”
Now let’s say you are right every other trade, i.e. your trading system has a winning percentage of 50%. This means that in the long run you can expect as many winning trades as losing trade.
For our example, let’s say you place 10 trades – 5 of them are winning trades and 5 of them are losing trades.
So you would make Rs 7500 on your winning trades (5 * 1500), and lose Rs 5000 on your losing trades (5* 1000). Your gross profit after 10 trades would be Rs2500. You now need to deduct your commissions, which should be around Rs500 – Rs 700 for 10 trades, depending on your broker and the markets you trade.
Therefore your net profit after 10 trades would be around Rs 1800-Rs 2000.
If you get 10 trading signals per week, then you can expect a weekly return of Rs 1800-2000 on a 50,000 account.
Which is 4% return in a Week, Does it excites you or thinking 2000 i can make in single session. But the trick is to make consistent profits. When FD is bank gives 9% per year and you are making 4% in a Week its is phenomenal return.
Thats the good part of story but life is not so good so there’s also the possibility of LOSING money.
If you had 10 LOSING TRADES in a row, then you would lose Rs 10,000, since you are risking 100 per trade. That’s 20% of your account 🙁
But honestly: If you manage to have 10 losing trades in a row, you should stop trading immediately. Because the chances of getting 10 losses in a row when trading a strategy with an expected winning percentage of 50%, is less than 0.1% (!!!)
So to summarize:
Before you even start trading, you need to know what to expect from trading.
Have realistic expectations, and understand the risks of trading. Set small goals. Don’t shoot for the stars. Try to make Rs 1000 per week on a trading account of Rs 50,000. That would be Rs 4000 per month, or 8% based on your capital. Per month!!!
You might not achieve your weekly goal every week. There might be some weeks when you make less. Or you might even lose some money. But in the long run you should be ahead and see your account grow. And with proper risk and money management, you should be able to control your risk while growing your account.
So the key is to have a trading strategy while achieving a reward-to-risk ratio of 1.5 to 1.
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