Trading Lesson Learnt From my Trading Guru Part-III
In Continuation with the previous 2 articles
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“Have the courage to trade in big quantity ”
He meant the willingness to carry a very, very large position when you have a high degree of conviction and the risk/reward makes sense.
This is actually the flip side of My Guru’s last pearl of wisdom- when there’s nothing to do, do nothing. But when there’s something worth doing, then do it in size.
Geroge Soros frequently talks about this, because it’s a common trait of all great traders. In order to be a big winner, you have to be very, very large in the positions that have the best risk/reward. Considering that most traders make their year on two or three big trades, then you have to pile in when you see an opportunity.
The key question is: how do you judge when to trade big quantity ?
The answer: you have to rank your positions in terms of overall attractiveness/conviction and then size them accordingly. Once a trade meets all of the minimum criteria for you to put it on, then you go further and rank it on a scale of 1-5 of overall attractiveness.
To simplify, I have the following criteria:
- Strong chart—breaking out of a base of at least six weeks’ duration on 2x average daily volume
- An overall stock market that’s trending higher
- Higher Time Frame and Smaller Time Frame in Sync
If stock/Nifty could just barely meet your criteria, In this case, you would rate it a 1 out of 5 (the lowest). On the other hand,if stock/Nifty This would merit a 5 out of 5.
How would your position size vary depending on the rankings? For a “5”, you would want a position size that’s several times larger than for a “1”. That means you could put a “1” at 1-2% of your trading capital, which you would feel comfortable putting on a “5” at 6-10%. After all, you would feel most comfortable betting more on a position where things couldn’t be better, rather than in something that’s barely meeting your entry criteria.
That’s how my trading guru did it. Whenever he found a trade where all of the stars were aligned and he felt that the risk/reward was skewed in his favor, he would put on a gigantic position. And while it wouldn’t always work, the gains on his winners would far, far outweigh his losers, leaving him a substantial winner.
As discussed in all 3 article methodology was quite simple. He would only trust his trading strategy , looking for trades that fit his methodology. When he had no ideas, he would do nothing; when he had a smattering of decent ideas, he would take some risk; and when he had a fabulous idea, he would put on a large position.
It sounds simple enough, but executing it is properly is another matter. As a matter of fact, despite his fabulous example and education,Many traders will be net loser. Why?
When push came to shove, I didn’t have a well-defined methodology for how to approach trades. Ultimately, no amount of advice will help you when you don’t really have a clear game plan.
As Brett Steenbarger says, the biggest barrier to trading success is usually a methodology problem. Hopefully, my example will show you importance of getting the very basics right.
After that, I hope that the My trading guru advice will help you to transform your trading to the level of the greats.
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