Everyday I get lots of emails from beginner traders or traders who are struggling to make money asking questions about what should they do. The journey from beginner or struggling trader to consistently profitable trader is step by step process and can be quick if you know what is important in trading.
The most critical insight which a beginner trader needs is that the money making setup you use is under your control. Markets and market reactions are not controllable . If you do good job of controlling the controllable variables you can build profitable trading strategies.
For beginner traders that can often be slightly difficult to understand due to lack of experience and profits.
Markets are ever changing. Markets are not completely predictable. Markets are complex and evolve as technology evolves.
Markets seemingly offers too many choices. This can lead to confusion and scattered efforts.
Market is not controllable. But methods are controllable. Methods can be constant irrespective of the market situations. Methods are under traders control.
Your trading mix is completely controllable and that is the key to profitability.
In marketing there is a concept called marketing mix. The central hypothesis is that you can not control the consumer behaviour but what you can control is the marketing mix.
Same way your trading mix is completely under your control. The elements of trading mix are :
Market selection (equity selection in stock market case, or instrument selection like options or futures)
Entries selection
Exits selection
Risk selection
Like in marketing the product is critical no amount of price, promotion or place variable changes can substitute for poor product strategy. Similarly as a trader your most important decision is equity selection. Which stocks to trade is 80% of the solution to profitable trading success.
In marketing there is a concept called marketing mix. The central hypothesis is that you can not control the consumer behaviour but what you can control is the marketing mix.
Marketing decisions generally fall into the following four controllable categories:
* Product
* Price
* Place (distribution)
* Promotion
The term "marketing mix" became popularized after Neil H. Borden published his 1964 article, The Concept of the Marketing Mix. Borden began using the term in his teaching in the late 1940's after James Culliton had described the marketing manager as a "mixer of ingredients". The ingredients in Borden's marketing mix included product planning, pricing, branding, distribution channels, personal selling, advertising, promotions, packaging, display, servicing, physical handling, and fact finding and analysis.
These four P's are the parameters that the marketing manager can control, subject to the internal and external constraints of the marketing environment. The goal is to make decisions that center the four P's on the customers in the target market in order to create perceived value and generate a positive response.
Same way your trading mix is completely under your control. The elements of trading mix are :
Market selection (equity selection in stock market case, or instrument selection like options or futures)
Entries selection
Exits selection
Risk selection
Like in marketing the product is critical no amount of price, promotion or place variable changes can substitute for poor product strategy. Similarly as a trader your most important decision is equity selection. Which stocks to trade is 80% of the solution to profitable trading success.
That is why basic and simplistic technical analysis often does not produce the desired results because it primarily deals with entry and exit selection. But with little bit of tweaking it works.
Select stocks with higher than normal probability of going up. For this you need to understand factors that make stocks go up or down rapidly and the conditions under which that happens.
In a complex market offering too many choices (around 8000 stocks), dynamically selecting the equities is the key.
In a complex market offering too many choices (around 8000 stocks), dynamically selecting the equities is the key.
As a beginner trader you need to understand the factors that lead to better stock selection. Momentum, earnings, volatility, valuation, liquidity, capitalisation are some well known factors that drive stock prices. If you use them to elect your stocks to trade it will improve your profitability.
As a beginner first spend your time on effort on better stock selection. Selection criteria then becomes a scanning criteria which should bring to your trading conveyor belt a series of best possible opportunities for given time periods.In a bear market or sideways market the method must select the best opportunities for that period dynamically. Similarly in a runaway markets it selects the best opportunities with runaway characteristics.
There are various way to select equities. But most of the one which work are based on some statistically proven anomalies. Hedge funds and big institutions have spent years and billions researching what to look for in equity selection. Traders may or may not be aware of them.
There are various way to select equities. But most of the one which work are based on some statistically proven anomalies. Hedge funds and big institutions have spent years and billions researching what to look for in equity selection. Traders may or may not be aware of them.
No matter the markets certain things work. The amplitude of return might be different but few key anomalies work across market situations and across stock markets in various countries. The earnings drift is one such thing. Earning momentum is one such thing. Price momentum is one such thing. Neglected IPO effect is one such thing. Like this if you start focusing on finding anomalies, you will find around 50 such anomalies which have edge. Some highly secretive hedge funds and traders may have found even more.
While there is a belief amongst most traders that if you share you will lose your edge, it might be true of certain anomalies, but some of the robust anomalies just do not disappear. They have been written about for donkeys years and various explanations have been offered as to why they work, but they continue to work. Knowing does not translate in to profitability. Making these insights work is a craft.
Making Pizza is very easy but only certain pizza outlets are extremely successful. The ingredients of pizza are no secret, but the craft of making it differs and most very successful or famous pizza places have a small unique twist to the method, which makes them stand apart.
While there is a belief amongst most traders that if you share you will lose your edge, it might be true of certain anomalies, but some of the robust anomalies just do not disappear. They have been written about for donkeys years and various explanations have been offered as to why they work, but they continue to work. Knowing does not translate in to profitability. Making these insights work is a craft.
Making Pizza is very easy but only certain pizza outlets are extremely successful. The ingredients of pizza are no secret, but the craft of making it differs and most very successful or famous pizza places have a small unique twist to the method, which makes them stand apart.
Similarly knowing a trading concept or method and making it work and making money out of that idea requires a trading craft. It might be qualitative pattern recognition or quantitative pattern recognition. Look around there are so many hedge funds or traders(pizza shops), they use same ingredients, have similar calibre quants or technical analyst, they know most of these anomalies (having worked in investment banks before), yet some hedge funds (pizza shops) consistently do well while others struggle.
Converting idea in to profitable idea is the craft.
One way to learn craft is by watching others who are more proficient at it. Deep knowledge works. Breaking down craft in to small units work. Mentoring works in high skilled professions. Crafts are difficult to transfer from one person to another. Transfer often requires an extended period of interaction between the two parties involved.
Learning craft also requires extraordinary level of motivation and dedication and time efforts. Both the person imparting the skill and person learning it must have extraordinary motivation for the process to work successfully. Most successful traders may not want to commit that level of time to transfer craft unless they find someone with potential. That is why trading remains so difficult and elusive craft.
But beginner traders in current conditions have much simpler path compared to pre internet era. Today there are thousands of good quality free resources for traders. A motivated trader if he or she follows the right approach can shorten his learnings curve quickly.
But beginner traders in current conditions have much simpler path compared to pre internet era. Today there are thousands of good quality free resources for traders. A motivated trader if he or she follows the right approach can shorten his learnings curve quickly.
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