What does it take to be a profitable trader?

My lessons from over 25 years of trading and interactions with thousands of traders.

Posting it here for follow on Q&A.

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@nithin i have read it but doesnt agree with some of points and my investment philosophy turns to be opposite of them. Dont get me wrong but for example you mentioned one quote of robert arnott about being comforatable and i strongly disagree with it and personally the more confortable i am with my particular position the more benefits it does to me. coming to difference between trading or investing both everything in market is or involves speculation,right.Or we can say investing is nothing but succesful speculation as stated by Graham Dodd in security analysis.

My problem is with this 1% success percentage.
Let’s talk cricket. Till date, 231 players played ODI for India from 1974. If we add all the Tom dick and Harry who held bat or ball at least once even in gully cricket, it comes around 15cr. So according to this, one’s chance of being successful in cricket is 0.000154%.

Performance has to be measured with acceptable denominator.

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Dear Sir,

Hard stops are only for traders or even for investors? Pls guide

Firstly about the quote, the context in which I have used is to say that, assume you got into a trade and it didn’t work out. Started making losses. The comfortable thing is to say, maybe it will bounce back, let me hold on. The tougher thing to do is to stick to whatever your risk management rule.

Of course everything in life (marriage, education, job, etc) has speculation to it, stock markets get blamed because all your rights and wrongs, you know the results instantly. For example, say in college you decided to select science over commerce, that is a bet you took. Was that a right bet or not, maybe you will never get to know. But in stocks, you do.

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The 1% I have shared is after adjusting for people who tried and left immediately. Otherwise that number is much smaller. But again, I have used that number in the context of people who trade the markets actively, not those who have invested in stocks and stuck around for many years.

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For investors as well. If you don’t trade well you burn money fast, if you don’t invest well you still burn money but slowly. But the good bit with investing is, you can give yourself a lot more time to learn. But eventually, you have to take a call, if you aren’t able to make or enjoy the process, maybe best to go invest in a mutual fund systematically and not directly in stocks.

Well said. I can relate it to me atleast. Market is certainly not an easy place to be in either for trading or investing. One has to pass value correction and time correction as well before making any substantial profit. Very few make it since start may be due to genes.

@nithin
I have been reading Market Wizards by Mr. Schwagger, thanks to your first podcast. Lessons, ideas and wisdom all in one place. Now the 2nd Illumination.

There are trades on which one forgets or down right rejects to have a hard stop. Like the trade that Saddam took when the tension escalated between Iraq and US. As I write, one other real world trade is afoot between India & China. Seeing such trades done in real world on daily basis, I could only wish there were good bracket order interface, where the these traders can bail out automatically as their Stops or profit targets hit…

The moment we take a stand in real life, we are trading. Once we realize this, then all the lessons that you have written becomes wisdom rather than just truth. If one digs deeper then these lessons are in parallel to age old war strategies of Sun Tzu, Clausewitz and Napolean. Keep sharing your insights and tactics.

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Answering questions from the Zconnect post + Social media.

Have you stopped trading?

I have personally stopped trading stocks from when we started the business in 2010. Nikhil, my younger brother does it, and he is probably the best I know personally. The reason we started with Zerodha was that he was a better trader and there was no point two people trading, and there was an opportunity to be a better brokerage firm. All my stock trades are just for testing our platform today.

By the way,

trading - the action or activity of buying and selling goods and services.

/ˈtreɪdɪŋ/

I think trading isn’t just trading stocks, it is a way of life. It is about doing things to generate an income where the risk to reward is most in your favor, also where the potential ROI is maximum. So yeah, I might not be trading stocks, but I am on the biggest trade of my life with Zerodha.

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Answering questions from the Zconnect post + Social media.

In one of your posts, perhaps in an interaction with other colleague, you mentioned you never used stop loss in your trading life, but here you promote it. How can this doubt be resolved?

One of the issues I personally had with stop loss when I was younger was like everyone else, sticking to it. Somewhere in the journey as a trader, I found a hack around it, which has helped me significantly in all walks of my life - trading stocks, building business, and personal life as well. I typically do anything only if I can make peace with the maximum damage. I have realized that once I have made this peace, my decision making improves dramatically.

So when trading stocks, the change I made was to keep the total money in the trading account itself as a stoploss. So I divided my trading capital into 20 pieces of 5% each, and this 5% was the stoploss. I was an active day trader, so no single position anyways would ever cause too much loss. That said as a day trader, you can end up losing all the money without too many bad trades due to bid-ask spread and charges. The remaining 95% of the capital would be used to trade very low-risk option strategies (almost like a fixed income product).

While I have stopped trading the markets, today we invest in startups through our https://rainmatter.com/ initiative. I follow the similar philosophy. Invest only to the extent where if the investment blew up, it didn’t’ make a huge difference.

Following such a strategy gets easier as the capital at play increases. But for the capital to increase you need to be doing the right things and hope luck hits you. You can’t just take unwanted risks hoping to increase the trading capital quickly. Not everyone hits lottery tickets and even those who hit it end up giving it all if they didn’t/don’t follow the right process.

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@nithin

Whom do u follow for motivation inspiration guidance for small~big decision making in life etc ? Whom do u consider ideal role model in life ?

Are u self driven / self motivated ? Or do u need a jack in your life ?

@nithin after reading the article, I felt that you have written it personally for me because I have made all the mistakes that you mentioned. Enjoyed it completely.

If it’s not too much to ask, can you or your team write an article about such low risk option strategies?

@nithin - Do you think for sustaining as a successful trader in coming years, an individual trader must learn/get into algo trading as it will become increasingly difficult to generate profits with AI/Quants competing against you?

So advantage of any manual trading learning will diminish with time unless you start translating that learning into piece of code and keep updating it with time?

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Which platform Nikhil uses to execute order , I guess it might be Bloomberg EMSX , also since you might now be taking positions worth milllions of dollars , how does it feel to be in position to move the markets. Btw how many traders you have to execute trades and manage positions.

Very nice article, we have come across similar learning many times, but have never followed through consistently. What it took me the follow these discipline and and risk management(no averaging down, mandatory SL), identity and sticking trend was Streak.
I had tried many other things, my own coded systems, ami broker, tips, new, but finally what clicked was, when I took all the learning and ideas and put into Streak and followed it diligently (now for over 1.5yrs), even through rough market patches, at the end every month, I have been comfortably up.
What took a lot of manual constraint now has been automated, you call it feature or lack of feature, I trade only if my conditions have meet, be it on any of over 50 stocks I track.
Thanks you Zerodha for it :pray:

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A program is only as good as the programmer behind it, who is again a human. If you try to trade high frequency or other such strategies where latency (faster spotting the trade and execution) is important, you’d definitely lose out to a program. But if not, manual trading still works and will maybe continue working for a while.

That said, even before computers and programs, all manual strategies also had the same issue of not working with time as more people adopted it. This business of trading is extremely competitive and people go to great lengths to get an edge over others - with or without computers.

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He uses Kite to execute trades. Traders generally have a problem of somehow thinking that they can suddenly start doing well if they had access to some fancy platform with all bells and whistles or if they had access to more trading capital. Your trading platform is only for execution - the simpler and easier, the better it is. Of course for analytics and spotting trading opportunities you can use the Bloomberg and Eikon’s of the world. But these platforms don’t really have as much as an edge any more today where news and information reach social media faster than on these platforms, and there are many online platforms available for free that have the same information. Btw, most people who use Bloomberg, do it more for connecting to other traders around the world.

About trading capital, trading large sizes is a huge disadvantage. Retail traders have a huge edge of being nimble - ability to get in and get out whenever you want. Imagine being in a trade and not being able to get out even when you know it is a wrong trade (a problem of trading large sizes) - it feels horrible.

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Zerodha and its management is becoming the “Amazon” of the Stockmarket!!! I used to think Zerodha is just a Supermarket(Pun intended) for various instruments… :laughing:
Fabulous strategy executed with patience and foresight. The idiom “Brothers in Arms (Biz)” comes to my mind.

I never knew about True beacon venture till date.

Zerodha is passionate about providing platform for traders / investors to profit in short term, while True Beacon works for the same traders/investors who invest their short term profit for long term returns. A Synergy or an edge!!! It would be an unshakeable “Edge” to Zerodha’s initiative Rainmatter with all the existing eggs that it is incubating.

I used to pass by Zerodha’s office in Bangalore everyday for my work for 5 years. Fascinated with the ticker tape running at the entrance Zerodha’s office, I opened trading account for my entire family (me, dad and mom) with Zerodha. I was very naive about the markets at that time…

Today after 5 years, Zerodha has become an inspration. Seeing such a growth and wealth creation we may have finance/ information company that may one day become Bloomberg of India and more. Keep up the awesome work…

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Okay, got it. Based on your insight about the markets, can you please share an estimate of what % of current trades on NSE are -

  1. Manual trades
  2. Algo driven manual trades
  3. Completely automated trades

Will be very helpful in analyzing present world trading environment from a learner’s perspective. Will also guide other traders.

Also does the % distribution in above 3 categories differ largely for Cash / F&O segments?

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