Trading is an activity that is based more on speculation than on mathematics and therefore to prepare for it – a lot of effort is required.
Written below are some steps that you can incorporate to get better results with your current trading strategy, or better yet, you can use this article as a guide to form a trading strategy from scratch.
How to Prepare for your Trading Journey
Step 1: Plan in advance!
- Don’t just stick to the buy-side. Don’t spend hours on charts trying to decide on buying; once you determine the price, you should also determine the selling price. At times, the stock price will continue to rise even after you have sold it – that is where your discipline comes in. This is the battle half won.
- You also have to decide on a stop loss. A stop-loss is the most powerful tool you have with you – it will help you minimize your loss lest things turn sour, and believe me, things will turn bad.
Step 2: Develop a philosophy.
Your philosophy is your own, people can guide you, but you will have to shape it as per your needs.
Warren Buffett started with “Cigar-Butt Investing,” which he learned from his guru Benjamin Graham. Cigar-Butt Investing involved buying statistically cheap businesses; next, he moulded his philosophy of buying high-quality companies and paying a fair price for them even if they seemed statistically expensive.
A philosophy caters to YOUR needs; it is very personal. For this, you will have to understand yourself.
To prepare for trading you must develop a philosophy and to develop a philosophy you must ask questions such as: “What is the situation am I in right now?” “Can I afford to lose money?”
Also, keep in mind that your philosophy cannot be constant because situations can never be constant.
Step 3: Build your temperament.
You don’t need brains to make a lot of money here – while Quant fund managers are brilliant people who lie at the top percentile when it comes to IQ, they trade basis pure mathematic formulas. They provide no room for error as there is no personal judgment involved.
Without temperament, you cannot handle uncertainty and if you cannot handle uncertainty – you cannot trade profitably. The most important step to prepare for trading is to prepare your temperament.
Step 4: Adapt & Refine your philosophy.
As mentioned above, a trading/investing philosophy is dynamic because situations are dynamic. While this philosophy is personal – you also need to keep in mind the outside world. Adapting your philosophy as per changing circumstances will increase your chances of getting even better results.
Step 5: Keep a diary.
The most overlooked and yet the most powerful thing you can do. Keeping a diary means that you write down:
- Your buying strategy, i.e., Why you’re buying the stock and at what price.
- Your selling strategy, i.e., Why you’re selling the stock and at what price.
- Explain your stop-loss strategy.
- If the trade goes wrong – potential reasons behind it going wrong.
Keeping a diary will eventually help you eliminate your own biases and enhance your results even further. Keeping a journal will also help you refine your philosophy.
It is easy to list all you need to do, but it’s an entirely different ball game when it comes to practically applying it. Below you will find how we can use these techniques in real life.
Darvas Box Theory
The Darvas Box Theory is a philosophy in itself. All it states is that you buy a stock when it starts to trade upwards after trading inside a box for an extended period of time.
As shown above, using an example of HDFC Bank – the stock traded in a range for about 9 months, and after that, it showed signs of upward movement coupled with the increase in trading volume. As per the Box Theory, it is a buy.
Buying Price: xyz.
Selling Price: abc
Stop Loss: pqr
The Philosophy – following The Box Theory but only buying quality companies with a rising trade volume.
The test of temperament would be to adhere to the plan in place.
Example using Momentum-Based Strategy on Tata Motors.
The Philosophy – trading on a stock that shows continuous price upwards movement coupled with an increase in volume. It can also include if you wish to buy stocks only on their 52-Week-High.
The Plan – You had two Major opportunities to buy the shares and make a hefty profit. The first was during the start of the year (Brexit announcement), and the second was recently in October.
The Diary: would explain you setting the buy price, the selling price, and the stop loss at a certain level. It should also include some other reasons why you have preferred this trade over something else – what could go wrong. In hindsight, you can also write what happened after the trade execution – what went wrong(could it have been anticipated).
Websites you can use to prepare better for Trading.
The internet is your friend, provided, of course, you use the resources efficiently. There are free trading websites and news portals that you can use to place your trades and make money, but all of it eventually comes to separating the wheat from the chaff.
- TradeView – a website used by millions around the world. It lets you look at indices and stocks across the globe and now even dabbles in crypto. The website is free to use with more features than a beginner could need.
- Pros – easy to use; free; a ton of features; customizable
- Con – ads on free usage can be irritating
- Trendlyne – a website that can be used for both trading and investing. Trendlyne is a free-to-use website with special features for subscribers. The website is a must if you are new to trading and rely mostly on ratios – the website is easy to use and readable.
- Pros – user friendly; free data; has a screener;
- StockGro App – unlike the ones mentioned above, StockGro is an app to Learn to trade and invest. The website allows users to be a part of a simulation and trade on virtual money – it provides users a very realistic setup. If you are unsure whether you can trade or not, we recommend you give the app a try.
Profitable Stock Trading
Successful trading is not easy. It involves discipline, patience, and the ability to be dynamic but most importantly, it requires you to be detached from your stock holdings because the attachment would prevent you from selling them.
Your planning and your philosophy will help enforce the discipline.
Your patience and detachment will come via building your temperament.
You will develop an ability to be dynamic when you keep refining your philosophy with the help of your diary.