For me trading is simple.
I just go by three simple rules:
Have the belief that trading is profitable.
Know your trades.
Know yourself as a trader.
Nothing more is required and nothing less will serve the purpose.
Trading is simple. We do not like when we fail to make money in something which is simple. So we make it complicated. We get bogged down with theories, charts and strategies.
What actually works– Strategy or Psychology ?
I had written on Quora a long time back.
Sharing the same content here:
Strategy Vs. Psychology :
There is a small story I heard many years ago. I did not understand the implied meaning then. Later on when I started trading the stock markets and listening to the people about their losses I remember this story almost on a daily basis.
A businessman was travelling in a train when it was attacked by dacoits. They asked everyone to hand over the cash and valuables like jewelry. This guy also did the same like everyone. When the looters were returning with their booty, this man calls out to the leader of the gang:
“ Hey, one minute, come here.”
The leader is a little surprised.
“ What is the matter? “
“ I have something more for you.”
He takes out a revolver from his pocket and hands it over to the gang leader. This man is taken aback and asks:
“ You had a gun all the time and did not protest at all? “
The business man sheepishly replied:
“ Someone told me that this gun will help me in a tight situation but it did not. That is why I am telling you to take this with you. It is worthless.”
The revolver is the strategy. Having the courage to use it or not is the psychology.
If the courage is missing, the best gun in the world will fail you in your moment of crisis.
A strategy without the right psychology is just like the gun in this story— Worthless.
How it Works in Trading? :
Remember that SBI came up with a rights issue priced at around Rs. 1590 per share in year 2008 .
A friend bought these shares at this price.
It crashed to Rs. 1100 in few months. Like most other people, he kept holding his position.
After October 2008, markets started recovering. I do not recall exactly when, but I got a call from him one day:
“ I have exited at 1600. Closed the trade today at 15:29 hrs. Thank God, I recovered the loss.”
SBI stock did not stop there. It went on to a high of Rs. 3500 around Deepavali time in year 2010.
He had the tool to make profit. The right stock.
Did not have the psychology for waiting patiently when the trend had turned.
Waited so long in loss, but lacked the patience to wait in profit.
What for we are in the markets?
To break even.
To avoid losses.
Or to make profits.
A trader has to address all these issues to self and find the solutions within.
Strategies will initiate a trade. Success in trades would depend on the psychology.
As Peter Lynch had stated: