Trading Rule – “Trade what’s happening not what’s going to happen”

WHAT IS THE FUNDAMENTAL DIFFERENCE BETWEEN AN INVESTOR AND A TRADER? AN INVESTOR IS LOOKING A LOT MORE INTO THE FUTURE. THE INVESTOR FOCUSES ON ISSUSES LIKE CHANGE IN EARNINGS, NEW ORDERS, MANAGEMENT PLANS, CORPORATE ACTIONS ETC. THE TRADER DOES NOT FOCUS TOO MUCH ON THE FUTURE.THE FOCUS OF THE TRADER IS A LOT MORE ON WHAT HAS ALREADY HAPPENED AND HOW THE STOCK WILL REACT TO IT. THE TRADER LOOKS TO THE MARKET TO ACT AS A GUIDE TO TRADING. HE FIRST READS THE MESSAGE OF THE MARKET AND THEN CALIBRATES HIS TRADES ACCORDINGLY. THE PRESENT HAS A LOT MORE WEIGHTAGE FOR THE TRADER…

LISTENING TO THE MARKET LIES AT THE CORE OF TRADING STRATEGY…

The trader has a simple rule; never try to outsmart the market. Don’t think that you know more than the market but believe that the market is always right. But the market also gives some very subtle messages. For example, you expect the market to come down based on negative global cues, but the market shows strength. How do you interpret this? Should you try to take a contrarian view assuming that the market is wrong? Or should you just go with the flow assuming that the market knows more than you know? The latter is a better choice for a trader. When you go against the wind, you may benefit as a long term delivery investor. But as a trader, you have constraint of time, capital and loss taking capacity. You must, therefore, begin with the assumption that the market is right and plan your trades accordingly. The market is always giving you a message of the underlying momentum of the market and it is best to stay as close to the momentum as possible.

WHAT IS GOING TO HAPPEN IS NOT REALLY MATERIAL TO A TRADER…

The focus of any trader has to be on three basic areas. Firstly, his task is to read the message that the market gives out about the underlying momentum of the markets. Secondly, the trader has to identify stocks to trade which are liquid and also ensure that he understands the right levels of entry and exit in these stocks. Lastly, the job of the trader is all about managing the risk within the constraints of capital and affordability. If you notice, all these three requirements of a trader are all about the past. There is no focus on the future at all. How the stock price will move, whether the company will better analyst expectations, whether institutions will buy the stock; all that does not matter? What matters is what message the market is giving and what are the right entry and exit points for the stock. A trader will typically live in the present and base his trading decisions only on available data and chart trends. Traders do not overly obsess themselves with what is going to happen. Rather they focus more on interpreting what has happened.

“Your job is to make the best of the current situation and not try to predict the future. To start being a trader; stop being an oracle” – A trader

5 PRACTICAL WAYS OF FOCUSING ON THE PRESENT IN TRADING…

1. Accept the market as the most credible source of information. After all, the market represents the collective wisdom and the collective stupidity of millions of investors across the world. It is surely more representative of the market reality than what you believe is going to happen.
2. Focus on interpreting trends and what it means to your positions. When you see a breakout, ask what the extent of the break out will be. When you find a stock taking support consistently, try asking yourself if the support base is credible or if it is giving you a false illusion of support.
3. Focus on how the stock reacts to news and other cues. You surely do not want to trade a stock that hardly moves. A stock like NTPC is a classic example. It is hard to recollect the last time the stock moved sharply with a lot of volatility. It is hard to trade a stock when it does not react to cues and external stimuli. You obviously want a stock that reacts; and reacts in a predictable way.
4. Focus on what the company has announced rather than what it is going to announce. If a company like Hindustan Unilever announces a structural shift in the quarterly results, then take a view on whether the impact will limited to a day or will continue for longer time. Adopt your buy-on-dips strategy accordingly.
5. Never lose your perspective. When you are investing, your focus is entirely on finding the right stock for the long term edge. You are now worried about time or capital. As a trader you are worried about time and capital. Hence you must calibrate your trades accordingly and focus purely on the present; not so much on the future.