Conversations Monday Dec 7

Aakash Gupta says: “I also invest my savings and read trading books like Mr.Gaurav above. I aspire to follow up my engineering with an MBA in finance and have a career in equities.

I would be obliged if you could advise me on how to get the experience and the risk understanding that you have mentioned above.”

My Notes: This is a sensible question. True to the Indian tradition, I often use high sounding words which read well but mean nothing. (I do not do this deliberately, just part of our national ethos).  So, some explaination is in order.

Experience: This consists of two parts: the theory of trading with technical analysis, and, the actual implementation of your learning.

To learn the theory you should (a) Read as many books as you can on TA. Don’t believe them, just read them. (b) Make a short list of books that impressed you. This will tell you about the methods that make you confortable. (c) Browse the web on TA topics. Every day for a fixed period of time. (d) Make Notes. Write anything. Just random thoughts, but write. (e) Invest in attending TA seminars, conferences, Investor Camps!

To get the experience: (a) begin with position trading, in which you keep positions for days to weeks. (b) Do actual trades. (c) develop a set of rules (99% mechanical) and write them down. Trade ONLY with your rules. Revise the rules once a month. (d) Maintain a trading journal, which should have your observations of what the market does. maintain an errors journal where you note down the periods when you did not follow your rules.

The experience can come from your own trading or from a trading job. The process remains the same.

Still there?

Risk understanding 

(a) Collect the money that you wish to invest in the trading business. Put that money in a separate bank account. This is important. (b) Now define your risk parameters. Not more than 5% of your capital should be invested in any one trade. Not more than 2% of your capital can be used to meet a loss. (c) Assume that you have no other sources of income. Every month, look at the P&L for the month and ask yourself: If I invested X times more, I could earn X times more. At that point, my earnings will have to support my business expenses, my family expenses, savings, taxes, reinvestment in business. Have I reached a point where I can do this? If the answer is Not Yet, then ask yourself: can I afford to invest more in trading? These questions and answers will get you the required understanding of risk. It takes time, but you will get it.