Can you Make a Decent Income by trading?

Yes, yes and yes! You can make a decent income. What is the catch, you ask? Discipline, discipline and discipline! “We follow orders, son. We follow orders or people die!” This is a famous dialogue from the movie, “A few good men.”  Same is the case with trading. If you do not follow the rules in trading, you lose money. Unless you are really lucky, the moment you throw your rules out of the window, you will lose. But luck will not save you in every trade. Same is the case with revenge trading and not exiting at the stop loss levels (stop order). If you avoid some basic mistakes, you can avoid losses. If you avoid losses, the job becomes a little easier to make money in the markets. Is there a holy grail to trade markets? Can one completely avoid losses? No.

Fellow trader and our friend Viswanathan mentions that there are only four possible outcomes in a trade.

• Big loss
• Big profit
• Small loss
• Small profits

What is a Big loss?

Any loss that makes you uncomfortable and makes you insecure is a big loss. Any loss more than 5% of your total capital is a big loss.

How to avoid a big loss?

Have a proper position sizing and a stop loss. You can choose your position size based on the stop loss too.  Say, you have five lakhs in your trading account. And your system gives a buy at 8700 on Nifty futures with a SL of 8630. That is 70 points.  70 points on one lot (75 qty) is 5250 Rs.  Let us assume the maximum loss you can incur in a single trade is 2%. Therefore you will buy only 2 lots.  2% on 5 lakhs is 10,000.

If you follow a proper position sizing and a proper SL, you will avoid big losses. Once it is avoided, the other possible outcomes are small loss, small profits, and big profits.

Once the position is in profits, do not check the MTM to exit your position. Wait till the objective of the trade is met. Trail the SL and wait till it is achieved or exit at the trailing SL.

Now, the position sizing and SL portion of the trades are decided. What next? You need a strategy, a positive expectancy system. Let us say; you have developed a system. A trend based one. If you are satisfied after extensive back-testing, it is time for paper trading. If you start with a capital of 5 lakhs, start with two lots as we have calculated earlier. Give allowances for slippages and brokerage costs. You must test at least 40-50 trades. This may even take six months based on the time-frame you use. Throw your judgment out of the window and enter all the trades. Exit when the system says so. Now, if you decide to change any rules based on the outcome, make sure you do your back-testing again and then paper trade for 40-50 trades.

If you are satisfied with the outcome, start with one lot using real money. Why just one lot? The aim is to understand the slippages and other implementation costs and not to make profits immediately. Once you are completely satisfied, we can increase the lot size based on the stop loss.

One of our friends, who used to be a impulsive trader has developed a rule-based trading system which he abandoned mid-way. When we back-tested it, the results were amazing. If you would like to see how we are paper-trading it, click this link

Caution

• This is not a trading recommendation
• There will not be any SL or exit levels communicated in advance
• The updates may be delayed (there will be at least 2 minutes delay in updating it)
• Whenever we go long, we will buy a put to hedge it (to mitigate overnight risk. We usually buy around 3.20 PM)
• But when we are short, we will not be hedging it