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OVER ANALYSIS.
You all must have heard this from me several times and thought to yourself, "Cut
the crap man. It's all about analysis." Almost everyone who starts trading, starts
with thinking that ANALYSIS IS EVERYTHING. This is the worst advice that anyone
can give to you or you can give to yourself. So, if you want to graduate yourself to
the next level, first understand the limitations of analysis.
The reason that analysis is just a small part of the whole game is that in analysis,
we try to forecast whether price will move up or down. But the truth of the
matter is that WE DO NOT CONTROL PRICE. We only look at probabilities of WHAT
MAY HAPPEN based upon price action and indicators/oscillators. But the truth
remains, that ANYTHING CAN HAPPEN. SO, WHEN ANYTHING CAN HAPPEN, YOU
CAN'T RELY 100% ON YOUR STUDY OF WHAT MAY HAPPEN.
2. I also did an intraday long trade yesterday which was also a losing trade. I
bought 1 contract at 167.05 which I squared off at 163.90 booking a loss of
12,600. So, post intraday square off, net net I was long 1 contract which I
entered initially.
3. Today, 29th December 2017, price adversely moved against the position
(Chart-2) and made a low of 98.30 in futures, i.e., 41% down from my initial
entry of 168.05. Considering that lot size is 4000 shares, it means MTM loss
of 2,72,800.
4. However, I closed my long position at 156.90 booking a loss of 44600.
5. Further, looking at the fresh situation of the chart when my thesis broke, I
went short. Remember, it's not that one should always go opposite when
original thesis fails. But I could see the momentum and order flow
favouring a short and I made a short at 156.50, just 9 seconds after closing
my losing longs.
This is the order sheet. The last row is when I covered my longs in losses. Then as
you can see in the middle row, I went short and then covered as depicted in the
first line.
Note: This order sheet does not contain initial entry as well as yesterday’s intra-
day trade as it is only today’s order sheet.
P&L MATHEMATICS
Ignore the 8000 in Net Buy/Net Sell Quantity and also ignore the prices given.
That’s because since I had taken a 3 total of 3 trades, one initial long, second the
intraday long and third the today’s short one, Zerodha has an internal
methodology of averaging the prices and displaying the confusions. So, don’t get
confused, I’d dissect the P&L in a couple of minutes.
a. The loss for long which I closed today in loss at 156.90 is calculated from
yesterday’s close rather than actual entry. So, though my actual long
position was taken at 168.05, yesterday’s close was 164.90. So today’s loss
in long trade was calculated from 164.90 to 156.90 that makes the loss
figure as 32000.
b. The profit for today’s short from 156.50 to 115.45 is calculated as 1,64,200.
This is the actual line wise, trade wise P&L calculation. So, effectively, a net profit
of 1,07,000 was generated in Infibeam trade over a period of 3 days and 3 trades.
LEARNING
As you can see that despite the analysis being completely thrashed and
destroyed, a lot of money was made in the trade. Every beginner must place
himself in this position and imagine himself in the trade. He should think, would
he have made money even when analysis is destroyed. Generally, the answer
would be NO. There are 4 major reasons for this:
2. Ego is another factor. Lots of beginners do not cut losses because they feel
that they have done lots of ANALYSIS and it can’t go wrong. So, when it
goes wrong, they start hoping that it will come back.
4. When one decision gets failed and a beginner gets punished by the market,
he becomes apprehensive of taking another decision. That is why it
becomes very difficult for a rookie to close a position in significant loss and
still be able to see the situation rationally and take another action.
FINAL WORDS
I don't remember who said it but I heard it long back when I started trading
almost a decade back. It went like, "I made most of my big money in my worst
trades." If you see the statement it makes a lot of sense.
I mean, there is no limit to being right but there surely is a limit of being wrong.
Hence, you must make big money when you are wrong because YOU KNOW IT.
See, let’s say RSI is coming from 70-80 and taking support at 40, which is bullish.
Price is also taking support at a demand zone. You have a long thesis on the trade.
In case of being right, there is no sure shot way to know that WHAT IS THE LIMIT
OF BEING RIGHT. What I mean to say is that, based on the above conditions, let’s
say you entered into a long trade and price started rising and RSI started rising
too, you know that you are right but you don’t know the extent of being right. I
mean, price and RSI can keep on rising for a long time. RSI can remain overbought
for a long time while price may keep rising.
But, the beauty about being wrong is that YOU KNOW WHEN YOU ARE WRONG.
The moment your price and RSI breaks support, you know you’re wrong. And
logic says, KNOWLEDGE IS POWER. So, that converts to a principle that you
must always remember if you want to be successful in trading:
KNOWING THAT YOU ARE WRONG CAN BE MUCH BETTER AND PROFITABLE
THAN BEING DOUBTFULLY RIGHT, PROVIDED THAT YOU CAN KEEP EMOTIONS
AT BAY AND TAKE DECISIONS RATIONALLY.
NISHANT ARORA