Becoming a trader has been an incredible journey for me. It has made me a different person and given me a new perspective on various aspects in life. The journey has helped me learn a lot through years of trial and error and observations.
Today’s newsletter is different from my other newsletters because I want to share with you a few of my learnings that are the foundation of my trading system and psychology.

1. Master the basics

To become successful in a profession or career, one has to master the basics. These basics lay the foundation for the journey ahead. Mastering the basics ensure the future learnings are quick and clearly understood. The basics in technical analysis are the classical theory. These could be the Elliot Wave theory, Darvas Box theory, the Fibonacci theory, or even the Dow theory. The reason these are called classical theory is because they have stood the test of time. Learn these theories, observe them on the markets and master the ones that resonate the most with you because each trader has their own unique thought process.

2. Always trade in the direction of the trend

Although this learning seems obvious, it is not what a new trader thinks about when starting out. The basic concept of trading is that trend exists, and the trade should be taken in the direction of the trend. if the trader is able to decode the direction of the trend, then half the work is done. It is then only a matter of deciding when to enter and exit the trades. It is important to remember that trend must be analyzed on various timeframes before participating in an instrument. I had to learn this the hard way. It was only through losing a few trades and understanding the importance of Multi timeframe analysis.

3. Be selective of the stocks to trade

Any trader who starts out in the markets will face two dilemmas: i) They will be paralyzed as to which stock to trade? Afterall there are 3000+ stocks in the market. Given this overwhelming choice of stocks, they will not be able to choose the stock to trade. This can lead them to the second dilemma ii) Jumping ships from one stock to another in search for the better stock. The only way to avoid these dilemmas is to choose a trading universe and to stick to it.

In general, there are 4 types of trading universe:

1. Fixed trading universe: These are the groups that are already created by the securities exchange or the broking software. Some of the examples are Nifty 50, Nifty 200, Nifty 500 or any of the NSE sectoral indices.

2. Dynamic trading universe: This is a group created by the trader who wants the stocks which meet certain conditions of their trading strategies.

3. Fixed-Dynamic trading universe: These are the stocks that are part of a fixed trading universe but also meet the conditions of the trading strategies.

4. Trading only one specific instrument: This involves trading only one instrument. All the positions that the trader wants like going long, short, or on different timeframes.

4. What type of a trader are you?

Widely speaking, there are two types of traders in the market: Breakout traders and Pullback traders. Breakout trades are the ones which participate in the stock when the previous high or low of a stock is breached. Pullback traders are the ones which wait for the price to revisit the breakout level and then participate upon a bullish or bearish pattern. Both the methods have their own drawbacks and advantages. Breakout trading allows for early participation but has a stoploss that may not be affordable by some traders. Pull back trading has a small stop loss and also gives a confirmation that the breakout was not false, but the issue is that the price may gain momentum and never revisit the breakout level.
Both the types of trading have different rules and require different trading psychology.

5. Backtesting

Backtesting has been an important part of building a conviction in my trading strategies. This is the reason why I am able to identify the trades which wouldn’t work even if the conditions are met. Backtesting has two benefits: One, it will help the trader build an observation. These observations will improve the trader’s ability to identify patterns and read charts effectively. Two, backtesting will build discipline and patience in the trader as it requires hard work and effort. The process of backtesting is long but will be worth it.

These elements and learnings have been game changing for me and it took a while for me to learn them. One of the important elements not mentioned here is that I had a mentor to guide me when I went wrong or wanted advice. Having a mentor helped me fast track my learning and gave me a confidence. If you are someone new to trading and are looking for someone who can be your mentor and guide you through the journey of trading, check out TNT One.