A Money Making Machine? A Practical Guide to Realistic Trading
Many traders start trading hoping to make good amount of money in a short amount of time; alas, most of them just end up losing money. So why does this happen? Mostly because it is just a miscalculation of the amount of profit he thinks he can make in a day.
For example, a trader has a capital of Rs. 10,000. He places a Buy Trade of 100 Qty @ price of Rs. 100. Suppose he keeps a selling order @103; in his mind, he calculates his profit as 100 * 3= Rs. 300 per day i.e. Rs 6000 per month. In his mind, that sounds reasonable, so he justifies the selling of his trade at 103.
However, he does not think deeper into the trade. He is to earn Rs. 6000 on the capital of 10,000, which would amount to 60% in a month. Now, either you are the luckiest person on earth or a an extremely good trader if this is the kind of return you are generating. So then, how practical is this approach? If it is the right approach then everyone would be trading in the market and every second person would become a Crorepati. Does that mean that money cannot be earned in the market?
It can be earned; the trader needs to change his approach. If we keep the same example as above, a Rs. 100 share moving to 103 is a 3% move. In share trading, that is a very big move within one day. When you see that a share is up by 3-4 %, it usually opens up 1.5-2% from the previous day’s closing price. Hence, in most days the market movement is not more than 2 %; in fact the trade-able movement is not more than 1%, on average.
So the trader must change his approach. He is to reduce his greed and try to make a realistic profit from the market.
The first and more important point is to calculate your profit/loss as a percentage of your capital, not on value of money. Using the above example, if the trader bought shares @100 and sold @ 100.55, it is realistic and possible to do this within a day. The net PnL as per RKSV’s PnL Calculator is Rs 51.28.
So we just round it off to Rs. 50; so the profit earned is 0.50% per day, which accumulates to 10 % per month, which accumulates to 120% a year. Now, we are talking about a very good rate of return, but how difficult is it to earn 0.5% every single day? If we try to be a little more realistic and assume that you don’t earn such a profit daily; instead, you generate 0.50% only 10 days out of the month, i.e. 5% a month, which accumulates to 60 % a year, and break-even the remaining 10 days. You can still see that 60% is 6 times more than the average return on an FD, more return than gold, more return than any mutual fund, more return than any land. Even if you were to keep a stop loss of 0.25% that gets hit 5 days a month: you still generate 0.25% per day, for a total of 10 days i.e. 2.5% per month, which comes to 30% a year. This still better than any other investment available to you.
So the idea is to make your strategy a percentage wise strategy and diligently stick to it; once your profit is earned don’t trade again for a day. Have control over your greed! My knowledge of the financial markets advises me to never trust the markets to run your home; instead, use it as a source of extra income to settle some of your expenses. So 3-5% a month is what you should aim for. It is realistic and achievable.