March 3, 2016

Question on becoming a professional trader

Hello KPL sir,

Need your guidance if one really wants to become professional trader, leaving current job.

Could you please guide me on when one can really become confident of becoming a professional trader?

Below are few points acting as barrier for me;

1. Entry barriers seem to be high as leaving current job (consistent money every month) and getting into trading business where we can have draw-down for many     months
2. What should be strategy to achieve it, what kind of trading one can do (considering doing his current job in parallel which is equally demanding)
3. We have prior financial obligations- home EMI
4. How much minimum money would you recommend one should have to start with this business.

I believe in really doing what one likes and trading is sector where I wanted to be since beginning of my career.

I am associated with market since 2008 (not as full time trader). Funny thing is I bought my life’s first stock in 2008 and post that market crashed and closed in lower circuit :). I had lived on tips for long enough to realize it’s not the way to success so started my learning journey few years back.

May be if you can make post on this, it can help other aspiring traders as well.

Also, would love to hear your story, how you became professional trader. What was the inspiration for you and when you decided to go pro?

Sujay Bodas


There is no easy answer here as each person will have his/ her own requirements, constraints, resources etc. I am not mentioning skills as one does not need any exceptional ability or intelligence to earn money from trading - simple common sense is enough.

For trading, there are some min conditions:
- trading edge/ system:  this depends of your trading system and  is something personal to everyone. What works for me may not work for others.
- good psychological state of mind
- Money management system
- discipline/ ability to follow rules.

Trading is all about understanding probability and less about intelligence. No matter how much study you do or how many "experts" you consult, there are 4 outcomes of any trade. Small loss, small profit, big loss, big profit. The first 2 cancel each other so over a large number of trades, the only way to make money is cut losses fast and let profits run. Most people do the opposite and will thus take few years to understand this (and pay lots of money in tuition fee to the markets).

Put other way around, it means that 80% of your profits will come from 20% of your trades.

Money management is the most important condition here. You can take a tip from anyone - but you should manage the risk in a trade in such a way that you do not lose more than 0.5% or max 1% in any trade. This will ensure you survive for at least 100 trades. Most people kill themselves in less than 10-20 trades.

Even a simple rule like buy on close above last month's high can generate stupendous profits! 

Which brings us to the issue of a good trading system. Your trading system or method should be as simple as possible. You should be able to write this down in say max 1-2 lines. Not more than 1 indicator is required (I don't use any).

The best systems will rarely have an accuracy or success in excess of 50-60%. This means you should expect half your trades to fail. But the manner in which this will happen is not known. So if you take 10 trades, expect 5 to fail. But you will not know the order in which trades will fail - this can be every 2nd trade failing or first 5 trades failing or last 5 trades.

Here the emotional stress can be a lot. Imagine coming home and  your wife asking - did you lose money today also? At this point, one is tempted to start the study all over again, try and make a better system and everything gets repeated.

Don't be obsessed with accuracy of a system. A perfect system does not exist. The best and most successful traders rarely have a success of more than 50% - this is as good as a coin toss. Money is made only because you kept losses small and riding profits.

What returns to expect

Delivery: depends on market. If markets go up, you earn otherwise nothing. Be prepared for several months of no action or SL getting hit. A CAGR of 20% over 10-20 years is excellent.

Futures/ Options: these are leveraged transactions so you earn and lose money at the speed of light. Not for everyone but you can earn really very very well.

With options, you need to have an excellent knowledge of option concepts like delta, theta, gamma etc. It is best one sticks to nifty options as liquidity is fantastic. Stock options are good for writers only.

The biggest advantage here is you can make money even on the downside. And with options, you can earn money even if the market is not going anywhere!

Finally whatever you do, it boils down to your trading edge and risk management. Principles of TA are independent of time frame so the same rules apply for all product classes across multiple timeframes.

Hope this helps.

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