Guru Speak | Pawan Arora—It takes a

different kind of mental strength to

sustain a series of losses for the sake of
the one big blockbuster win 
Pawan Arora, a veteran trend following trader talks on what it takes to be a trend following trader

 SHISHIR ASTHANA JUNE 29, 2021 / 10:32 AM IST

Discount broker Zerodha runs a competition for traders called the 60-day challenge. Way back in 2013,
they featured an interview of a trader on their website who made a 400 percent return on his trading
capital during these 60 days. Pawan Arora, the Bangalore based trader was later featured by other
media houses. Since then, Arora has had many successes and drawdowns.

A trend-following trader has more losses than wins in his career. Arora trades one of the more difficult
forms of stop-and-reverse (SAR) strategy, which has a higher number of small losses but the few
winners take care of the losses and more. It takes a different kind of mental balance to sustain a series
of losses for the one good trade that is round the corner.

A reader of non-trading books, Arora likes cycling, walking and playing badminton in his free time.

Pawan Arora was one of the first choices to be featured in the traders’ interview series since it started,
for his track record, aggressive trading style and risk appetite. We were finally able to track him down for
this chat, where he talks about his trading style and what it takes to stay standing despite repeated body
blows.
 

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Q: How did you make a comeback?  

A: It was through an IPO. In 2010, I applied for Coal India’s IPO and was allotted some shares. I booked
my profit on its listing and started my second innings in the market.

I used the two years as a sabbatical to learn more about the markets. Till 2008, my trading was random
and more to do with gut feel rather than anything else.
I always had a desire to make it big. I dropped a year after my 12th standard to prepare for IIT but could
not make it and I settled to complete my engineering from a private college near my hometown.
Post engineering I gave a shot at IIMs through the CAT entrance but could not crack that too. I was
good in quants but lacked verbal skills, perhaps due to my schooling from a small town. I decided to
focus on my strengths, rather than crib about my weakness.

I read up on markets and came across Icharts after reading Ashwini Gujral’s book. I subscribed

to Icharts which gave me access to their chatbox. Many seasoned and full-time traders in those days
were active in the chat rooms.

One day Dharmraj (DJ) also from Bangalore, who later founded Traders Carnival, announced a traders’
meet at his place in the chatbox. Some of the smart traders whom I followed, were expected to come for
the meet.

As luck would have it, the meeting date collided with JBIMS, Mumbai MBA Entrance Exam Date. I
chose to go for the traders’ meet rather than appear for the exam. To date, I have no regrets about my
decision. Nearly two-and-a-half years later I was trading full-time.

That day I understood that my first love was trading. Getting an MBA degree was just an escape route
from my IT Job. In the chat room of ICharts, there were many full-time traders, watching them gave me
the confidence that it is possible to be a profitable trader. Since then, I was on a mission to make trading
my profession.

Q: What are the factors that have contributed to you becoming a successful trader?  

A: During my formative years I learned that trading is about winning over your emotions, it is about the
commitment, the determination, and some motive behind it.

During this period, I also started treating money as a number. Even though trading involves dealing with
money, detachment from the money is necessary to win this game.

Initially, it was very difficult for me to leave money on the table in a profitable trade. If I had a position
that was giving me a mark-to-market profit of 150 points and my trailing stop loss was locking in a profit
of 50 points, I would be uncomfortable leaving that much profit. Then there was the issue of overnight
risk which could affect my returns and kept me worried. Over time, I have learned to live with it and am
comfortable with my trailing stop losses which give me lower whipsaws.

Q: You are a stop-and-reverse (SAR) type of trader, the first we are interviewing. How do you
trade and what are the challenges as a SAR trader? 

A: A SAR trader always has a position in the market, either on the long side or the short side. Within
SAR I am a breakout trader, which means I will continue to be on the long side of the trade unless
support is broken on the downside. I will then reverse my position and will be trading on the short side
till resistance is taken off. Then again, I will go long in the market.
The chart below explains my trading style and how I trail after getting into the trade.

SAR trading is the most difficult form of trend following, I have hardly met one or two SAR traders so far.
The biggest challenge is to avoid fake breakouts because, since a SAR trader always reverses the
trade, he can be hit in a choppy market.

But at the same time, it can be rewarding as well since it will not let you miss any move. Like, in March
2020, it gave me some 4500-5000 points by shorting and trailing my profit. Also, on the day the finance
minister announced a corporate tax cut, the SAR system converted my Short to Long trade and then
Nifty zoomed up 600-700 points in 2 days.

On the other hand, it has its bad days too. My worst trade was when I was caught wrong on the Brexit
event when Nifty gapped down some 300 points and after some months the demonetization event when
it gapped down 400 points. At that time I was using more leverage, so it hit me harder, I have a pinned
tweet about this drawdown story.

There are some choppy days when I get 2-3 continuous reversal signals, those are the worst days and I
always keep on thinking of ways to avoid such fake breakouts. Apart from choppy days, for a SAR
trader gap opening is an inevitable risk that he has to live with.

There are two ways to beat the overnight risk. One, we can hedge our position by buying options – calls
and puts depending on the direction of the trade. But buying this insurance comes with a cost. Second,
we can trade with reduced leverage.

I prefer to do the second. I trade one lot of Nifty for every Rs 5 lakh. The current contract value of Nifty is
around Rs 11 lakh (15000 * 75), which works out to leverage of 2X. In a worst-case scenario, even if
Nifty gaps down 10% and I am stuck in a long position, it will give me a loss of around 22%, which is
well within my risk appetite. Over the years, I have scaled down my leverage to reduce drawdowns.
Such a black swan event happens once/twice in a decade, but being a full-time trader, I cannot ignore
the worst-case scenario and need to be prepared for it all the time.

My entry and exits are all at the same time, I do not do pyramiding or phase in or out of my position.

My win to loss ratio is between 35-40% but my average winners are 3-4 times the average losing trade,
which gives me the positive edge.

Q: Any words of advice for a new trader? 

A: Trading is a tough game. If you are ready to give 5-7 years of effort, only then should one jump in this
game. Those 5-7 years will be very taxing on your mental/physical health and your
pockets. So introspect hard if you really want to get into it.

Trading has been made very rosy on social media, because people have their vested interests, but it is
nothing less than an extreme sport.

Further, there is no one way of making money, a trading style should suit the trader's personality. Since I
have a bigger risk appetite, I am not shaken by a 20-30% drawdown, thus SAR trading works for me.
But some traders cannot see a 10% drawdown, so they follow a different strategy that suits their risk
profile.

One last piece of advice, if you have made up your mind to become a trader, then don't give up. Not
giving up means burning more money, but one needs to remember that we cannot just come and
straight away start making money from the very first month.

It took me 5-6 years to start making money. You will have to pay the tuition fee. The learning cycle has
to be completed. The steps are - Blow up your account a few times; Breakeven for a couple of years
and only then will you start making a profit. You cannot directly jump to the third step, no matter how
many seminars you join or how many books you read.

I believe that success or failure depends upon how strong one desires to succeed.

  SHISHIR ASTHANA