Zen and the art of trading ….

Annonymous trader
Market Wiz(ar)dom
1) First things First
First, be sure u want to trade. It is common for people who think they want to trade to discover that
they really don’t.
2) Examine your motives
Think about why u really want to trade. If you want to trade for the excitement, u might be better off
riding a roller coaster or taking up gliding. I found that in my own case the underlying motive for
trading was serenity – or peace of mind, hardly the emotional state typical of trading.Another
personal motive for trading was that I love puzzle solving- and the markets provided the ultimate
puzzle. You need to examine your own motives very carefully. The market is a stern master. You
need to do almost everything right to win. If parts of you r pulling in different directions, the game is
lost before u start.
3) Match the trading method to your Personality
It is critical to choose a trading method to suit ur own personality and comfort level. George Soros
has once commented that virtually every successful trader he had met had a trading style which
suited their personality. Incidentally, the mismatch of trading style and personality is one of the key
reasons that many traders fail.While the odds of getting a winning system r small- certainly less then
50/50- the odds of getting a system to suit ur personality are smaller still.
4) It is absolutely necessary to have a edge
You cant win the game without an edge, even with the worlds greatest discipline and money
management skills,If you could, then it would be possible to win at roulette ( over the long run) using
perfect discipline and risk control. Of course , that is a impossible task given the laws of probability.
If you don’t have an edge, all that discipline and money management will do if to guarantee that you
will gradually bleed your way to financial ruin.Incidentally if u don’t know what ur edge is, you
don’t have one.
5) Derive a method
To have an edge, you must have a method. The type of method is irrelevant. Some may follow a pure
fundamental approach and others technical and some a hybrid. Even within one group there will be
variations. The type of method is not important, having one is critical- and, of course, the method
must have an edge.
6) Developing a method is hard work
Shortcuts rarely lead to trading success. Developing your own approach requires research,
observation, and thought. Expect the process to take lots of time and hardwork. Expect many dead
ends and multiple failures before you find a successful trading approach that is suited to your
personality. Remember you r playing against tens and thousands of professionals. Why should you
be any better? If it were that easy, there would be many who were super rich trading, I in my life time
know only of a handful traders.
7) Skill versus Hardwork
Is trading success dependent on innate skills? Or is hard work sufficient? There is no question in my
mind that many super traders have a special talent for trading. Marathon runners provide a
appropriate analogy. Virtually anyone can run a marathon, given sufficient commitment and
hardwork. Yet, regardless of the effort and desire, only a small fraction of the population will be able
to run a marathon to under 2 hours. Similarly anyone can learn to play a musical instrument. But only
a handful will go on to be able to be concert soloists. The general rule is that exceptional
performance requires both natural talent and hard work to realize its potential. If the innate skill is
lacking, hard work may provide proficiency, but not excellence.
In my opinion the same applies to trading. Virtually anyone can become a net profitable trader, but
only a few have the inborn talent to be super traders. For this reason it may be possible to teach
trading success, but only upto a particular point. Be realistic in your goals.
8) Good trading should be effortless
Wait a minute. Dint I just write hardwork to be essential part of successful trading? How can good
trading require hardwork and yet be effortless?
There is no contradiction. Hard work refers to the preparatory process- the research and observation
required to be a good trader- not to trading itself. In this respect, hardwork is associated with such
qualities as vision, creativity, persistence, drive, desire and commitment. Hardwork does not mean
that the process of trading should be filled with exertion. It certainly does not mean struggling with
and fighting with the markets. On the contrary, the more effortless and natural the trading process,
the better the chances of success. As the anonymous trader in “Zen and the art of trading “ put it, “In
trading, just as in archery, wherever there is effort, force, straining, struggling, or trying, its wrong.
You’re out of sync; with the harmony of the market. The perfect trade is one that requires no effort.
Visualize a world class runner, clicking off mile after mile at a five min pace. Now picture an out of
shape, 250 pound couch potato trying to run the same mile at ten min pace. The professional glides
along gracefully-almost –effortlessly- despite the long distance and fast pace. The out of shape
runner, however, is likely to struggle, huffing and puffing like a steam engine. Who is putting in
more hard work and effort? Who is more successful?. Ofcouse the world class runner, is putting in
more hard work during training, and this prior effort and commitment are essential to his success.
9) Money mgmt and Risk control
In my opinion money mgmt is more important then the trading methodology u follow. Many
potentially successful systems or trading approaches have lead to diasaster because the trader
employing them lacked a method of controlling risk. You don’t have to be a mathematician or
understand portfolio theory to manage risk. Risk control can be as easy as the following three steps.
1) never bet more then 5% of ur capital as a loss in any given trade. ( Depending upon ur style of
trading a modestly higher number may be okay but not 10% surely )
2) Predetermine ur exit point before u enter the trade.
3) If u lose a certain amount of ur capital take a breather. The strategy of cutting trading size down
sharply during losing streaks is one which I too follow very rigorously.
10) The Trading Plan
Trying to win in the markets without a trading plan is like building a home without blueprints- costly
( and avoidable) mistakes are virtually inevitable. A Trading plan simply requires combining a
personal trading method with specific money management and trade entry/exit rules. The absence of
a trading plan is the root of all the difficulties that a trader faces when trading the markets. Your
trading plan also should reflect ur core personal philosophy.Without ur core personal philosophy, you
are not going to be able to hold on to ur positions or stick with ur trading plan during really difficult
times.
11) Discipline
Discipline is the most important component of being a trader.There r two basic reasons why
discipline is critical. First, it is a prerequisite for maintaining effective risk control. Second, u need
discipline to apply ur method without second guessing and choosing which trades to take. People
always when they apply their mind will pick up the wrong trade or what seems comfortable to do is
often the wrong thing to do and what is very difficult to do is the right thing to do…………...simple
and clear.
Remember one thing u r never going to be immune to bad trading habits- the best u can do is to keep
them latent. As soon as u get lazy or sloopy, they will return.
12) Understand that U r responsible
Whether u win or lose, u r responsible for ur own results. Even if u lost on ur brokers tip, an advisory
service recommendation, or a bad signal from ur own system, you r responsible because u made the
decision to listen and act. I have never met a successful trader who blamed others for his lossess.
The Difference between a casual trader and a serious trader

The difference between a casual trader and a serious trader

The casual trader loves to talk about the markets in general the serious trader will never discuss the
markets in general.
The casual trader will have price knowledge of a multitude of scrips, the serious trader will only be
worried about the prices of what he is trading.
The casual trader will always have resistances and supports patterns and a multitude of things ready
to be discussed, the serious trader will never want to discuss such things as he knows that before a
hunting expedition we do not tell the hunted what weapons we r going to carry
The serious trader will never ever discuss his position while as the casual trader will only be
interested in talking about his position
The casual trader will necessarily have to be talking about politics while as the serious trader will
never give his views on the same
The casual trader will always be sitting on the fence so to say when it comes to predicting, the
serious trader will not mince and give his views only in figures.....if this happens( read price ) this or
else this and if that happens then this.
The casual trader loves giving advice on the markets to anybody who is a listener and the serious
trader will never do that, as he knows that people listen only to what they want to hear.

FIRST RULE OF TRADING

What is the first rule of trading?

I would argue that before anything else, the prospective trader must find the approach that is best
suited for his personality. Each trader must select the appropriate market arena, choose between
system trading and discretionary trading, fundamental and technical methods, position trading and
spread trading, short-term and long term-horizons, aggressive and conservative approaches, and so
on. For all those opposing choices one alternative will suit the traders personality, while the others
will lead to internal conflict.
At this point, u may think that selecting a trading methodology in sync with ones personality doesn’t
sound like much of a insight. “After all”, u might ask, “doesn’t every trader choose a methodology
which suits his personality?” Absolutely not!!!. My own exp in this regard is that this is the single
most reason why people fail.
In a more general sense, it is remarkably common for traders to adopt methods that are most unsuited
to their personalities. There r traders who r good at system development but end up consistently
overriding and interfering with their own systems, with disastrous results. There r traders who r
naturally inclined towards developing long term systems but end up instead trading short term
because of impatience or a compulsion to “do something”. There r naturally born traders who can
read the screen traders who abandon their expertise and become mundane portfolio managers. And
there r therotically inclined individuals who develop intricate, low risk arbitrage strategies but then
decide to become position traders- a approach that may require a degree of risk acceptance far
beyond their comfort levels in order to be applied successfully.
What do i do when im undergoing a losing streak?
Any systemic player will necesseraliy have to undergo a losing streak while he keeps up the
discipline of following his system. I write becauuse i can sense that people out there who trade will
be undergoing a losing streak now as the systems r making strong money for us. Which implies that
people generally r losing money in the markets.
This is what i do when im undergoing a losing streak.
I cut back my position size. How do i know that im undergoing a losing streak. If i treat every month
as the trading period in which to calculate my performance and after 50% of the time if im below the
annual avg of my lossess in a month, then i sit up and start wondering whther im going in for a losing
month. By cutting the avg size of my position after the above mentioned parameters r met i will lose
as little as possible.
When i get into a losing streak, i like to read a book to learn something new. That action
accomplishes two things. First, it takes my mind of trading; second, by enhancing my knowledge, i
help improve my self esteem.The key is to do something positive.
The one single reason people lose money in the markets is because they have no mechanism to
control their lossess. It is a curiosity of human nature that no matter how many books talk about this
rule, and no matter how many experts offer this advice, people will still keep making the same
mistakes. The key is to approach trading as a business. In any business when u make lossess the first
thing u do is to reduce ur top line in this case it is to reduce ur exposure to the markets. Simple yet so
diffiicult to follow.

Adivce to all novice traders

There are five basic steps to becoming a successful trader. First, focus on trading vechicles, strategies
and time horizons that suit your personality. Second, identify non random price behaviour,while
recognizing that markets r random most of the time. Third, absolutely convince urself that what u
have found is statistically valid. Fourth, set up trading rules. Fifth, follow the rules. In a nutshell, it
comes down to just two words…….be Disciplined.

If trading can be taught, can it be taught to anyone with reasonable intelligence?

Anyone with average intelligence can learn to trade. This is not rocket science.However, it is much
easier to learn what is to be done in trading then to actually do it. Good systems generally violate
normal human tendencies.Of the people who can learn the basics, only a small percentage can
become successful traders.
If a betting game is played amongst a certain number of people long enough, eventually one player
will have all the money. If there is any skill involved , it will accentuate the process of concentrating
all the stakes in a few hands. Something like this happens in the market. There is a persistent overall
tendency for equity to flow from the many to the few. In the long run, the majority loses. The
implication for the trader is that he has to act like the minority to be able to win. If u bring normal
human habits and tendencies to trading, you will gravitate towards the majority and lose.
Decision theorists have performed experiments in which people are given choices between sure
things ( amounts of money) and simple lotteries to see if the subjects preferences are rationally
ordered. They find that people will generally take a sure gain over a lottery with a higher expected
gain but that they will shun a sure loss in favor of an even worse lottery ( as long as the lottery gives
them a chance of coming out ahead). These evidently instinctive human tendencies spell doom for a
trader- take your profits, but play with ur losses.
This attitude is also culturally reinforced, as exemplified by the advice: Sieze opportunities, but hold
ur ground in adversity. Better advice to the trader would be: Watch idly while profit taking
opportunities arise, but in adversity run like a jackrabbit.
One common adage on this subject that is completely wrongheaded is: You cant go broke taking
profits. That’s precisely how many traders do go broke. While amateurs go broke taking large losses
professionals go broke taking small profits. The problem in a nutshell is that human nature does not
operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the
number of winning trades ( or minimize the number of losing trades ) works against the trader. The
success rate of trades is the least important performance statistic and may even be inversely related to
performance.

A very new trader who is learning trading under me asked me today what time does it take to be a
good trader?
the answer is if we start from zero it takes three months to master the rules and another three months
to apply them in real life. then another three months to know all the mistakes u have done and
another three to come out victor. In all a year, now know for urself if u have that much time with u to
learn trading ?

The Trader within

Many potentially successful systems or trading appraoches have lead to disaster becasue the trader
applying them lacked a strategy for controlling risk. Rsik control means the following
Know when u will get in , know when u will get out and know when u will not do anything and just
sit tight.
When u will get in has to be determined by some rule of what price and at what time u will get in,
The later time element is least understood and maybe one of the essential reasons people get sucked
into false moves just because price seems to be moving
Even before u get in u should also answer when u will get out once u get in, here again the price and
time concept comes into play, Time is a best leveller they say how true it is in the trading world as
people dont understand time while trading the markets.
Varying the bet size is another element of risk control which people grossly misunderstand, some
stick to even lots others over trade and a smaller but truly unfortunate lot simply dont trade to their
potential by trading ever so small. Needless to say that neither approaches will make the trader
employing any of the above see the light of the day in trading. For him it will remain a run to catch
the horizon.
What then is the holy grail of risk control, well i will tell u when u be with me for it is at the heart of
my winning secret, Why share it with a casual reader, i am simply being street smart, after all i am a
trader, u see.
Trying to win in the markets without a trading plan is like trying to build a house without blueprints-
Costly ( and avoidable ) mistakes are virtually inevitable. A trading plan simply requires combining a
personal trading method with specific money mangement and trade entry rules. The absence of a
trading plan is at the root of difficulties traders encounter in the markets. Ur trading plan has to
reflect some core philosophy, U will not be able to stick to ur positions or ur trading plan in times of
distress if u dont have a core trading philosophy.
I know u have heard this one a million times before but "discipline" is really important. There r two
basic reasons why discipline is critical. First, it is a prerequisite for maintaining effective risk control.
Second, u need discipline to apply ur method without second guessing and choosing which trades to
take. What feels good is often the wrong thing to do. Remember u can never be immune to bad
trading habits- the best u can do is to keep them latent. The moment u become lazy or sloppy, they
will return. For those of whom who have known me these r the servants of "Her Majesty Chaos".
Whether u win or lose u r responsible for our own results. I have always met people who have
blamed something or someone for thier trading lossess, i have honestly never seen a person stand up
and squarely own the loss in terms of the decisions made.

Is trading success dependent on innate skills? Or is hard work sufficient?

There is no question in my mind that to be a super trader u have to be born with some innate skills,
but the general rule is that exceptinoal performance requires both natural flair and hard work to
realise potential. If the natural flair is lacking hard work may provide profiecieny but not excellence.
Mind u it is worth remembering that inspite of having innate skills it also requires hardwork, so what
if one doesnt have the natural flair for it the amount of the hardwork then needs to go up massively.
Ask urself whether u r ready for such a gargantum jump of efforts, is it the motive of making fast
money ur basic aim? answer this question honestly for if the answer is a "yes" then know that a lot of
time and money will be required which automatically cuts the fast money out. Then why trade?
Good trading is effortless, u may wonder how i can be so incongruent as to mention hardwork and
then say it has to be effortless, there is no contradiction. Hard work refers to the preparatory process-
The research and observation required to be a good trader- not to the trading itself. In this respect
hard work is associated with such qualities as vision, creativity, persistence, drive, desire and
commitment. Hard work does not mean that the process of trading should be filled with a lot of
exertion. If ur mind is filled with a sense of relief when the market closes, it is a sure sign u r at the
wrong place. If on the other hand u wished that the markets kept on going, know u r in the right
place.
Visualize a world class runner, clicking off mile after mile at a five minute pace. Now picture a
couch potato trying the same run. The professional runner guides along gracefully- almost
effortlessly- despite the long distance and pace. The out-of-shape runner is likely to struggle, huffing
and puffing like the dullard who barely manages to pass exams. You may ask ur self who is putting
more work and effort? who is more succesful? Of course the world class runner puts in hard work
during training, and this prior effort and commitment r essential to his success.

How much capital is right capital to start trading ?

The one reason why most businesses fail is because they r, to start with, undercapitalized. If this is
taken into consideration then its imperative to know how much capital u should have before u
venture into trading the markets. I will stick to the Indian commodity markets. When I say Indian
commodity markets Im restricting myself to a set of nine commodities viz: Alum, Copper, Crude,
Gold, Lead, Natgas, Nickel, Silver and Zinc. Another point worth noting is that im discussing major
lots of all these commodities.
If u consider the general rule of the MCX that initial margin required to take positions is 5% of the
contract value or based on SPAN whichever is higher then we can come to the capital required to
trade one lot of each of these commodities. The total if u did the calculation would come to round
about 3.45 lakhs. The break up has been given below.
Sr no Scrip name Price Lot size Contract value 5% margin
1 Alum 105.20 5000 526000 26300
2 Copper 401.40 1000 401400 20070
3 Crude 5830 100 583000 29150
4 Gold 25500 100 2550000 127750
5 Lead 122.30 5000 611500 30575
6 Natgas 215.80 1250 269750 13488
7 Nickel 823.40 250 205850 10293
8 Silver 40300 30 1209000 60450
9 Zinc 109.80 5000 549000 27450
Total 345525
Now what we need to take into consideration is the additional working capital that will be required to
trade. In the trading world working capital is nothing but the amount u have to keep aside to take care
of ur losing trades. The best System in the world works at a trade ratio of 80:20 by which I mean that
for every 10 trades two trades can be wrong. This is the worlds best we should accept it with a pinch
of salt ours cant be better then this and hence we r to assume a 60:40 ratio………….. be realistic.
There is no guarantee in the trading world that these four signals which r likely to fail can’t come in
succession. More often then not they do come in when we least expect it. So If we r to factor in that
in our money management then we need to make provision for at least four successive lossess.
Now the best part, the most disturbing and the most vital. What if these four signals failed in gold
successively. Assuming a percents loss on each trade u will be down 1 lakh rupees but we can also
assume that these signals will fail in say nickel and there we would stand to lose much lower, just rs
8000 in all four trades put together. So now we can come to the final requirement for trading one lot
of each commodity and that is Rs 345000 + RS 100000 = Rs 4.45 lakhs.
One can play around with ones working capital but strictly speaking this is the requirement and if any
one of u decides to do two lots then know that the capital requirement doubles. Now u can apply this
test to what money u have and then know for urself what stocks u r supposed to trade. Another very
important thing to know is that individually each stock or commodity does go through loss making
months. In 12 months 2 months every stock and commodity will go through a loss ………and this
applies no matter what system or method u r using. Which leaves us 10 months of profitable trading,
assuming that two of these months have to be compensated for the loss making months then we have
8 months of net profitable trading on each stock or commodity.
They say Well defined is half solved………..i tried my best to define it for u the other half I leave for
u to finish urself lolz……and that is to trade. Happy trading!!!!!

What is the prevelant market sentiment? This is the holy grail in trading the markets. If any one of us
knew what the sentiment is going to be it would be a great advantage, unfortunately each one of us
can go in three directions in this, bullish, bearish and undecided. One will find it hard to believe but
the markets r in a undecided position for more then 40% of the times.Yes the markets r always
undecided in any given counter for more then 40% of the times. Which means that given any counter
we can be trading only on the remaining 60% days. This fact is easy to read but when we come to
apply it in practice it is a very difficult thing to do. Assume u bought zinc today and it went down,
what happens internally is that we tend to think of it having changed modes from bullish to bearish,
what a human mind fails to understand ( and this I write with the utmost respect to the best of brains )
is that the sentiment may have changed from bullish to just being undecided. It has massive
implications on what our trading results can be. The reason I write this passage today is to throw light
on this aspect of sentiment. The table below gives u the price bias as also the sentiment bias. This
sentiment bias is a mathematically derived product and not one based on my understanding of the
markets. It involves the interplay of not only price, volume but also of the avg price of the days
trading as also the minor level system signals which create areas of bullish breakouts as also bearish
breakdowns.
Scrip name Price bias Sentiment bias
Alum -ve +ve
Copper -ve +ve
Crude +ve +ve
Gold +ve +ve
Lead -ve +ve
Natgas -ve -ve
Nickel -ve Undecided
Silver +ve Undecided
Zinc -ve +ve

The life of price