3. I trade on my account, but that is with an online brokerage. In my shop, we don’t trade Futures and Options for anybody. I don’t profess to ‘know’ how to trade. In fact, the learning process is relentless, and almost every time I trade, I learn a new ‘lesson’, which most times may or may not be similar to a lesson I had already learnt in the past. 

Before I actually start listing out trading rules or maxims, there is a need to set the table. Hence: 

1. Ideally, one shouldn't trade at all. But, many of us (me included) are ‘bitten by the betting bug’. Just remember that trading and investing are two separate games, and one has to compartmentalise each of them separately. How one ensures this compartmentalisation is very subjective, but it has to be done. If one is not disciplined about the segregation, it can lead to some unintended consequences. More often than not, a loss-making trading position gets converted into an investment; and the profit making positions are sold. As a result, we are left with the duds; whereas positions in which we booked a profit just continue in the same vein. This doesn’t always happen, but you’ll be surprised by how often it does.  There are two immutable lessons to remember: (1) One cannot be a long-term investor and also a ‘swing’ trader at the same time - before entering the trade decide which hat to wear, and then (2) when one is trading, booking your losses is a survival strategy and one has to be absolutely ruthless about it. 

2. Trading involves both sides of the trade, long and short. Everyone knows how the long side works. The other trade, which is going short, needs some explanation. Short selling is the opposite of owning, or being long, a stock. When you are long, the idea is to buy low and sell high. In a short sale, you still want to buy low and sell high, but in this case, the sale comes before the purchase. Ideally, it should work this way: your broker borrows shares from a shareholder who lends them to you, and you sell them in the market to a new buyer, thus establishing a short position. To close out the position at a later date, you buy shares in the market and return them to your broker to cover your short, and the broker returns them to the owner. Your profit or loss is the difference between the price you receive when you sell the shares short and the price you pay to buy them back. The more the stock falls, the more money you make - and vice versa.

This is not how the Indian stock market functions. SEBI has mandated rules and regulations for Stock Lending & Borrowing (SLBM) that effectively ensure that it is totally unviable to lend or borrow stock. As a result, the whole SLBM segment is a non-starter. However, we do have stock futures. This is an Indian innovation, and suffice to say that, it’s an idiotic concept. But we are stuck with it, and as long as there are stock futures, SLBM as a segment will never gain widespread acceptance. To be fair, before the advent of stock futures on the NSE, Indian markets had a very vibrant stock lending and borrowing mechanism, which was known as vyaj badla. SEBI banned this - stock futures is the new avatar. It is what it is.

In global markets, the concept of stock futures does not exist. They have Index Futures, Index Options, Stock Options and these are supplemented by a very vibrant stock borrowing and lending mechanism. Hence, one cannot really short stocks in India, the way they do in other global markets.  The direct outcome of this is that stock options on the National Stock Exchange of India (NSE), aren’t that actively traded. Actually, Index Options are all the rage as on date. 

3. When one trades, one has to remember that the Current Market Price matters, and for all practical purposes, nothing else does. And this is directly in contrast to an investing trade. When we are investing, we should concentrate on the playing field, and not on the scoreboard. When we are trading, just invert that maxim. Price is god, or as they say, Bhav Bhagwan Hai. 

4. One has to be aware that the person on the other side of the trade may be better informed. Who is on the Other Side of the trade matters, but we will never know their identity. Big players, including the governments, more often than not, tip their hand (show their cards selectively to someone else). So, if there is a surprise price move that is largely unexplained, and you can’t understand, the savvy trader should first square the trade, and look for the reason later. It is better to lose your opinion, not your money. 

A couple of months ago, I read that members of the US Federal Reserve all have Bloomberg trading terminals on their desk. Post their meetings, they are very keen to observe market reactions. At first, I brushed this off as an exaggeration and nonsense. Robert Kaplan Was Trading Like a Hedge Fund Kingpin for Five Years while President of the Dallas Fed; a Dozen Legal Safeguards Failed to Stop Him, has been published as recently as September 27, 2021. And he wasn’t the only one. It seems another Fed President, who goes by the name of Eric S. Rosengren, also resigned for similar reasons. I don’t care the least about the legality of their actions. But, the thought that some trader on the NYSE was buying from, or selling to a Fed President when the pandemic broke out, isn’t exactly comforting. We are looking for weak opponents, and when the person on the other side is a sitting President of the Federal Reserve, the odds aren’t exactly lined up in our favour, are they? Moral of the story, beware of who is on the other side and take the necessary precautions. 

5. Can one learn how to trade by joining a class or an academy? The answer is nuanced. Most of the great traders learn from their own trading experiences. But there is a twist in the tale. For those readers who haven’t seen the English movie Trading Places, I need to give some context. They released the film in 1983, and it tells the story of a skilled commodity trader who is employed with a brokerage firm that has two partners. The partners lay a bet that they can teach the trading skills of this commodity trader to anyone, even a street urchin. And the movie shows the outcome of their bet.  

After they released the movie, the legendary commodities broker, Richard Dennis laid exactly the same bet as was shown in the movie with his partner, William Eckhardt. Dennis proved that trading can be taught. There was a rigorous process for selecting candidates who Messrs Dennis and Eckhardt would teach. The traders who came out of his academy were known as turtle traders. Interested readers can click Turtle Trading: A Market Legend to learn more.

As on date, this concept of teaching individuals to trade for a living has indeed taken off in a big way, thanks to Dennis and his partner. So, in India, we have Capstone, which started its Indian operations in 2014 and has now spread its wings to many other Indian cities. They trade US markets; they don’t trade on the NSE. And such businesses (like Capstone), that are primarily run by US brokers, today employ cohorts of day and position traders, and they now exist in all major financial centres of the world (like in London, for example). 

6. The reason I have written about the movie and its consequences is to highlight the fact that the methods taught by Richard Dennis involved trend following. Trend following as a trading technique, mostly, doesn’t work anymore. The point is, trading methods and techniques that worked yesterday may or may not work tomorrow. To put it another way, the stock market is not like the stock market  - you can’t use the old 'maps' anymore. The terrain keeps changing, and by the time we find out that the terrain has changed, it is too late. 

If one of us is using the lessons from the last bull market to trade the current one, not all of those lessons still work. Every new bull market presents its own share of challenges. Those who win are the ones that show more adaptability to learn new lessons and unlearn the old ones. As they say about our journey in life: Experience is a hard teacher, because she gives the test first, the lesson afterwards. Ditto for markets. Only traders that adapt, survive. The rest are flushed out by the ‘system’. 

7. When we are trading, we have to avoid distractions. I consider the news cycle as a major distraction. And this is not personal in any way. It is a question of mindset. Journalists want to be factually correct in their interpretations and reporting; they don't want to make money from trading in the stock market. As a trader, we want to make money. So, it's a trade-off between interpreting the news flow in the correct manner, or making money. 

It's not a question of what our opinion or that of the journalist in question is; what the market thinks of the news ultimately matters. As a trader, you want to be more concerned about what is happening, and less concerned about why. I am not saying that the why is not important, but we get bogged down on the why. As a trader, the what is what matters, not the why.

8. Aspiring traders must have some kind of trading edge. And, if you don’t know what your edge is, it means you don’t have one. Algorithms and sophisticated high-speed techniques have made the business of ‘trading for a living’ extremely difficult. Hence the adage, trading for a living on the stock market is a hard way to make an easy living. 

I will try to write about trading maxims that have stood the test of time, and are relevant as on date, in my next post. 

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