The biggest trading mistakes that cost me Lakhs of Rupees.

“I have not failed. I’ve just found 10,000 ways that won’t work.” —Thomas Edison

In my small trading career, I have made lots of mistakes, faced lots of troubles, and many times got frustrated but kept going.

Over time, I realized that Mistakes are necessary to grow in anything you do in life, just keep those mistakes small enough so that you can bounce back.

These are the biggest mistakes and the lessons I learned from doing those mistakes.

Mistake 1: Hot Hand Fallacy

In simple words, It’s a belief that a person who experiences successful outcomes in the past has a greater chance of success in the future.

This fallacy is derived from sports, as when a player is on a hot streak we expect the streak to continue, irrespective of the average of the previous performances of that player.

In Trading when a trader goes through a time of winning streaks, he thinks that he knows everything and he has decoded the markets, and now nothing can stop him from being a billionaire.

Thus, he starts to take wrong-sized bets, which eventually lead to blowing up or Huge losses in the end.

Let’s know, How I experienced this Hot hand fallacy, and what were the consequences and the learnings that I got from this event.

Context:

The year was 2017. The markets were inching higher and higher for the last 1 year.

In mid-2017, Graphite stocks like Graphite India, HEG, Goa carbon started to inch higher, which seems to be normal as many stocks were moving up at that time.

Then the news comes that China is shutting down many Electrode manufacturing plants as they were not in compliance with the Environmental policies.

China was a net exporter of Electrodes at that time, and this move turned China into a net importer of Graphite electrodes.

HEG and Graphite India were the 3rd and 4th largest Graphite manufacturing companies at that time.

This move by China led to a Boom in graphite prices from 3000$ per MT to 11000$ per MT in 6 months.

Indian Graphite electrode companies were direct beneficiaries of this move by China.

I started tracking graphite India when it was around 160-170 Rs, in July 2017, as it came into my All-time high screeners.

As I was tracking it very closely, One day I was checking the block and bulk deals data. I found that some big Investment banks bought a huge qty around 190 Rs. It was Morgan Stanley (France) who bought the shares.

Though I was not looking at the Fundamentals of the company, I Kind of liked the story of these stocks looking at the situation.

I started dabbling into it by buying a few shares and selling them for a quick 4-5% profit and the stock just kept going up, so was my conviction with the Graphite story.

My profits were growing rapidly, and I remember that I stopped tracking any other stock at that time because Graphite India was giving me enough profits. whatever price I bought it used to go up from there.

In the next 5-6 months, it did what I expected, it kept running higher and higher.

And my Position sizing kept increasing with the increasing Conviction in the stock, I was taking delivery trades with 3-4X leverage, as my broker used to give leverage in cash delivery trades also.

My account went 300% in profit during this time, though many times I lost huge amounts of money ranging from 5-15% of the account due to high leverage, the profits were still higher than the losses.

As you know, someone can drive a 200 car once or twice, but if he keeps doing it every time he drives, then it’s a sure-shot way of going to the hospital.

And it happened!!!

When I was flying high with a huge amount of profits, I was sure that wherever I bought it, it would fly higher, and all the rules of Position sizing, low risk, stop loss, etc went into vain.

After The biggest profitable trade in my trading career, My confidence was at its peak, I was not in any fear of losing money, and Greed took over, without me knowing, and I loaded a huge qty of graphite India at 645 Rs.

The stock was in the Upper circuit that day. I placed the buy order just below the UC, as I thought it would be a good opportunity to buy if the UC opened, and I played it with full 4x leverage.

And I did not calculate how much I’m risking, did not have any SL in mind, the only thing that I calculated was that how much money I will make if Graphite India goes, 100 Rs up from here, Pure greed!

The stock went from 650 Rs to 530 Rs (-20%) in the next 4 sessions, And In a panic, I sold all my positions at 535 Rs. I lost around 60-65% of my total capital in that trade.

I was in great shock, as I was back to square 1 from where I had started. In the last 6 months, my account went from X to 4X to now back to almost around X.

LEARNINGS :

Though it was the worst experience of my trading career, it taught me the most important things that will keep me in this business for a long time.

1. Always Put a stop loss in the system

The worst thing you could do in trading is not put a stop loss in the system.

In the above incident, if I had pre-decided my stop loss, and put it into the system, I could have only lost 20-30% of my account even with a very bad position sizing.

Most traders forget the fact that the markets only need 1 chance and it will take everything back with the interest if you are not disciplined.

2.Position sizing can Make or Break the game

See the more you risk, the more you make, there’s no other way around it, but you just can’t risk your whole account into a single trade.

For someone who is starting trading, or New to it must not risk more than 1% on any single trade.

I assure you that if you risk less than 1% on a trade, you have very little chance of blowing up your account.

Keep this in mind “ Your biggest losses will come after biggest profits if you are not disciplined ”

I have written an article on Position sizing, you can check that out if you want to know more about it.

Mistake 2: Fear, Negative belief, and Struggle.

If there was a chart showing my confidence levels after the Big loss, it would look something like this.

After the big loss, my confidence was shattered. Previously I was trading with 10-15k qty and now I was even afraid to take even 100-200 qty of a stock.

I started to think that maybe I don’t know how to trade, and worse I don’t deserve to make money.

This is the worst thought one can have, these self-sabotaging beliefs made my mindset even weaker.

It looked like I was a different person last year and now I am a whole different person.

Each of My trading decisions was based upon fear!!

Before taking a trade, I started to ask myself, what if I lose on this trade, and the Fear mindset took over me, every time I wanted to take a trade.

Most of the time, I used to miss the trades or enter very late which again led to more losses.

I remember saying to myself again and again, that you don’t deserve any money, you don’t deserve anything better.

It was the lowest point of my trading career.

This whole phase continued for the next 6 months.

I realized over this time that it’s not only about the technical skills you have in this business, but how you cope with the Fear and greed after big profits or losses.

That’s why I started to read psychology books, my favorite ones being Trading in the Zone, Super traders by Van Tharp and Mark Minervini’s books, and Think and grow rich by Napoleon hill.

It helped me come over the Self-sabotaging beliefs part, and I started to think positively about myself but I was still facing fear while entering a trade.

Tackling the Problem.

Then, I found that the sole reason I was fearing to take a trade is that I was taking risks more than my mental capital.

(Mental capital is your risk-taking capacity.)

So, I asked myself how much percentage I should risk per trade, which would not make me nervous?

The answer was 0.25% of my account. I started taking small risks, and even if I was wrong, I didn’t feel too bad, I started to get comfortable with the risk I was taking.

I made a plan, that I will increase the risk by 0.10% after every 20 trades, and I get around 20-30 trades in a month.

After about 100 trades, I got my risk back to around 0.75% per trade and I decided that I will keep trading with similar risk, at least for the next few months.

Slowly, the fear vanished, but I kept in mind that if I again get into the Euphoria mindset, I will again get into trouble.

So, I made few rules for myself –

1. Always decide how much you are going to lose if the trade goes wrong.

2. Always put stop loss in the system.

3. Never have self-sabotaging beliefs for yourself.

4. Never risk more than you afford to lose.

LEARNINGS :

3. Your psychology is as important as your technical skills in trading.

4. To Eliminate fear, Get comfortable with the Risk.

We only fear when we take more risk than our mental capital, Find the level of risk with which you are comfortable trading.

Keep trading with the same size for the next 20 trades.

And then increase the risk, very little, and by doing this exercise again and again you will increase your risk-taking ability without getting into a fear mindset.

Mistake 3: Trading the P&L and not the Markets

During the initial years of my trading, My main focus was on making money and nothing else.

The more I focused on money, the more it distanced itself from me.

Fear and greed generate from money, and if you are constantly watching your P&L, you will make irrational decisions based upon how your P&L is moving.

It’s like you got a job and you keep thinking about the salary that you will get next month.

Let me assure you, the quality of your work will never be good Because your focus is on the salary and not the work at hand.

See, In trading, you wanna make money right?

So, to do that you have to make good decisions, and only when you make decisions based upon what the market is doing, and not what your P&L is doing, you will achieve the result, which is money.

To tackle this issue of focusing on money, I made a plan!

The plan was to only track the R multiple or Risk reward ratio of the trades that I take, and not look at the money that I make in those trades.

R is the risk that we want to take in every trade that we take, say we have fixed the risk to 1%.

So if we lose 10 trades, it means that we will lose 10R or 10% of the account.

This tracking of our performance in terms of R and not Profit and loss will have a huge impact on our performance.

We have already written an article on Risk reward ratio or R multiple, to know more about it, you can check that article.

Learnings:

5. To make rational decisions, focus on the process and track your results in terms of R.

Mistake 4: Not understanding my Personality

There are many types of trading that you can do in markets, Swing trading, intraday trading, scalping, directional, non-directional trading, etc.

Each has its own merits and demerits, and each requires different skill sets and suits a different personality.

When I started trading, after learning the basics for a few months, I started interacting with traders on social media. Most of them were scalpers, day traders.

Don’t know why but at that time, intraday trading looked quite fascinating to me, as it gives fast money, starts your work at 9:15, and packs up everything at 3:30. That looked fantastic to me.

What I did not understand was that is it suitable for my personality?

See Intraday trading is like a First-person shooter game, where you have to be fully active with your fast reflexes, if not then the other player will knock you out, who is faster than you, for example, Call of duty, PUBG, etc.

Swing trading is more like an open-world game, which also has the elements of an FPS game, but you have more flexibility in it, you have more time to make decisions, and you still have to do the tasks and upgrade your character, so it’s kind of a combo of FPS + open world, for example, GTA 5.

So you have to know initially which type of trading will suit you more. I started with intraday trading though my personality was just opposite to that.

That cost me a lot of money, but after some time I realized that I make better decisions when I am taking swing trades rather than intraday trades.

Plus it helped me to learn the most important concepts of trading, and after a few years, I was able to apply it to any time frame I wanted. Now after many years of practicing, I can do any type of trading, though my forte is still swing trading.

Learnings:

6. To become better at trading, Find who you are and which type of trading and methods will suit you more.

Mistake 5: Experts Know Everything

During the initial years of my trading, when I joined social media, I followed many Traders.

I thought that most of these traders know everything in advance, what the market is going to do.

I also asked them many times what they think of this stock, or what they think it will do from here.

They gave the answers as per their analysis, but many times what they said did not happen.

Then I realized that a trader does not have to be right 100% of the time to make money, and the experts can also get wrong many times.

Most of the big traders I know now, (Trend-followers) have around 40-50% accuracy.

This means they are only right about 50 out of 100 trades. (Their average profits are higher than their average losses)

Learnings:

7. Don’t rely on other Traders

No one knows exactly what the markets are going to do, a successful trader just keeps executing his plan, and over time he makes money.

So, if you are a beginner my advice would be to learn from others but take responsibility for your trades.

Otherwise, you will keep blaming social media, operators, and your broker for your trading losses.

So, learn from others but don’t copy their trades, be responsible if you want

to make money in this profession.

Mistake 6: Exhausting my Risk limit all at once

See, I am mainly a stock trader so sometimes I can get around 4-5 signals in a day, Which could be about 5% of my account if I am risking 1% per trade.

So, if all stocks take a U-turn the same day I enter them, I will take a hit of about 5% in a single day.

And it used to happen many times with me, that I load up everything at one go and then the markets take a U-turn and My account goes in red 3-4% in a day.

Then I started to use Progressive exposure of Risk in my trading.

What I meant by this is –

Say I got a buy signal in stock, I take it, now I will not take the next trade till this trade will go in my direction 2-3% or till my TSL reaches cost.

Once the TSL of 1st trade reaches cost, then I take the second trade, and again I repeat the same process.

Say I have about 3R of profits, locked 2R in the first trade and 1R in the second trade.

Then I can take 2 trades in a go, as even if all stocks reverse and the market falls badly, I will not get any hit.

This way I manage my risk, which helps me psychologically.

Learnings:

8. Don’t use all your chips at once, make some profit cushion and then use it as insurance for your next trades.

There are many more mistakes that I did, like

Having a short term thinking

Having a narrow mindset

Too much influence from the result of a trade

Thinking it’s a one-day game.

And many more, but if I talk about all of them then probably I have to write a book 😉 Just joking, I will write about them in some other article.

So, that’s all for today from my side, I hope that you learned something new, and if you did then please do share it with someone who you think can benefit from reading this.

Trader knight