Last week, I wrote about how you can unlock trading success by measuring it. Today, let us understand the right way to measure and evaluate your trades.
Every trader or investor must know these three things:
- Success Rate
- Average Gains
- Average Losses
To begin with, every person involved in the stock market must know his success rate. What do you mean by this?
Success rate refers to the percentage of profitable trades a trader has out of the total number of trades taken over a specific period of time. For instance, in cricket, the batsman’s aim is to score runs on each and every ball he faces. If he scores 75 runs in 100 balls, we say he has a strike rate of 75%. Similarly, in the stock market, the trader’s aim is to make as many profitable trades as possible.
For instance, if a trader has executed 100 trades and achieved profitable outcomes in 60 of those trades, the success rate would be computed as:
Success rate = (60 / 100) x 100 = 60%
On the other hand, his failure rate will be 40%.
In this scenario, the trader demonstrates a 60% success rate, implying that 60% of their trades were successful in generating profits.
One of the great investors of all time, the late Mr. Rakesh Jhunjhunwala had a success rate of merely 35%-40% yet he was the greatest investor of our times.
So is having a high success rate important to make money? Will improving your success rate only help you to make money?
The answer to both these questions is no.
The success lies in the formula encompassed below:
ET CONTRIBUTORSThe key here lies in improving the average gains when you are right and reducing the average losses when you are wrong. How can you achieve this?
The answer is simple – Holding onto your winners and cutting down your losers early. Let us understand with the help of the following example:
ET CONTRIBUTORSThe difference between a great investor and a poor investor is his Trade Score. Even though Investor B has a better success rate than Investor A, the average gains in the winners of Investor A are much higher when compared to Investor B. Similarly, Investor A also takes exits earlier than Investor B. This has led to a better Trade Score for Investor A.
A Trade Score of more than 3 is excellent. A trade score between 1 and 2 is considered average while less than 1 is considered poor.
Market participants must try to improve their Trade Score to succeed in the stock market. By implementing effective risk management, developing a robust trading plan, employing comprehensive analysis, continuous learning, and maintaining discipline, market participants can enhance their trading performance and increase their chances of consistent profitability in the dynamic and ever-changing stock market environment.
Technical Analysis:
ET CONTRIBUTORSNifty continued its stellar run this week moving in a higher high higher low formation, making a fresh all-time high of 19,992 before selling pressure gripped the markets on Friday. Nifty closed the week at 19,745, up 0.92%.
The mood, however, is upbeat in the market as the Future Open Interest (OI) data indicated buildup of fresh long positions in Index futures in five out of the previous seven trading sessions. Nifty has formed a shooting star candle on the weekly chart, which is considered to be a bearish reversal signal. The Put-Call Ratio (PCR) fell from 1.44 on 17th July to 0.79 on 21st July, indicating that the put writers are not very comfortable adding positions at fresh highs. The India VIX, known as the fear indicator, rose 7.51% this week and closed at 11.49.
As we head into the final week of the July expiry series, 20,000 will act as a key resistance for Nifty. Long Unwinding was observed at 20,000 Strike on Friday. Heavy call writer additions were seen at 19,800 Strike which dragged the Index down. The support for Nifty is placed at 19,700, while a break below the same can the Index to 19,500 where its next visible support is placed.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
