A few months ago, I started teaching positional Breakout Trading to a small group of traders (consisting of both men & women) having different full-time jobs. Still, one thing in common was their passion for trading.
I had asked for two commitments from all of them:
They will be learning and committed towards this course for 2-years
They are not supposed to try any other trading method especially intraday trading
As most of you know, there are three major trading types in the market:
Trend Following
Trend Reversal, and
Breakout
I had chosen Breakout Trading, as it works well in most market conditions, except downtrend.
I had designed my course for small retail traders who have less capital.
Hence they are supposed to take only "Long" trades in the cash market as per the setup.
It's because we can't carry positional short trade in the cash market in India, and taking trades in the future or options don't fit under the money management rule.
This course was initiated before the pandemic. Everyone completed the initial learning and assignments. They started taking trades, and they were in the right direction.
Unfortunately, the COVID-19 issue started, and markets began falling. Nifty (Indian NSE Index) has corrected around 40%. This fall also had an impact on their trading.
After 2-months of the COVID-19 incident, we had set up a Zoom meeting to discuss the completed 25 trades (this is part of the course).
When I saw those 25 trades, 50% of the trades ended with breakeven or a small loss (as we have a quick trail SL plan), 40% are winning trades, and the remaining 10% took the original stop-loss.
During the discussion, I had observed none of them had taken a big hit on their portfolio (all were in the -3% to +2% range on their portfolio). Hence we discussed the trades, and I encouraged them to continue with the same plan. Because sticking to one trading system throughout different market conditions is an absolute necessity to become a successful trader.
Unfortunately, the COVID-19 impact continued in the market. Nifty showed major volatile moves for many more weeks. One day it showed a big gap up open, and the next day it showed a big gap down. In this situation, the time has come to discuss another 25 trades.
When I started the meeting, I had sensed that the energy level of the group is down. Being a pranic healer, I can easily sense a person's energy levels, and sometimes this helped me find a proper solution.
Thus, instead of discussing 25 trades, I decided to look at the losses and thought to talk about the importance of focus and persistence effort. When I looked at their 25 trades, around 68% of the trades ended with breakeven or small loss, and the remaining 32% are the winning trades.
It means our Breakout Trading system showed only 32% accuracy. Many retail traders run behind 90% accuracy systems. However, what they tend to forget is along with 'Accuracy,' 'Risk-Reward' is also essential.
Let me explain this in detail.
Assume a trader risks 1000 for each trade.
System-1: Accuracy 80% and Risk-Reward is 1:1
In this case, for every winning trade, he gets ₹1000, and for every losing trade, he will lose ₹1000 (as risk-reward is 1:1).
After 10 trades -
Profit = ₹1000 x 8 = ₹8000
Loss = ₹1000x 2 = ₹2000
Hence, the total profit is ₹6000.
System-2: Accuracy 60% and Risk-Reward is 1:1.5
In this case, for every winning trade, he gets ₹1500, and for every losing trade, he will lose ₹1000 (as risk-reward is 1:1.5).
After 10 trades -
Profit = ₹1500 x 6 = ₹9000
Loss = ₹1000x 4 = ₹4000
Hence, the total profit is ₹5000.
System-3: Accuracy 40% and Risk-Reward is 1:2
In this case, for every winning trade, he gets ₹2000, and for every losing trade, he will lose ₹1000 (as risk-reward is 1:2).
After 10 trades -
Profit = ₹2000 x 4 = ₹8000
Loss = ₹1000x 6 = ₹6000
Hence, the total profit is ₹2000.
I hope now you got an idea of how both "Accuracy" and "Risk-Reward" plays a crucial role in trading.
Coming back to our original story, my students have received only 32% accuracy.
Does it mean their accounts have taken a hit?
I asked them to check.
The maximum drawdown happened was 5% in one account, and most of them were in the breakeven situation (means their portfolio neither made any profits, nor it has taken any loss).
Keeping a trading account in a breakeven condition after taking trades regularly in the opposite direction during this significant correction in the market is a great achievement.
Any successful trader will understand this situation. While learning intraday trading, I stayed in a breakeven condition for over a year. Trust me, that was the second toughest situation I have ever faced in my trading career (the first one is riding the profits).
But how do I tell them?
They were down because of two reasons:
They have taken more hits (accuracy is only 32%)
They have not made any money (it indicates high expectation)
From our childhood days, we are programmed to accept only the win and not the loss. We also think 'winning' is good and 'failure' is terrible. Because of this programmed mindset, most people struggle when it comes to trading. Besides, high expectations also create a lot of emotions in our minds, which impact our trading decisions.
I had realized I had to teach them through trades only because they were not in a situation to get impacted by a lecture. I planned to increase their conviction in their trading system, which reduces the % hits and increases accuracy.
I rolled up my sleeves and started searching for good Breakout scripts. It was a while I took some positional trades, as I didn't want to distract my focus from intraday trading. In two weeks, I gave them 5 trades and asked them to observe how they behave.
Below are the trade details.
Trade-1: SBIN on 11th August (prediction was upside)
The result - It moved 3.6% upside on the next day (it is down now, but we have a trial SL concept in the system, and it will not allow booking a loss once the price shows a good move on the upside)
Trade-2: EIH Hotel on 13th August (prediction was upside)
The result - It moved 20% upside as of today (22-Aug-2020)
Trade-3: Century Text on 18th August (prediction was upside)
The result - It moved 6% upside as of today (22-Aug-2020)
Trade-4: Shriram Transport on 19th August (prediction was downside)
The result - It didn't fell much. It's down only by a small %. I consider this a failure.
Trade-5: NTPC on 20th August (prediction was upside)
The result - It moved 6% upside as of today (22-Aug-2020)
After seeing the results of these 5 trades, all of them were in a pleasant shock. I have made the below points very clear to them:
One should win in mind first. Then only they can win on the battlefield.
High expectation without much effort is not right.
Trading is similar to any other skill which demands focus, discipline, and persistence effort.
After all this drama, all of them are charged up. They arranged a meeting for themselves and discussed a few points. Hopefully, I will update their progress in another article after a few months.
By the way, did you figure out the two terrible things you need to fix immediately if you are a trader?
If yes, comment below!
If you are interested to know more, then check my recent Best Selling book "How to Make Money with Breakout Trading"
(paid link)