Do you know that most rumors, tips etc. are spread by operators, brokers and dealers? There are several reasons for this. In most cases these are spread deliberately as some big party wishes to offload the stocks at a premium price to unsuspecting retail traders.
By now you must have realized that there are problems in your trading style with the proof being the losses you have been making in your trades consistently. You might also have realized that retail traders lose money in the market because they have no rules and even if they have, they do not abide by them. They are mostly driven by emotions, which they say, are the biggest enemy of a person. Emotions cloud your judgment and you fail to remain unbiased most of the time. Let’s say the stock is trading at 110 and you want to buy it at a slightly better price say 105. Later it is available at 98, will you still buy it? Probably not, because now you may think something is wrong with the stock and that is why it is falling. At 110 you wanted to buy it but you could not stick to your decision to buy when the stock suddenly fell to 98. Emotion of fear was prominent here which stopped you from buying the stock at such low prices. This is how emotions affect your judgments.
Now, let’s talk about professionals. How do they trade? What are their secrets? These secrets are revealed and discussed in detail in the subsequent chapters.
One of the secrets we would highlight here is Discipline. Professionals are successful because they are disciplined in their approach to trading. It may look an ordinary trait; however they consider it of utmost importance. They make rules based on their experiences and analysis; and most importantly, they stick to their rules.
It is important to note that they too suffer losses if they do not follow their rules. We would like to share a real life instance. A professional trader took a big intraday position and violated his rule of exiting his position before market closing as there was positive news about the stock. He thought he would close the position next day at market open hoping for a better exit price. Next day the stock opened 12% gap down. He waited patiently for recovery but the stock never recovered to his desired levels. The stock was down about 18% near to market closing and he was forced to exit the position immediately. In this trade alone he lost 40,000. One big loss takes away profits earned by ten profitable trades. Simple deviation from your rules may cost you thousands in the markets.
As we learned that professionals have a set of rules which are collectively called a ‘system’ and such rule based trading is called ‘systematic trading’. We will learn more about systematic trading in the coming chapters. But where does this systematic trading fit in the context of Algorithmic Trading? We saw how sometimes even a professional trader violates his own set of rules. How can one prevent this from happening? The answer is ALGORITHMIC TRADING or ALGO TRADING as it is popularly known.
The way algorithmic trading works is that the rules set by the trader is formulated in the computer software and thereafter the software takes all the decisions. The software is in total control. There is no place for emotions and no chances of violating trading rules set by the trader. At times, the rules are complex and based on mathematical calculations. In such scenarios, it becomes impossible to manage these rules manually. This is the reason more and more traders are shifting to 'algo systems' and letting the software manage their day to day trades with minimum manual intervention.
Apart from discipline, there are many secrets that we are going to share in the book that will help you gain more insights to be a better and a profitable trader. We discuss more about algo systems, their inner functioning and how they can be adopted by a regular trader for profitable trading.