Many beginner Traders join social media, especially twitter just to connect with Fellow traders.To check! What others are doing, Making or Losing.We get mesmerised on day 1 by Profit Screenshots, Motivational quotes, Informative threads.Our main purpose though is to make a huge amount of money, as quickly as possible.And We begin our social media journey.Though with time, It affects us in a wrong way, which was unexpected.Here’s how-IT MAKES YOU BREAK YOUR RULES-Let&#8217;s take an example of a guy named Rahul.His daily ritual is to get up and the first thing he does is to check Twitter.<img loading="lazy" class="size-full wp-image-2262 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/sc1-e1622635142356.png" alt="" width="1012" height="506" />And See, What his favorite Trader is forecasting about the markets, whether Nifty will go up or down.But today, He is worried!Because he is holding Nifty futures (Buy) at 15000 with 14800 as SL.And his favorite Twitter trader said that the Nifty is going to fall 500 points today.<img loading="lazy" class="size-full wp-image-2272 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/2-e1622636419853.png" alt="" width="1012" height="506" />The reason for the fall Prediction is that His guru saw a Bear in his Dreams.Rahul took the trade based upon his own analysis and he promised yesterday to himself that he will follow his trading plan and will not exit before his system doesn&#8217;t give an exit.But, Now Rahul is getting crazier because the SGX nifty is also showing a downtick of 100 points and global markets are also down.He is eagerly waiting for the markets to open To sell right at the opening.The markets open only 50 points down, he is happy because he will exit from the trade with just a 50 point loss. (Note that his original SL was 14800)That point where he exited his long position was day low, and markets kept rising for the day and ended up 200p up from his original buy point to 15200.<img loading="lazy" class=" wp-image-2275 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/Picture1-e1622636681447.png" alt="" width="824" height="412" />He didn’t re-enter fearing that the market can fall(remembering his guru&#8217;s prediction.)And the market keeps rallying for many days till 16000.The trade which would have resulted in a 1000 point profit , In reality gave him a 50 point loss.WHY?Because he did not follow his plan and was badly influenced by the outer world (Gurus, News, global markets).This is how social media affects your Trading decisions.Let&#8217;s take another Real-life example-In 2017-18 There was a boom in Graphite-electrode stocks, Many names like Graphite India, Goa carbon, and Heg Rose more than 1000%.<img loading="lazy" class=" wp-image-2276 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/Picture2-e1622636836718.png" alt="" width="788" height="394" /><img loading="lazy" class=" wp-image-2277 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/Picture3-e1622636931888.png" alt="" width="804" height="402" />When they were near their top in mid-2018, they were hyped like anything, Many were giving targets of 5k For graphite India which was around 1000 at that time.Many of my friends bought Graphite at those levels, though they knew these stocks are pumped and they can go down a lot.They had a plan that they will exit if the stock goes down more than 20-25% from their buying levels.But The hype was so much on Twitter that even when the stocks fell, 20-30% were looking cheap.They bought more at those levels.Stocks fell more, even when results came good.They kept on holding them and stocks came tumbling down 70-80%.&nbsp;<img loading="lazy" class=" wp-image-2278 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/Picture4-e1622637283803.png" alt="" width="738" height="369" /> <img loading="lazy" class=" wp-image-2279 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/Picture6-e1622637359653.png" alt="" width="732" height="366" />The original plan was to exit at 20% loss, but they almost wiped their capital in these stocks.The problem was not the stocks, the problem was not that they bought at the top.The problem was that they did not follow their plan!Now let&#8217;s talk about the second point &#8211;It creates “FOMO” &#8211;&nbsp;<img loading="lazy" class=" wp-image-2280 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/Picture7-e1622637459273.png" alt="" width="716" height="358" />You are bombarded daily with Profit and loss screenshots, 1000% Return stories, etc.They are good to get inspired but Most Traders will try to imitate the performance and might blow up their accounts.If you are comparing your performance with others, you are going in the wrong direction.There&#8217;s a lot of money to be made in Trading, BUT!Only if you FOCUS on YOURSELF.The most recent example of how Social media creates FOMO is BITCOIN.Everyone is talking about it, open Twitter, Instagram, or youtube.<img loading="lazy" class=" wp-image-2281 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/Picture8-e1622637528899.png" alt="" width="722" height="361" />You will find everyone is busy Making huge sums of money.And you seem left out, Even though you don&#8217;t even know what it is and how it works and 2 months back you were saying it&#8217;s just going to crash.But now you try to find ways to get into bitcoin, and finally, you bought bitcoin at 60k $.Thinking that it will go to the moon.And it crashes from 60k $ to 30k $ in a few days, and you sold at the bottom in panic.<img loading="lazy" class=" wp-image-2287 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/Picture1-1-e1622643168609.png" alt="" width="653" height="332" />Remember that you weren&#8217;t originally interested in buying it, but how social media platforms give you a feeling that you are the only person who hasn&#8217;t made 100 X returns.The point is not if Bitcoin will go to the moon or not.The point is That you are not taking Trading decisions based on any analysis, study and More importantly “without any plan”.Now, you know that How social media affects you as a Trader, what can you do about it?Don&#8217;t use it during market hours.When you are holding a position, It might be best if you isolate yourself from others&#8217; advice, otherwise, you will again end up Breaking your rules.Learn from others, but Take trades only based upon your understanding.You can&#8217;t just keep on taking trades on the basis of others, you have to take your own trades, even if they go wrong, otherwise, how will you improve.Know that most social media influencers are just showing the BEST of their lives-See, No one will admit it, but hey who wants to post their Failures out there in public,So, know that everyone is just presenting the best of what they got and you don&#8217;t know what is going behind the scenes.Know Your purpose of Using social media-There could be different objectives to use social media, Learning, Sharing what you know, Selling products and services, Growing audiences and few guys also have a TROLLING business 🙂So, whatever you need from it, it will give you, if you need knowledge it will provide you knowledge, if you need profit screenshots it will provide you profit screenshots.So choose wisely.So, that&#8217;s it for today from my side folks.Thanks for reading.Written By:-Trader knight&nbsp;

Social Media! Reason behind your bad Trading decisions?

Risk reward ratio is a method used by most Profitable Traders.In this article, you will understand, What it is and How you can use it to increase your trading profits.What is the risk to reward ratio?In simple terms- It is how much profit are you making for every Rupee that you risk per trade.&nbsp;<img loading="lazy" class="size-full wp-image-2465 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-6-e1623847219977.png" alt="" width="1012" height="506" />For example-If you risk 1 Rupee to make 5 Rupee, then the risk-reward ratio is 1:5.We can also call the Risk: Reward ratio, R multiple.In which R refers to the risk that we take.In the above example, the R was 1 and we made 5 R on that trade.How to calculate the Risk reward ratio Say you enter a stock at 1000, with stop loss at 980.And you book profit at 1060.&nbsp;<img loading="lazy" class="size-full wp-image-2466 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-7-e1623847143636.png" alt="" width="1012" height="506" />Now you know what the Risk reward ratio is.You may have a question: why use this method, what&#8217;s the benefit of using this?Okay, so here you go.Benefits of using Risk reward ratioIt helps you to focus on Trading, instead of money.Most of the mistakes you make in Trading are because you are too much focused on the money part of it.You don’t take your eyes off your M2M, and that&#8217;s the reason you make mistakes like &#8211;Exiting the trade without any reason.Let&#8217;s again take the example of My friend Rahul.He bought Reliance in 2000 with SL in 1950.Reliance reaches 2020.Because he was solely focused on the M2M, in fear of losing the profits he exited the trade at 2020.Now, keep in mind that his Risk was 50 points, whereas he only booked 20 points profit.This happened because he was so attached to the money part of the trade, he forgot that he made very little compared to the risk he took.This is the problem you will face if you are only looking at the M2M while you are in a trade.So, better track how much R you are making in a trade, that way you will think logically.Now, let&#8217;s move on to the second point.You Do not get fooled by Big profit Screenshots.You will see many big traders posting big profits.Nothing wrong with them posting profits, but you only look at the profit and not on how much risk they took to make those profits.Making 1000 by risking 500 is the same as making 1 Lakh by risking 50k.The Latter looks more appealing, though it has the same Risk to reward ratio as the prior one.So, next time you get mesmerized by looking at big profits if you can then ask about the Risk that they took on the trade 🙂Now, let&#8217;s take a look at Real life example of how to calculate Risk reward ratio.Suppose you bought Reliance at 1620 with SL at 1490.And you exit the trade at 2180.Below are the calculations of the trade.&nbsp;<img loading="lazy" class="alignnone size-full wp-image-2467" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-8-e1623847274654.png" alt="" width="1012" height="506" />&nbsp;<img loading="lazy" class="alignnone size-full wp-image-2468" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-9-e1623847327940.png" alt="" width="1012" height="506" />ExpectancyYou can also use the Risk: Reward ratio to know the expectancy of your trading system.What is Expectancy?In simple terms, it is, What you Expect to make over the next 100 or say 1000 trades.How to calculate the expectancy using the Risk: Reward ratio or R multiple &#8211;&nbsp;<img loading="lazy" class="alignnone size-full wp-image-2469" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-10-e1623847382975.png" alt="" width="1012" height="506" />First, you have to have R: R data of at least 100 trades, I will give an example based on 10 trades due to space constraints.Now, to calculate the expectancy of your trading system, simply add the Total R that you made in Total trades and divide it by the number of trades that you have taken.In the below example I have taken data of 10 trades, in which I made about 7.3 R.So total R will be 7.3 And the total trades taken are 10.&nbsp;<img loading="lazy" class="size-full wp-image-2470 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-11-e1623847426915.png" alt="" width="1012" height="506" />It&#8217;s better if you have data of at least 100 trades, then you have to divide the Total R with the number 100.In the above example, My expectancy is 0.73 R.But, it doesn&#8217;t mean that I will make 0.73 R on every trade, it&#8217;s just that over a while my average R could be around this number.Also, one more crucial piece of info that you should have is R: R and win rate should be seen together and not separately-Most People Run behind systems that have a High Win rate of more than 80-90%.These systems generally have a profit booking mechanism at, say fixed targets.That&#8217;s why it increases the Accuracy.But, by doing this they Reduce the R:R.Take a look at the below chart<img loading="lazy" class="size-full wp-image-2471 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-12-e1623847481182.png" alt="" width="1012" height="506" />A system with 1:1 R: R can break even with a 50% accuracy.And a system with 1:4 R: R can break even with a mere 20% accuracy.A system with better R: R can withstand the test of time.So, it&#8217;s better to find a system that has a Higher Risk: Reward ratio and has a low Win rate.Because if a system has a higher win rate, then R: R will be very low and Room for error will be very less.We can use R to calculate the minimum win rate we need to break evenWin rate is basically the number<img loading="lazy" class="size-full wp-image-2472 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-13-e1623847539668.png" alt="" width="1012" height="506" /> of trades on which you made a profit out of total trades.The formula for minimum win rate is &#8211;&nbsp;Say your system has an expectancy of 0.7.Then your minimum win rate will be &#8211;&nbsp;<img loading="lazy" class="size-full wp-image-2473 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-14-e1623847591946.png" alt="" width="1012" height="506" />From the above formula, you can see that the Win rate is inversely correlated to the R: R If your R is high that means you are making big by risking less, your Win Rate can be small and still allow you to break even or make a profit.If your R is Low that means you are making less by risking more, you will need a higher win rate to make money or break even.&nbsp;<img loading="lazy" class="size-full wp-image-2474 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-15-e1623847652352.png" alt="" width="1012" height="506" />If you look at the above graph you can see that you can be profitable even if you have a 20% win rate but your winner should be at least 4 times your losers.And you can be unprofitable even with a 90% accuracy if your losers are 10X bigger than your Winners.Most of the big traders, who use the A Trend follow system generally have a 25-30% Win rate but their R: R is much higher (more than 4-5 generally).So, don&#8217;t Just run behind High win rate systems.Still don&#8217;t believe me, then read the below exampleI can be Right 99% of the time if I buy Nifty at the open and book just 1 point profit every time, but 1 Loss will Erode all the profit that you will make in 100 trades.So, that&#8217;s it for today from my side.Thanks for reading 🙂Trader knight&nbsp;&nbsp;

Risk reward Ratio! You can increase your Trading profits using this method.

<blockquote>90% of your losses come from less than 10% of the trades.</blockquote><img loading="lazy" class="alignnone size-full wp-image-2488" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-16-e1624108495880.png" alt="" width="1518" height="759" /><img loading="lazy" class="alignnone size-full wp-image-2489" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-17-e1624108547353.png" alt="" width="1012" height="506" />If you don&#8217;t believe me check your P&amp;L report and You will see that you are at loss due to very few but big losses.In this article, we will learn why you are not able to ride your winners and cut the losses.And how you can do it by following a few simple principles.Why Are You Not Able to Ride the Winners and Cut the Losses?To understand this let&#8217;s first play a gameChoose either (A) OR (B) from both the casesCASE AA.) A sure loss of 10000 RsORB.) A 95 % chance of 12500 loss + 5 % chance of “No Loss at all”CASE BA.) A sure gain of 10000 RsORB.) A 95 % chance of 12500 RS gain + 5 % chance of No gain at all.Let me guess, most of you will chooseOption “B” from case 1 and option “A” from case 2.Why do most people choose option B from CASE 1?<img loading="lazy" class="alignnone size-full wp-image-2490" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-18-e1624108604227.png" alt="" width="1012" height="506" />The answer is “GAMBLING CHOICE”, They want to have a chance (5%) of making no loss at all.Though 95 % chance is they would lose 12500 Rs, they still choose option B.Option A is much wiser to choose than option B because in option 1 you will only lose 10000 Rs whereas in option B you have a High chance of losing 12500 Rs.This is the opposite of “Cutting your losses short.”Why do Most People Choose Options A From CASE 2?<img loading="lazy" class="alignnone size-full wp-image-2491" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-19-e1624108644388.png" alt="" width="1012" height="506" />They want to choose option A because they don&#8217;t want to lose the sure-shot money and don&#8217;t want to have a 5% chance of not gaining anything at all.Even though Option B is a much wiser option as it has a 95% chance that they will make 12500 Rs.But most people choose the sure-shot money, and that&#8217;s why they forget about the “RUN YOUR PROFITS RULE”.These biases towards choosing small profits and big losses are the reason 95% of traders lose money.So, How can you ride the winners and cut the losses?1. Place the SL in the System Yes, you heard it right, Place the SL in your system.Most of the traders don&#8217;t place SL orders in the system.Few think that they are being watched by the operators and their SL could be hunted.Few just don&#8217;t even know what their stop is, so they never put the SL.And the last category is who says they have Soft SL, which means their SL is in their mind.Now you would say, How does placing the SL in the system help you lower your losses ?&#8221;Let me give you an exampleA guy named Raman has 1 year of market experience and has found his trading style, but he is not profitable yet.He gets a buy signal in Reliance at 2000, his SL according to his analysis is 1950.He doesn&#8217;t place SL in the system because he believes in SL hunting.Reliance Initially moves in his favor but then starts to decline and reach towards his SL.He is worried, as he doesn&#8217;t want to lose on this trade.He turns on the Tv and watches a financial news channel, and he sees that everyone is Talking about Reliance because of some positive news.One of the panelists even said that Reliance is about to go to the moon.Raman is overjoyed after hearing this news, he calculates how much money he will make if Reliance makes a big move.But reliance is still going down and about to reach his SL.He thought that what if his SL level is wrong, and maybe he will get a good profit, so he held the trade without any SL.The next Morning Reliance share falls 5%.Raman is in shock, that how come reliance fell this much.Though he is an atheist, he is now praying to God that if Reliance reaches his cost price, he will exit and will never make the same mistake again of not honoring the SL.Reliance shares do not recover and Raman ends up selling his positions with a whopping 20% loss in his account.So the first lesson is to always keep the SL in the system and not to interfere with it.2. Do Not Carry Your Intraday Losses I am telling this from my experience, after making and losing a lot of money in the markets.That carried losses of intraday trades are more likely to give you more losses than profits.So, if you are taking an intraday position into any stock, and it doesn&#8217;t perform to your expectations, it is better to exit with the loss at the end of the day.Otherwise, be ready for a 10X more loss than that you would have made by exiting the loss on the same day.3. Get off Your ScreenThough this advice may sound the opposite of that, you should have more screen time to gain more experience.But, In my opinion, once you are in a position and you have placed the SL order, then there&#8217;s no need to watch the screen, especially if you are trading on time frames greater than 15min.Let&#8217;s say you are in a trade and you keep glued to the screen to watch every movement of what your stock is doing after your entry.Your position is going well and is up 3% from your entry.You plan to Trail your SL with every higher low.But then suddenly a Big red candle forms on the chart, and you exit in panic.<img loading="lazy" class="alignnone size-full wp-image-2492" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-20-e1624108756351.png" alt="" width="1012" height="506" />Though it was not part of your plan to exit before the TSL or SL hits.So, you did not follow the plan because you are Reading “PRICE ACTION”Now, just after your panic exit the stock moves back to the highs and closes the day with a whopping 10% move.<img loading="lazy" class="alignnone size-full wp-image-2493" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-21-e1624108699318.png" alt="" width="1012" height="506" />4. The Bigger the Losses the Harder it is to Recoup ThemA 5% Loss only needs a 5.3% gain to break even.But, A 50% loss needs a 100% gain to break even.And that&#8217;s what you have to keep in mind always.<img loading="lazy" class="alignnone size-full wp-image-2494" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-22-e1624108818433.png" alt="" width="1012" height="506" />We have seen many times stocks dropping 30-40% intraday.Below are the two examples, when stocks fell 30-50% intraday, and one Wrong trade like this could wipe your account if you don&#8217;t cut your losses.<img loading="lazy" class="alignnone size-full wp-image-2495" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-23-e1624108862717.png" alt="" width="1012" height="506" /><img loading="lazy" class="alignnone size-full wp-image-2496" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-24-e1624108904781.png" alt="" width="1012" height="506" />5. Don&#8217;t take Uneven Risks Most of the time an average trader (Let&#8217;s call him Joe) ends up with more quantity when he is wrong and less quantity when he is right.Why?Because of uneven Risk-taking.Sometimes he risks 1% on trade and the other time he risks 5% on a trade, based on his intuitions.Let’s see how taking uneven Risk can ruin your capital, even if your analysis is correctLet’s say his system has a win rate of 50%.And this is the sequence of win and losses of his last 10 trades<img loading="lazy" class="alignnone size-full wp-image-2497" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-25-e1624108998994.png" alt="" width="1012" height="506" />The above Trading system looks profitable, Right?As the win rate is 50% and he made about 3.7 R profit in 10 trades.But wait, Joe has one problem, he keeps on changing the Risk on every trade, sometimes he risks more and sometimes less, depending upon his “CONVICTION”So, let&#8217;s see how much he risked on these trades<img loading="lazy" class="alignnone size-full wp-image-2498" src="https://finkarma.in/wp-content/uploads/2021/06/word-image-26-e1624109606118.png" alt="" width="1012" height="506" />So as you can see because of his conviction he risked more in some trades and less in others.Due to this, his Total P&amp;L % is negative 3.35%.He would have made 3.7% returns if he had kept the risk 1% at every trade.So, now you know it&#8217;s not a good idea to change the risk at every trade, otherwise, even a positive expectancy system can not perform well.6. Make Rules For Your ExitsNot having any pre-decided exit rules is one of the reasons that Trader can&#8217;t hold their winners longer.For example, you can make a rule to exit the trade when the stock closes below the 20 EMA.Or, Exit when the stock breaks the Higher low sequence.Or any Exit rule like that.Having a Rule for your exits is better than exiting the trades intuitively, as when you have a rule, you have a sense of predictability and you will have consistency in your trades.Find what type of exit works best for your trades and then just follow that sincerely.If you follow all the things that are explained in this article, you will see a big change in your Trading results.That&#8217;s all for today from my side.Thanks for reading 🙂Trader knight

How To Cut The Losses And Ride The Winners, Like A Pro

80% of the Traders blow their account in the first 2 years of their Trading career.Why?Is it because they don&#8217;t have enough knowledge of technical analysis?OrIs it because they don&#8217;t have enough money to trade?OrIs it because they did not buy any fancy courses?The answer is “ NONE OF THE ABOVE ”Then why are they blowing up their accounts?The answer is “bad position sizing”<h1><a id="post-2538-_oqy6rryhn51t"></a>What is Position sizing?</h1>It decides the “HOW MUCH” quantity you will buy or sell in security when you get your entry signal.It decides how much you will make on a trade.<img loading="lazy" class="alignnone wp-image-2539 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-10-e1625312569644.png" alt="" width="1012" height="506" /><h1><a id="post-2538-_oj0rn3ha9uqa"></a>Now you might have this thought in mind, what the heck this has to do with the profitability of a trader?</h1>Let&#8217;s know-how.Say there are 2 traders, Rahul and Akshay.Both Follow the same System with a Win rate of 50%, which means out of 1000 trades, 500 trades are likely to be positive and 500 are likely to be losers.Both have the same amount of capital, i.e 100,000 Rs.(Win rate is In how many Trades you make Profit out of Total trades.)Let&#8217;s take a sample size of 20 trades, though it&#8217;s a small sample size it will work for this example.First, take a look at the below table, which shows how many losses you can have in a row with different Win rate%.<img loading="lazy" class="alignnone wp-image-2540 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-11-e1625312615501.png" alt="" width="1012" height="506" />So a 50% win rate system can have 16 losing trades in a row.Now, let&#8217;s get back to Rahul and Akshay.First, let&#8217;s talk about Akshay.He is a passionate trader who wants to make a living out of trading, but as of now his capital is low so he has to do his job and Trading side by side.Though he hates his job and wants to become a full-time trader as soon as possible but with a small amount of 1 lakh, he can’t become a full-time trader.Because of this, he decides to take higher risks so that he can make money faster.As his trading system has a 50% win rate and 1:3 Avg Reward to risk ratio.He calculates that he only has to be right in 3 out of 10 trades to break even/become profitable.So, he thought about risking 5% of his account on every trade, because he is sure that he will make money in 5 out of 10 trades, because of his 50% win rate.He is calculating in excel that he needs only 10 profitable trades to double his account, and he is sure that he will 10x his account this year.He starts to trade and the next 5 trades come to be losers.This means that his account is down by -25% and now he is only left with 75,000 Rs.<img loading="lazy" class="alignnone wp-image-2541 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-12-e1625312663296.png" alt="" width="1012" height="276" />He was shocked that how come he got 5 losers in a row, there must be something wrong, maybe things will take a U-turn and the next few trades will make me profit, he thinks.The next 4 trades are also losers and his account is now down -45%.<img loading="lazy" class="alignnone wp-image-2542 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-13-e1625312710951.png" alt="" width="1012" height="276" />He is Frustrated but he is sure that this is just the worst going on, and the profit is the only thing that is going to come from here on.His account is now down to 55000 Rs, He thinks of increasing the risk to make the lost money as fast as possible.So, he increases the risk per trade to 10% of his initial capital.Bad luck again!<img loading="lazy" class="alignnone wp-image-2543 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-14-e1625312853594.png" alt="" width="1012" height="276" />The next 3 trades are also losers, he has lost about 75K of his total account, and now only has 25K left with him.He is really worried, because he has lost 75% of his capital, and has left with only 25k capital to trade.Desperately in need of making his lost money back, he again increases the risk to about 15% per trade, he thinks that this must be the end of the losing streak and I will take back everything in just 3-4 trades.The next 2 trades also come to be losers, Akshay has blown up his trading account.<img loading="lazy" class="alignnone wp-image-2544 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-15-e1625312957134.png" alt="" width="1012" height="276" />Now, let&#8217;s take a look at how Rahul’s performance looks like-<img loading="lazy" class="size-full wp-image-2558 aligncenter" src="https://finkarma.in/wp-content/uploads/2021/07/photo_2021-07-03_19-55-19-e1625322464703.jpg" alt="" width="1012" height="780" />Because they both were trading the same system, both got the same trades, it&#8217;s just that Rahul only took a 1% risk of his initial capital.Rahul also got the hit because of 16 losers in a row, but because of his low risk he was able to survive the losses, and then because his profitable trades were 2-3 times of his losses, he is only down 6% of his initial capital.Rahul was not in a hurry to make money, because of his low risk he was able to keep calm during the drawdown phase.Both Rahul and Akshay were using the same system, Akshay got bankrupt and Rahul was able to continue his trading and will make money in the long run.But, Akshay came in the grip of Gambler&#8217;s Fallacy.<h1><a id="post-2538-_syb8xng3fhgg"></a>Gambler’s Fallacy</h1>In simple words, if an event occurs too many times in a row then we expect that it will stop occurring in the future.<img loading="lazy" class="alignnone wp-image-2546 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-17-e1625313052382.png" alt="" width="1012" height="506" />In the above image you can see that when three heads come in a row, the person thinks that it&#8217;s highly unlikely that another head will come up next.They try to predict the future outcome based upon the last few observations.What they forget is that each toss has its probability, which is 50%, every time the coin is tossed there will be a 50% chance of the tail to come and a 50% chance for heads to come.Similar to this, each trade also has a 50% probability of being right and wrong, i.e the result of the last few trades has no impact on the probability of the current trade, it will always be 50%.In Akshay’s example, we saw that he increased his risk because the last few trades were losers, and he thought that now it&#8217;s highly likely that a winner will come, so he kept increasing his betting size, which eventually led to his blowup.The most famous example of Gambler’s fallacy occurred in Las Vegas at Monte Carlo casino in 1913.<img loading="lazy" class="alignnone wp-image-2547 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-18-e1625313096784.png" alt="" width="750" height="500" />The roulette wheel’s ball had fallen on black many times in a row, so the players think that now it&#8217;s highly unlikely for the ball to fall on a black, so they bet heavily on the Red.The ball fell on the Red square after 27 turns, Gamblers lost millions of dollars during this event.<h1><a id="post-2538-_sppheibh6mps"></a>The Law of Small Numbers </h1>Extreme examples are more likely to be found in small rather than large samples.In Akshay&#8217;s example, you saw that the winning probability of his system was 50%, which means that out of 1000 trades 500 will be losers and 500 will be winners.So, one may say that every 5 out of 10 trades will be profitable, Right?Wrong! When you take a random and very small sample size there is a chance that extreme events can happen like we saw that their system got 16 losers in a row, which was highly unlikely, yet it occurred,His system has a 50% winning probability, but only over large sample size.So, now we can say that a trader is more likely to be profitable in the long run if he keeps trading, over a large sample size, with small risk.The need to make the money fast can be fatal for our accounts.Now we know how position sizing can affect our performance. Let&#8217;s know how to calculate position sizing.<h1><a id="post-2538-_du0viz6twuri"></a>Position Sizing Methods</h1>There are several position sizing methods, here are a few of the most important methods.<h1><a id="post-2538-_n1sfxiu30co5"></a>Percent Risk Position Sizing Method</h1>As the name suggests in this position sizing method we are risking a fixed percentage of our account on every trade, irrespective of the account size.If the account size says 1 lakh and we are risking 1% on every trade, our risk per trade will be 1000, so now if we make some profit and our Capital grows to 1,10,000 then we will riks 1% of it, which will be 1100, and say if we make some losses and our capital reaches to 90k, then we will risk 1% of that, which will be 900.The main things you need to use this method are a stop loss level and the percentage you want to risk on every trade.Let’s take an example to understand this method more.Say you want to buy Reliance at 2000, and according to your method, the Stop-loss level for this trade should be 1950.And you decide to take 1% risk on every trade that you take and your capital is 1 lakh Rs.<img loading="lazy" class="alignnone wp-image-2548 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-19-e1625313146795.png" alt="" width="1012" height="506" />The position size in this example comes to be 20, which means that you have to buy 20 qty of this stock.Let&#8217;s take an example of short selling also &#8211;Say you want to short a stock at 1000 Rs and your SL for this trade is 1020.Your risk% per trade is 1% and your account size is 1 lakh.The only change in the case of short selling is that to calculate Risk points, you have to subtract entry price from stop-loss price, otherwise, the risk points will come in negative.<img loading="lazy" class="alignnone wp-image-2549 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-20-e1625313186508.png" alt="" width="1012" height="506" />In this trade, you have to short 50 qty of a stock.Now let&#8217;s move on to the next position sizing method.<h1><a id="post-2538-_2ebfv8s33fro"></a>Equal Units Position sizing method</h1>In this method, we allocate an equal amount of money to each trade, irrespective of our stop loss level.We divide the total equity into parts, say 5, and then we allocate the same amount to the 5 stocks that we buy in our portfolio.For example, if we have 1,00,000 in our account, and the max position we want to hold at a time is 5, then we can divide the total capital into 5 parts, which will be 20K each.So, we will allocate 20k of our account on each trade that we get, irrespective of anything else.<img loading="lazy" class="alignnone wp-image-2550 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-21-e1625313220830.png" alt="" width="1012" height="506" />Say we got a signal to buy Icici bank at 600 Rs, your account value is 1,00,000 and you decided to put 25k in each stock that you Trade.So, this is how you will decide your position sizing using this method.<img loading="lazy" class="alignnone wp-image-2551 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-22-e1625313282302.png" alt="" width="1012" height="506" />This method is mostly used in investing or portfolio building, where we buy a bunch of stocks, with similar 5-10% below SL levels.The equal unit approach allows you to give equal weightage to each investment in your portfolio.Now, let&#8217;s move on to the next method.<h1><a id="post-2538-_7wqo5xtlwkq3"></a>Percent Volatility method</h1>This Position sizing method is based upon the Volatility of a stock, By volatility what we mean to say is the daily movement of an instrument.To calculate the daily movement of a stock we have to subtract the Low of the day from the high of the day.Say, Reliance stock Opened at 2000 and it made a high of 2150 and a low of 1980 and closed at 2020.Then its daily movement is High &#8211; low = 2150 &#8211; 1980 = 70So we can calculate the last few day’s volatilities by calculating the average daily movement of the last few days, but we are ignoring the gaps if we use this method.To counter this we use the ‘Average true range’ to measure the stock’s volatility.This method is used in combination with the percent Risk method that we discussed earlier.Let&#8217;s see how, with the help of an example<img loading="lazy" class="alignnone wp-image-2552 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-23-e1625313322876.png" alt="" width="1012" height="506" />Say, Our Trading account value is 1,00,000 and we don&#8217;t want to risk more than 2% on any trade.Say we get a buying signal at 145 because the stock had found buying in this zone many times in the past.Then we check the ATR indicator value, which is around 7 Rs at the time of entry, so we subtract 7 rs from 145, which is 138, which will be our stop-loss price for this trade.Calculating the Position sizing<img loading="lazy" class="alignnone wp-image-2553 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-24-e1625313357757.png" alt="" width="1012" height="506" />So you would have to buy 285 Qty of this stock according to this method.The main merit of using this method is that it takes into account the volatility of the stock, as different stocks have different volatility, and even the same priced stocks can have different volatilities.So, this method gives us an objective way of setting our stop loss according to the volatility of a stock, without any guessing work.<img loading="lazy" class="alignnone wp-image-2554 size-full" src="https://finkarma.in/wp-content/uploads/2021/07/word-image-25-e1625313414876.png" alt="" width="1012" height="506" />Many times when a stock gaps down, most people lose heavily because they use stop losses based upon guesswork or intuitive levels, but when you use the ATR, you are at least ready for 1 ATR gap down which is the normal volatility of the stock.So, this is all for today from my side. If you learned something new, then please share this article on your social media handles.See you all in the next article, till then goodbye.Trader knight

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