After completing my MBA in Finance, I got a job as an Equity Advisor in one of the broking firms. I got allotted with some 200-300 clients and my job was to trade for them and ultimately generate revenue for the firm. I used to recommend some technical and fundamental calls to these clients and trade for them from my terminal (of course with their permission). When they used to trade, firm used to get the brokerage and that was the source of revenue for the firm.
Every month, I used to get 100-200 new clients and I used to call and trade for them.
The typical model that we (we had a team of 7-8 people) implied was we used to meet the client in person and explain them one of the intraday strategy of trading Nifty Index Futures. The strategy was entering into a trade and exiting after 10-15 points profit. In case, the trade goes against, we would typically exit in 10-12 points loss. In total, the client would earn around Rs. 1000-1200 and commission of Rs.100-150 used to
go to the firm resulting into a win-win situation for both of them. Moreover, I used to get an incentive on the amount of brokerage earned as well. win-win-win!
If there is win ratio of at least 65%, client would earn net profit after brokerage and taxes. With the inhouse technical and fundamental research team sitting in front of the chart screen the whole day, 65% win ratio seemed to be very easy to achieve and past statistics suggest 70-80% of such success ratio.
After trading for almost 12 months in more than 2000 client accounts, can you guess how many clients would have earned net profit?
Not even a single client to whom I traded and in total around 10000 clients that my team traded, none of them earned net profit. There were hardly 1% traders who survived after 12 months. More than 90% of them were wiped out from the system. Only broking firm and equity advisors earned money.
I was astonished by these findings and when I sat quietly and thought on it, I came to know the reasons behind their losses. I had big learnings that I would love to share with you.
1. The clients didn't stick to the plan. Although the strategy was simple on paper, it was not so easy in reality. It is very easy to say that you will book loss of 10 points if things go against you but actually when you have 3-4 such stoplosses triggered in a row, on fifth trade, you will not put a stoploss and this is the only trade which gives BIG LOSS of 70-80 points. Following plan specially in bad times is very difficult.
2. Overtrading. There was a lot of churning of clients. Due to overtrading, there were huge transaction and brokerage costs that ate up majority of profits. Overtrading, hence shall be avoided as far as possible.
3. The biggest lesson that I learnt and shall be printed in BIG and BOLD in front of your trading terminal is "NEVER TRADE WITHOUT A STOPLOSS".
You may get away in some cases without a stoploss but remember, you are just 1 trade away from blowing your account without stoploss....I repeat...you are just 1 trade away from blowing your account without stoploss...
I had one client who had shorted 10 lots of Nifty Index intraday position which he carried to the next day just because he saw a loss of 22 points. The next day marked gapped up 110 points...95 points gap up
the next day and 135 points gap up on subsequent day...His 80% capital got wiped out in just 3 days...One bad trade is all you need to go out of the business...
4. Don't make the habit of taking small profits. While trading for the clients, I could never think of taking 20 or 30 points in Nifty because we normally exited the position after 10-15 points. That got me a bad habit of cutting profits short. This created problem for me when I started to trade in my account. I could not go beyond 25-30 points. Every time Nifty gave me 30 points, an alarm used to get triggered, 'Book Profit',
'Book Profit' and I used to book...It was only after realizing this as a PROBLEM that I made efforts to get rid of it...I then developed my own trading system and traded on that and slowly I started taking big profits and there was one trade that I remember back in 2021/2013, I took 650 points in one single trade in Nifty index but it took me 2-3 years to come out of that bad habit of cutting profits short.
Those 12 months gave me tremendous learnings and helped me during my Ph.D. which I did on 300 derivatives traders as well as my personal trading as well...
Hope you also learnt from my experience as well...I am eager to know your views in comment box...