[MUSIC] We have looked at this market every since the concept and we saw what is the source of our trading strategy's going to be. All that is fine. Are we now fully ready to start trading? Last one point of advice before we actually get into trading. Let me ask you a question. I know that in this medium, I can't wait for their answers, but what I mean is you can just think about it. If you're asked this question, what is the most important quality that is required to be successful in stock market, what do you think is answer? Or let me put it this way. Many people have asked our successful investors, land investors, or even technical data sort or any one of them. Whenever people have asked them what is that quality that makes a trader successful? What do you think is the inordinately large number of people have answered? Is it intelligence? Is it some kind of knowledge, knowledge of maths, knowledge of economics? Or these days, lot of quantitative traders have physics PhD and all. So is it that, or is it something else? If you actually read what successful investors have written, the most important quality that they emphasize is discipline, yes, discipline. There is nothing more important than discipline. I can tell you Piotroski score, I can tell you G score, I can tell you F score, I can tell you any other score. You can compute, you create all the formula, you get into trading. And then, if you do not stick to it, all your effort will go in vain. Discipline is the most important thing. Now, what do I mean by discipline? And why it is so important? Now you may be wondering, now you have a formula, you have a score, you know what to buy, what to sell. What is the role of discipline in this? The problem with trading is that our mind starts playing games with us. Now what do I mean by mind starting to play games? Let me give you an example. Suppose you use one formula, whatever it is, it could be Petrosky, it could be Mondrian, it could be something else. By the way, we're going to talk about all this. And then you bought some stocks and you sold some stocks and you have a portfolio. Now your formula says or your rule is that you have to hold on to this let's say for three months, right? So that's the rule. Now you buy some stocks and sell some stocks, say, on a particular day, beginning of the month. Now, you imagine the day you bought it, the stock goes up, say, 20%. The longs that you have, one day, 20% is too much. Of course, those of you know about October 1987 know that this can happen. But let's say 5%. You're so lucky that the portfolio that you're short on, the stocks that you're short on, is down 5%. On day one, you're making huge profits. Let's be realistic. Let's make plus two minus two. It's more realistic. So you're making how much on day one? 4%, 4% is huge for one day. Suppose you start with the $100,000, you're having $4,000 straight away. Now here is the role of your mind. Your mind will start telling you let me get out of this. I made this money, what if tomorrow this reverses? The stocks which has gone up, may come down. The stocks which are down today, may go up. You start visualizing these scenarios and your mind will tell you let me close this position and take the profit home. Now, this is call disposition bias. This is very dangerous. Now, under these circumstances you tend to violate your own rule and you tend to close positions early and take these $4,000 home happily. What you'll see tomorrow the next day most of the times is that stocks which went up yesterday will go up further and stocks which are down will go down further. In fact, you'll realize that by just following the rule, on an average, you could have made more money. Of course, I'm not saying every time this is going to happen. I'm talking about on an average situation. This is one kind of problem. Another kind of problem, again you have a 30-day kind of strategy, and you have some longs and you have some shorts. By the way, most of our strategies you will have longs and shorts. You will be neutral towards market direction. That's how our strategies are going to be. Say on the 30th day, 30 day the rule, 20, 30 days whatever is your holding period as per the formula, 30 days are over. Now, at the end of the 30th day, what are you supposed to do if you only put it as 30 days?. Yes, yes, yes. You are to close the position. Now imagine that you are sitting in on a 10% loss. That means the stocks you are long on have fallen and the stocks you are short have gone up. Now your mind will play a different type of game with you. Your mind will tell you that the stocks which have fallen are going to come back. The stocks which have gone up will fall down. Why not wait for another 20 days? Why not wait for another five days? Why not wait for whatever number of days? And the problem is, your mind will cook up examples of situations where, in the past, a stock went down and it came back, or a stock which went up fell down. So all these examples will come to your mind and finally you will convince yourself that, let me violate this rule this one time. This is very dangerous and, trust me, most of the time, again, the market is likely to go against you. The stocks which are down will go down further and stocks which are up may go up further, then you will further lose money. To compound this problem, a lot of times it may happen that you faithfully follow the rule, and after the fact you lose money. Let me give a third type of example. Imagine that you open the position, based on a rule that you have learned in this course or you learned on your own. On day 25, you're sitting on 10% profit. Now again, your mind tells you that let me close this and close the position and take profits home. But you listen to this video, and you thought, no, no, no, this is this position, let me hold on, right? And you decide to hold on. 26th day you lose 5%, 28th day you lose another 3%, by 30th day you are minus 2%. Imagine you start cursing yourself at that time, because it's very easy after the fact to think about what you would have done better in the past. It's very easy. You will start thinking about situation, what if I closed my position on the 25th day? What if I'd done it at least on the 26th day? Again the chances of violating the rule becomes high in such situation.. Next time when you see 10% on, say, on the fifth day, your mind will tell you just close the position and go home. These are the dangers one has to avoid. There have been careful studies which have shown that those traders who violate their own rules ultimately end up losing money. Of course there are situations where, after the fact, you feel that it is better if you have violated the rule. Of course there are situations where, by following the rule, you may lose money. But what I am saying is, on an average, on an average you will find that it is always better to stick to a rule. Now two questions come. How do we stick to a rule? And the second question is if suppose we find that this rule is not working, should we treat this like a religion and never question it at all? The answer is no. So let me answer the first question. How to ensure that you follow the rule. The first rule is that once you set the formula, you will not disturb that during trading. Once you decided that this is 20 days holding period, you may have another rule saying that 20 days total trading period, or 10% loss, whichever is earlier. 20 day trading period, or a 15% gain, whichever is earlier, fair enough. Or on this should be a rule and you should find that the trading strategy is profitable in your back desk. Once you decide on the rule, you should never ever disturb it during trading, that's the first point. How do you ensure that? The simple way of doing it is don't be in front of the screen all the time. One of the reasons for this behavioral bias is that being constantly in front of the screen, it's a big mistake. Once you know that you are holding for this 20 days, it is better only if you check stock prices occasionally. You should not be looking at the screen all the time, I'm sorry. Now what about the second question? Should we never question this rule? Is it that these rules are infallible? No, answer is no. This, again, you should go to drawing room if you think that some rule is not working. Get the data, get the numbers, go back to your drawing room, do the testing all over again. If you find that the rule is not working, then either abandon the rule or tweak the rule, improvise the rule, and then implement. Let me warn you at this stage, just because you're making losses, does not mean that rule is not working. In a toss of coin, you could have five days in a row. It is not a impossible situation. So you are to define your own threshold based on your risk appetite. At what level of loss you will start thinking about changing or abandoning the strategy or trying to modify this. All this you should decide at the beginning itself. More importantly, when you do the back test, when you go back and analyze the reason for a loss, if you're told you're faced with a loss, you should first check whether it's because the rule is not working, or it's because of your interference. Trust me, most of the time, the answer is the second one. The rule may be working, but we might've intervened in between thinking about some consequence or something is going to happen. Let's say you are short on a pharma stock. And you think that next day there's going to be a court case and four more companies want to win that particular case. Now that time, you may proactively intervene and close that position. But what does your Petrovsky rule say? It doesn't consider any of those. In such situations if you go and intervene and then you make a loss, say a court case goes against the company and your short position was a justified position, but you thought the court case was going to go in favor of the company and close the short position. Now because of this intervention if you lose it is not Petrosky's fault. It is not Mondrian's fault. It is not a fault of any trading strategy. Please don't think that. What I mean is that every time all news will go in favor of your positions, no. But since you are sufficiently diversified, there will be news in favor of some of the stocks that you hold. There will be news against some of the stocks you hold. They will cancel out. Now if you start watching individual stocks, thinking about what will happen to their prices the next day and intervening in them, and then you lose, then it is not the fault of the trading strategy. So whenever you, if at all you're faced with a loss, the first question that you're going to ask is is the straight trading strategy not working or is it that you're intervening? If you're intervening, then the solution is not to abandon the trading strategy. But if you think the trading strategy itself is not working, you are facing losses continuously, then it's our time to rework of re-tweak this strategy. So this is very important. So that is why the most important thing here is discipline. Getting knowledge of this strategy is not very difficult, trust me. You follow this module of facts as we are also going to talk about how to implement this. You'll be in a position to start trading on these strategies, but discipline is something no one can teach. So my advice is, when you learn about these strategies, you should also think about how do you discipline yourself so that you stick to these strategies? And this cannot be taught. Unfortunately more mock trading is not going to help. A lot of people are very disciplined in mock trading. It is easy to be disciplined in mock trading, because there is no money to be made there is no money to be lost. This whole thing of your own mind playing games with you comes only when you do actual trading. Because there is a lot of stake in it, that you will gain or lose money. So this is something that you ought to be conscious of when you actually start trading using our studies. [MUSIC]
