Trading: No Holy grail, choose your path

There is no single path to God (for believers) or Nirvana (for non-believers). Choose one in which you are most comfortable and develop skills in that.?And for that very important to understand the epistemology of any style or method.?

Astrology and Technical Analysis have a similarity: ??Both are subjects of probability, a particular pattern has a better chance of success (bullish or bearish), not 100%,?Better probability not Higher probability, not guaranteed. ?Whether on palm, birth chart or stock chart.?Since a game of probability, conviction is always an issue, and will never be there. Conviction (measured as success ratio) - does not go higher than 60-65% in Technical Analysis. For astrology, unfortunately (pun intended) very difficult to prove. Hence Stop Loss is a must. Hence bets cannot be very high, and one cannot lose more than 1% in a single trade if one has to survive. Also, since success is only 60-65%, have to leverage, no other way to get better returns and will not beat INVESTMENTs. The need here is of discipline and mental strength - takes trades, execute stop losses. The conviction has to be in the process of taking trades, keeping stop losses and executing the stop losses.???

Even in Trading based on price movements & volatility - there are three broad areas - Technicals, Trends and Momentum. Yes, there is TTM even on the price side. All three are different but clubbed under one heading usually momentum. Momentum has proven to be the only exception to the efficient market theory. There are Momentum schemes now based on that theory and studies, with some variation globally and now in India.? The theory works on the assumption that what worked in the pre-define past period, will also work in the future. For the trains going north, traders will hop on to the fastest trains to the station. If the previous speed was faster than others the future speed is also assumed to be so.? The trains can be caught at any station if the journey is from Kanyakumari to Kashmir. Only condition the speed till arriving at boarding station has to be the faster than the others.??

As far as trend trading is concerned, know of a very good trend trader. Good CAGR and an actual track record but has one very big serious weakness - Drawdowns.?Drawdowns beyond 40% also sometimes, as markets usually are sideways more than 50% of the time. So no trend and whipsaws more than 50% of the time, leading to a success ratio of only 40-45% Incidentally in Sept 2022, the market has been back to where it was in Oct 2021. The 4 successful trades out of 10 have to cover the losses of the balance 6. One-way trends like the one seen from March 2020 bottoms to Oct 2021 make up for all these losses. But leverage is a necessity, without leverage cannot beat the market and with leverage cannot avoid high drawdowns. Hence lessons learnt about rising after every fall are tested.? So good only for small allocation if a large portfolio. The entry is made only at Bangalore after the train has touched Kanyakumari and turned back.??If in luck, the train goes long distances, say to Delhi and when it turns back and reaches Agra, exit. If luck is bad, back to Kanya Kumari and join Rahul Gandhi on his yatra. Tops and Bottoms are known only after they have happened and enter or exit after some journey by price from those tops and bottoms.

Both the above trading methods (momentum and trend trading) are system driven or rule-based. Effort and skill are in creating the rules and making the system. One that can bear the tides and the storms. If not be ready to be sunk.

Opposite of Trend traders are the mean reversion believers (Option writers), reverse problem to that of trend traders (9 months of low volatility and 3 months of volatility). Option volatility is higher than the underlying volatility of the stock and hence needs to know how to get out fast of the position. As risky as getting out of a running train. Another direct correlation to volatility is that of blood pressure. As vols (volatility) increase, so does the blood pressure of the writers. Their main bet is that the train will not go very far on either side. But when it goes, will have to get out a running train. Option writing can be rule-based or discretionary.

The last trading style is Discretionary trading. No rules not systems and hence discretionary. The trader uses his discretion for every trade by using charts or reading the price ticker or any other price-based method. Effort and skill are in using discretion.

All three methods of trading are probabilities, and they vary for all three. Thinking probabilistically means having a willingness to always ask questions like “What else might happen?”, “What could happen next?”, “What if we're wrong?” and to look at the full range of possibilities that might come to pass rather than assume that things will go as planned.

When a chartist says price target 120, stop loss 90 for the current price of Rs 100, interpret him as saying, "there is a higher chance of price touching 120 before it touches 90 and if it touches Rs 90 first please exit"

In INVESTMENTs, the conviction is supposed to be higher (but still cannot be 100%). The success ratio goes up to 75-80% and is good enough as the gains will be substantially more than enough to cover the 20-25% failures. Win-loss ratio (Gains per win to a loss per failure) will be high, cannot lose more than 100% of the value invested in failure, the upside can be Amazon or Bajaj Fin.?With an 80% success rate and high win-loss ratio, one does not need to take leverage.? Thinking ability and discipline are critical.?Laziness can be an advantage in some cases.??Here also drawdowns can be there, but since no leverage, investors can bear it. Here leverage with the right type of stock selection leverage will give RJ type of returns.??

There are Pros and cons to each style or method, but no holy grail.?Choose your path. Choose your mode of prayer.

Same with astrology. What every astrologer predicts is just a probabilistic estimate. It has a higher chance of happening, based on his previous studies of such birth charts or palms. Hence have an alternative assuming the prediction fails. Have a stop loss even for an astrologer's prediction.