The Reality of Trading: Understanding Expectations vs. Reality for New Traders

Article by our CEO – Mr Shrey Jain in Economic Times

New traders often begin their trading journey with the unrealistic expectation of finding a magic strategy that will generate consistent profits, allowing them to quit their day jobs and retire luxuriously. This often leads to a phenomenon known as “System hopping,” where traders experiment with various strategies across different asset classes, unaware of the finite nature of their funds. As a result, they often deplete their trading capital, become demotivated, and exit the market.

To avoid this pitfall, new traders should keep in mind the following key points on their path to becoming successful traders:

Importance of Backtesting and Paper Trading

As a starting point, it is crucial to backtest your trading strategy using historical data before implementing it in the live market. Backtesting will help you understand the profitability of the strategy as well as its volatility. This allows you to fine-tune the strategy to align with your risk profile. Additionally, it is important to paper trade the strategy to see if it actually works in real-time. While paper trading may not be as exciting as live trading, which gives you the rush of mark-to-market profits, it helps build discipline and confidence in your strategy.

Start Trading with Small Capital

It’s important to remember that backtesting is not a guarantee of success in the live market. Backtest do not account for trading expenses such as brokerage, taxes, and slippage that may occur during live executions. Therefore, it’s crucial to implement your strategy in live trading with small capital. In my first live trade, I couldn’t square off my position at the defined stop-loss because I wasn’t emotionally prepared to accept a loss. Trading with small capital in the live market can help you understand your emotions and identify the type of trader you are.

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