Rakesh Jhunjhunwala on trading

​​I hope you saw the two videos given above. I too saw them few months back and thought how could these videos are not discussed enough in trading courses. For me, these videos have been guiding light in my trading journey. Rakesh Jhunjhunwala, in his unique style, outlines the core of trading for me. Everything that I have learnt about trading has been beautifully summed up by Rakesh. We lost Rakesh sometime back and we miss him dearly. As someone who has achieved so much in his lifetime, Rakesh Jhunjhunwala's view on the overall process of trading has a lot to teach us. 

Rakesh talks about the following in both the videos

​​Broad direction

This indicates that Rakesh was a trend following trader. He emphasizes on not to try to predict every move in the market. This is important because in today's world trading gurus project themselves as someone who understand the market to such an extent that they guarantee the outcome of a trade. They pretend to have a no loss strategy that is making money for them. Let's face it, markets are uncertain and will remain uncertain for as long as it exist. No one has the secret strategy that everybody has been searching for. He emphasizes on to be on the right side of the trend. He also talks about momentum in prices. He realized that if the broad trend is clear and strong then the chances of making profit is higher. Correct entry can ensure good RRR in trend following system. He disregards the importance of timeframe in this principle. In fact we all know that the higher we go in time frame, lesser the noise. Monthly chart will have less false signal than the weekly chart and a weekly chart will have a more accuracy than the daily chart. 

I am not saying that reversal setups do not work or there cannot be any system that can continuously make money with reversal trades. In fact, the reversal setups in the direction of a larger trend has even more chances of getting success and better risk to reward ratio. Pullback patterns like flag and pole, Fibonacci level etc., are precisely the reversal setup to trade in the direction of stronger trend.

Sense of direction is important as a lot of traders struggle to control their overtrading. Punching trades one after the another without having the clear trend results in frequent stop losses and thus drawdowns and blown accounts.  Markets not giving clear direction is very common in  sideways  market. There will be a lot of false signal in this period and beginners will take trades even when the trend is not clear. They try to catch a trend even before its there. Even if there are profitable trading strategies that go against the trend, most of the traders will not be able to maintain the high risk reward ratio necessary for strategy to work. 

If we look at the merit of this approach then we can all agree that this will help us to avoid trades in the wrong direction. This approach increases the probability in our favor as it needs the market to do something extraordinary for us to lose on the trade. The contrarians have to have a very strong reason to bet against a strong trend. A rapid U turn in a strong trend is less likely and  a reversal price action might also take time to develop. This gives trader more time to react and get out of the trade.

What to stake

Rakesh does not use the words "position sizing" and "money management" but the idea is exactly the same. He mentions that his successful trades are less than 40% of all the trades initiated. He understands that there is no way he could be certain of the outcome of a trade. This uncertainty mandates us to allocate the money accordingly. There are chances that the next trade could incur loss. To be able to allocate the appropriate amount on a particular trade one has to derive it from the strategy that they are following. Having an idea of success rate, risk- reward ratio etc., are important to determine the position sizing. He mentions that he is not afraid to take a loss as he knows that he will be able to trade the next day. He was eliminating the fear of loss with the help of position sizing. His mentality is reflected in his statement-" no amount of shares are small". He takes position sizing very seriously and decide the number of shares based on the risk. He would have bought one share if that is what his risk would have allowed.

"Who knows what is the highest price"

Rakesh did fully realize that markets are truly unpredictable and anything might happen next moment. His risk management style included combination of pyramiding and trailing stop loss. He ridicules the experts giving targets for a stock. He knows that there can be potential levels where the trade can face problems, he calls these levels where "prices become unreasonable". However, he patiently waits for the technical data to indicate the same for him to exit. He does not impose his view on the market and keeps adding to his position with pyramiding. Him saying "who knows what is highest possible price" truly indicates his  mindset that enables him to hold on to his winning positions. So many traders fail to succeed because they are not able to hold on to their winners and his philosophy on trades might help to build them to follow the trading plan. ​

When to take a loss

Rakesh mentions that one needs to learn to book a loss. Based on the strategy that one follows there has to be logical exit. However, people are not able to book loss because of emotional pain experienced by the traders. Shifting stop loss as the price moves towards the stop loss and averaging the prices makes the losses larger than what was planned for. This behavior is the outcome of not fully accepting the fact that market is superior and uncertain. Traders after analyzing the market, enter a trade that they feel has very good chance of making profit. Deep down they feel that market can be completely analyzed and the secret to success is better analysis. Rakesh on the other hand had accepted that markets are going to follow unpredictable behavior and there is no point moving the stop loss. He thinks that majority of people does not possess the skill of booking a loss.