8-step process to build scientific hypothesis of successful trading

Let’s take an example of Q3FY24 results, of a total of 6,742 listed companies, only 3,352 are profitable. This is only a 50% success rate.

There are lakhs of boys who play exceptional cricket. But all of them don’t make it to IPL teams. If the failure rate is high in all fields, why does trading get all the bad names?

That’s because the fall from the highs can be super quick. You can be a millionaire one day and lose all your worth in a single trading session. This won’t happen in other fields.

An actor would lose his charm slowly. But a trader can blow up his capital in a single day.

Despite this, some traders and investors have succeeded in the stock market. People like , , , and many others have made enormous wealth from the stock market and are considered heroes in the field of trading and investing.

Then what distinguishes a successful trader from a gambler? Let's understand the science behind it.

A scientist and a trader are both alike. They form their hypothesis, test them, and check the results. If the result matches the hypothesis, then they conclude. That’s how you make sense out of the randomness in nature and markets. Until you have a hypothesis that can be tested and proven whether it is working in markets, you will be a gambler.

So how do you build a hypothesis and move close to the science of ? Here is the process you must follow to building a for trading and testing it:

1. Investment objective - You must assess your financial objective, risk-taking ability and time horizon you wish to invest in. Understand what investment strategy will be suitable for you as per your objective.
2. Identify your core competencies - Every trader has a different mindset and unique way of thinking. Understanding your own key competency, analysing past trades, and trading accordingly will help generate better returns.
3. Identify your parameters - Some find it easy to understand technical analysis while some easily crack the fundamentals of stocks. Traders should know their key strengths; understand what sectoral business or trading strategy they find easy to understand and follow them accordingly.
4. Entry & Exit signal - Entry & exits are crucial in trading. Hence it should be accurate and unbiased. The formulation of rule-based entry and exit parameters helps eliminate emotional biases, ultimately improving financial outcomes.
5. Decide your position sizing & risk management - The potential risk of wiping out the entire capital in a few trades must be eliminated. Maintaining strict risk management rules helps traders to preserve their capital. A trader can decide predefined rules like a fixed % of stop loss per trade or the maximum amount to be invested in a stock.
6. Back-tested strategy - A trader can use past data available on NSE/ BSE and formulate his strategy. He can test what happens when he buys a stock when a set of conditions are met. These conditions could be based on technical, fundamental or any other parameters he believes work in the market.
7. Paper trading - In various instances, it has been found that a certain strategy gives better results while back-testing but during the live market, it fails. Hence, once you get positive back-tested results you should first try paper trading based on that strategy
8. Implementation - If a strategy is consistently giving positive results during back-testing as well as in paper trading, consider it as ready to implement in the live market.

Developing a strategy requires understanding of the financial markets. By conducting such scientific experiments you can eliminate gambling from trading and become a successful trader.

Nifty ended the week on a flat note without any change from the previous week’s level at 22,519. The index gave up all of its gains registered in the first three days of the week on Friday with a fall of 234 points.

The index has formed a gravestone Doji candle on the weekly charts suggesting selling pressure from the top. The strike price of 22,700 has maximum call open interest. Thus, only a break above the same in the next week would lead to further upside till 23,000 levels. On the downside 22,500 and 22,200 are likely to act as a strong support zone.