Published on: October 20, 2024
#RealTradersRealStories
Stock market trading is often described as a battlefield where traders face uncertainty, volatility, and emotional swings. It’s a place where fortunes can be made or lost in the blink of an eye.
Some traders focus solely on their strategy, others swear by their risk management practices, and some find success by blending both.
Let’s step into the shoes of traders to understand which plays a more critical role—trading strategy or risk management—or if they go hand in hand.
Meet Amit, an Ambitious Trader
Amit Desai’s journey as a trader began in Mumbai, the financial capital, in 2009. Fresh out of college, he was captivated by the potential of the Indian stock market. The idea of making quick profits and beating the market fascinated him. Armed with basic knowledge of technical analysis and enthusiasm, Amit dived headfirst into day trading, focusing on small-cap stocks known for their high volatility.
In the initial years, Amit adopted various trading strategies. He experimented with breakout strategies, moving average crossovers, and trend-following approaches. In 2011, he struck gold by betting on a pharmaceutical stock that surged after a favourable government policy announcement. Amit’s gains were impressive, and he soon developed a reputation as a rising star in his circle of traders.
The Lure of Trading Strategy
Amit was hooked. He believed the secret to success lay solely in mastering the perfect trading strategy. He spent hours backtesting different strategies using historical data and tweaking his setups every night. He subscribed to newsletters, attended webinars, and followed market gurus, all searching for the Holy Grail—the one strategy that would guarantee profits every time.
However, as Amit’s portfolio grew, so did his risk. He sometimes allocated his entire capital to a single trade if he believed the setup was flawless.
After all, if the strategy worked, why worry about risk management? Are you one of them who prefers trading strategy over risk management?
The Reality Check: 2015 Crash
Amit’s blind faith in trading strategies crashed in August 2015 when the Chinese stock market plunged, sending shockwaves across global markets. The Indian markets were no exception, with the Nifty 50 index falling over 6% in a single day. Amit, heavily invested in a high-beta stock, saw his portfolio shrink by 25% in just a few days.

The losses were devastating, and Amit realised that even the best trading strategies couldn’t save him from unexpected market crashes. He had ignored risk management, believing his winning strategies were enough to protect him. But this wake-up call forced Amit to rethink his approach.
A Shift in Focus: The Importance of Risk Management
The loss in 2015 marked a turning point in Amit’s career. He began to realise that while a good trading strategy is important, it is worthless without sound risk management.
Even the most successful traders in the world, like Paul Tudor Jones or George Soros, emphasise the importance of managing risk over relying solely on strategy.
Amit started reading books on risk management and incorporated practices such as:
1. Position Sizing: No matter how attractive the setup seemed, he no longer allocated more than 2% of his capital to a single trade.
2. Stop Losses: Amit implemented strict stop losses for every trade and ensured they were honoured without emotional interference. This was a significant shift from his earlier style, where he often hesitated to exit losing trades.
3. Diversification: Instead of concentrating his bets on one or two high-volatility stocks, he diversified across sectors. This reduced the impact of adverse movements in any single stock or sector.
4. Risk-Reward Ratio: Every trade was now entered with a clear risk-reward ratio in mind. He avoided trades that didn’t offer a 1:3 risk-reward ratio, ensuring that his winners were significantly larger than his losers.
The Rebirth of a Balanced Trader
By 2017, Amit had refined his approach, balancing trading strategies with robust risk management. He started following a Volatility Contraction Pattern (VCP), popularised by trader Mark Minervini, which helped him identify stocks with a high probability of breakout.
The key difference now was that Amit focused equally on his risk. No trade was taken without a calculated risk percentage, and each trade was meticulously monitored.
One particular success story from Amit’s newfound strategy was his investment in Reliance Industries in 2018. Using the VCP method, he identified a consolidation period in Reliance’s stock and entered at the breakout point. However, his risk management practices played a crucial role.
Amit had set a stop loss at 3% below his entry price and a profit target with a 1:4 risk-reward ratio. Reliance’s stock surged over 50% within 12-13 months, but even more importantly, Amit’s calculated risk allowed him to hold the stock confidently.
Trading Strategy vs. Risk Management: Can You Separate the Two?
Amit’s journey raises an important question – Is trading strategy more important than risk management, or do they go hand in hand?
A trading strategy is like a roadmap—it gives you direction and helps you identify opportunities in the market. However, the stock market is unpredictable, and even the best strategies are not foolproof. This is where risk management steps in—the seatbelt protects you when things are unplanned.
Let’s draw an analogy. Imagine you are driving on a highway. A good trading strategy is like having a high-speed car that can zoom through traffic. But even the best cars need brakes. Without brakes, the car could crash at the slightest turn or obstacle. Similarly, no matter how sound your trading strategy is, without proper risk management, one wrong move could lead to financial ruin.
A Real-Life Example: The 2020 COVID-19 Crash
The stock market crash in March 2020, caused by the COVID-19 pandemic, serves as a stark reminder of the importance of risk management.
The Nifty 50 index dropped over 30% in a matter of weeks. Traders with great strategies but poor risk management lost significant amounts of money. On the other hand, those who had stop-losses in place and managed their position sizes could protect their capital and return to the market once the dust settled.
Many decades-experienced traders in India, like Rakesh Jhunjhunwala, emphasise that the first trading rule is to protect capital. Losses are inevitable, but large, unmanageable losses can end a trader’s career.
Successful traders don’t aim to avoid losses entirely—they focus on managing them.
A good strategy may help you make profitable trades, but risk management ensures that you stay in the game long enough to benefit from your strategy. Risk management is often the differentiator between successful traders and those blowing up their accounts.
For traders, especially those in the volatile Indian stock market, it’s crucial to strike a balance between the two. Just as Amit discovered, the most successful traders are not those who never lose but those who manage their losses wisely and allow their winners to run.
By weaving in the real-life story of an ambitious Indian trader like Amit, this article captures the emotional journey, thrill, and perils of trading.
If stories like Amit’s journey inspire you and you want to improve your trading skills, DECMA 2024 is the perfect opportunity for you.
DECMA, organised by Definedge, brings experienced traders, market experts, and financial strategists under one roof to share insights on trading strategies, risk management, and the latest tools to enhance your market approach. You are a beginner or a professional trader, DECMA offers a unique platform to connect, learn, and refine your trading techniques.
Don’t miss this chance to evolve your trading game—register now at DECMA 2024.