CEO of Marathon Trends Atul Suri told CNBC-TV18 that successful traders used a fair amount of psychology to seek out good deals for themselves. It's an intrinsic quality which cannot be taught to potential future traders but it does determine how much risk they may chose to take or a while striking deals. Investors need to decide, whether they are in the stock market for excitement or to make money.

Excerps from the interview given to CNBC-TV18

Q: We keep talking about excel sheets, fundamentals, P/E ratios. How much of it is beyond the screen and in your mind?

A: One of the best ways to actually study trading is to study successful traders and the more you hear about them and the more you talk and read about them, (you will find) that increasingly in their careers, they have moved away from just the mechanics of trading, which most of us struggle with and into the whole area of psychology, into the whole area of risk management, which most traders or most investors who are at a very basic level do not think exists. In fact, I think it counts for about 80% of the success of fairly advanced, mature and successful traders.

Q: Is that the lesson got from many of the great success stories of the world's greatest traders?

A: Certainly. For example someone like Ed Seykota has been featured in Market Wizards and there are a lot of other good traders who are featured in this very good book called Market Wizards. In the book, Jack Schwager has really gone about and interviewed these traders at the psychological level. He has not just covered mechanics and increasingly what has come about in each one of their cases, has been the importance of psychology. This is something, which unfortunately, unlike mechanics cannot be taught. You can teach someone on excel spreadsheets, you can teach someone how to calculate earnings per share, EPS, but you can't teach someone how to take away greed and fear from their mind. It is the Waterloo for anybody, at any point in time - how successful or how good a track record he has.

Q: How important is it to start off by knowing your own mind, when you are getting into the market? Are people fundamentally conservative, highly risk averse or highly risk prone?

A: This is something people have spent hours discussing and I think it's worthless because at the end of the day, what matters is what works for you. There is no real prescription. There is no holy grail. What you really have to do as a trader is - fundamentals and technicals all works, information works, astrology works - but you have to make it work for you and for that I really think that there are two basic components, one is your intellectual mind and the second is your emotional self.

As far as the intellectual state goes, you really find that everyone is bestowed with different intellectual capabilities and a lot of it is also genetic. You inherit a lot of it and a lot of it you develop. If you find that you are good in numbers, a lot of people have very good numerical abilities and very good analytical abilities. You will find that something like fundamentals comes very naturally to them. But if someone who doesn't know anything as far as numbers go, to ask him to work on excel spreadsheets and to remember EPS, P/Es etc, it's very difficult for him. So definitely people with good numerical ability will gravitate towards fundamentals.

And people with good intuitive abilities, artistic ability, who can read patterns well, who have that little bit of psychic ability, you will find that they will be more successful in technicals. 80% of people trade in this country on information. Even there you need intellectual capacity, you need to be a networking person, you need to know the right people and you need to be able to extract information from them and then use that information. So what is really going to happen is that each one is going to have certain intellectual capabilities and you are most likely to succeed, if you have a system or a method which suits you. The question is can you it work for you? I think that is important.                     

Q: Can you be both - a trader and an investor?

A: Yes. I also had these doubts till I met some successful people, where I found that they were able to keep a very different mindset as a trader, as a investor. I really think that's a really fairly advanced stage in the whole mental makeup, maturity, intellectual and psychological. For example, as a trader you may be short but as an investor you would be having some long-term bets. So the conflicts that are there within you, would really come up. So you have really been a very good evolved person psychologically to be able to have this conflict. It's possible but definitely very challenging. 

Q: How important is it to just concede that the market is always supreme? Do you have to start by saying whatever I am seeing on the screen is a right price and I am often wrong?

A: I am a great believer in that. This is very much a technical analyst's or a trader's mindset. But yes, there are lot of fundamental analysts who search for value. Let's say, they look for a stock, say Reliance. They assume that the value of that stock is Rs 1,000. Today it's below Rs 1,000, so they think that the stock is undervalued, sooner or later the value would take it to the price and what would happen is, they would make money.

Similarly, if the stock price is above the value, lets say if they find that the value of Reliance is Rs 400. Today it is above that, so they feel that sooner or later it will come down. So as a value investor, as a fundamental investor if you have that kind of time horizon or that kind of mindset, then they would approach it in that manner. But if you are a trader, where you are looking to make short and quick gains, then there is no need to struggle about values because discovering value can be a very long-term procedure and it'll also require deep pockets.

So from this point of view, it is best to accept that the market is right. The market is factoring in the fundamentals, it is factoring in the greed, the expectations. Now days, you know what liquidity can do? It factors in liquidity, it factors in inside/outside information. There are so many variables to the market. You cannot put them on a spreadsheet. So for a trader, it's best to accept that 'price is God, I am going to trade on the price, make money on the price, lose on the price, being right and wrong is not important, making money and losing money is important'. So that really would be a great premise for a trader.

Q: So one should have that ability then - to say that 'I am wrong, I accept it and I'll have to cut my losses' and move on?
 
A: Yes. But then the ego comes in. The ego is a very big thing. We all say that we come in this market to make money but at a basic level, if you look within, there is a lot of ego that goes in. It is terrible, you know there is something wrong when your stomach churns.  So that is the problem about taking a loss and accepting that you are wrong. The fact is your ego will get hurt.

We must remember that this is a game of probability and you cannot be right all the time. Stop losses are a must and they are a reality, but the big problem is ego. Accepting that you are wrong hurts you emotionally. So it's a real big challenge. People think trading is easy but it's really not easy and you require great emotional maturity to be able to trade successfully.

Q: Is averaging a dangerous concept? Have you seen that go wrong with a lot of people?

A: I personally do not believe in averaging. If I buy something and the stock goes down, I am wrong at that point in time. So I really wouldn't go on an average. I like to average upwards, what I term as pyramiding, which is if take a trade, the stock is right, the call is right, it's making money. I may take more of that and in this way I try to build a pyramid in a particular stock, that is a case of rewarding your winners.

Q: What about the other way around when you are making money, we often hear that people bought at Rs 100 and sold at Rs 110 and the stock moved from Rs 100 to Rs 200, they made small chunks of it but could not hold for the entire rise or doubling of the stock. Is it also to have that maturity to say that I am not playing for small gains and maybe something good is happening out here and I will play for a bigger game?

A: Yes exactly, they need to define, at the end of the day you have to define yourself, you have to define your system. Just as when people trade for Rs 10 and are able to take Rs 50 hit on the downside, similarly it should not be the other way round that I am ready to stand for Rs 50 on the upside, but my stop losses are very thin, so immediately the stop losses get triggered or there about. You really have to have great perspective in terms of time, in terms of entry, exit, stop losses and there's always this ratio. You cannot have a stock that is a sure short and risk-free. Then why are you in the equity market? You should be having money in FD because that's the only sure short method. So there has to be a balance and there has to be the risk-reward profile and it maybe 2:1 or 3:1 but the ratio always has to be there.

Q: Do you work with preset systems and over a period of time have you become a more disciplined trader?
 
A: Yes. Our human mind tends to break everything down in systems, have it beautifully structured, because when you have a discipline and a structure, there is a greater chance of success. I use technicals, so it’s much easier for me because there is nothing relative about it. Price is a reality and some of the great traders have said that have a discipline or have a system that is so simple that you can virtually programme it because when you programme something there is nothing left for intuition or interpretation. So make it so simple that whatever system you follow, technicals/fundamentals or whatever, it is so well defined that there is no chance of your mind playing games.

So it is very important to have discipline because it gives you a system and takes away the influence of emotions and all the external factors at that point in time.

Q: How important is it to know our limits?

A: Management of risk and risk controls are very important. There are some areas where we have to come up to some critical points, critical decisions. One is, what trade size? Trade size is very important. Just as a sort of intuition, we say okay buy 5,000 or 10,000, depending on the person's capacity. Why do we take these numbers? It is just intuitive, it is just by habit. You feel too bullish, you say okay buy 20,000 and if you are little unsure then you buy 5,000. Very often we do not know what the stock price is? What is the volatility?

So it is very important that one decides when one enters a trade where is one's stop loss. How much hit can I take? So based on what my stop loss is, assuming that I get it, I should then take a trade size equivalent to that. The recommended thing is that I should not trade more than 5% of my capital risk on a single trade. That means if an idea goes sour, my stop loss gets risky, my portfolio or my capital should not come down by more than 5%. 

So if we look at it in the inverse manner, when you first calculate risk and stop loss and then decide your trade size, this is how your whole size of trade will remain under control. So this would be a very important clue. Look at it the other way round, first look at how much loss I can take and then decide how much I should buy.