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Unknown Market Wizards

Daljit Dhaliwal: Know Your Edge

Daljit Dhaliwal’s initial passion was tennis instead of trading. Yet, his track record speaks volumes. In his nine-plus years of trading in 2020, he has achieved a remarkable average annual compounded return of 298%. When he has a high degree of confidence, he trades aggressively by taking large positions. His average annualized volatility is immensely high at 84%.


Dhaliwal’s return/risk statistics are impeccable: an adjusted Sortino ratio of 10.3 and a monthly Gain to Pain ratio of 8.5. These numbers are five times the levels of excellent performance.


According to Daljit, a trader must know his edge. If he is not clear about it, he won’t know which trades to focus on or which trades earn a larger position size. One of the crucial improvements Dhaliwal made to his trading was identifying the types of trades that were responsible for nearly all his gains. By doing so, he was able to focus on identifying, executing, and managing those trades that really mattered. As an additional benefit, he was able to greatly reduce taking insignificant trades which had a net negative impact on his portfolio. Those marginal trades also dragged his focus and energy. Once a trader is able to identify his edge, he should stick to those trades that fall in his sphere.


It is amazing how many traders are highly competent in applying a specific methodology, yet fall prey to taking other types of trades, which usually end up with net losses. 


Dhaliwal was also able to identify the trades according to his edge because he kept a detailed daily journal of all his trading. He recorded not only his market analysis and reasons for each trade but also his feelings. This detailed journal made it possible for him to categorize trades and define the common factors in the trades that provided his big wins. 


The trading journal also helps to record lessons like correct decisions and actions and also the mistakes that were made. Reviewing such journals periodically is an effective way for a trader to improve. 


A trader has to be adaptable to become a successful trader. Daljit started out just using technical analysis, but he quickly shifted to focus on fundamentals when he realized that the smaller number of fundamental trades were the source of almost all his profits. 


His original method looked to capture the initial price movements on important headline events. However, once algorithmic traders started stimulating the predicted prices more quickly than he could manage to enter the orders, he shifted to a strategy of fading these price moves. This strategy was trading exactly from the opposite direction after the preliminary price move. 


As Dhaliwal supervised a lot of research with his full-time assistant, macroeconomic analysis became the primary driver of his trades. Change has been the only constant in Dhaliwal’s trading process. 


Daljit always makes sure to have stop loss protection on large positions. Another critical element is a specific process for cutting his position if a downside exceeds certain limits. He will cut size in half if a drawdown exceeds 5%, and cut it by half again if it exceeds 8%. If his decline reaches 15%, he will stop trading until he feels ready to resume. 


Another crucial point that is often overlooked is that the reward/risk ratio of a trade is dynamic and changes as the trade is held. For example, a trade is implemented, seeking a 300-point gain and risking a 100-point loss. If the market moves 200 points in favour of the trade, the reward/risk ratio then is completely different from the ratio at the time of implementation. Daljit Dhaliwal manages this dynamic nature by taking partial profits. According to him, holding the entire position is an attempt to be 100% right with a risk of being 100% wrong. 

Taking partial profits is another form of risk management tool. If the market suddenly moves against the trade, the action of partial profit booking will reduce the profit or loss.


There must be a contingency plan for every trade before execution. Formulating a trade management plan before getting into a trade is much more preferable because there is an advantage of making decisions with full objectivity. Once the position is executed, this advantage is also lost. Dhaliwal also plans out his trades to be sure of his response in each possible scenario.


Generally, traders develop their own opinions about how markets should respond to an event and then trade accordingly. Dhaliwal used the opposite approach of having no predetermined beliefs but instead looking at market price movement and then identifying the reason behind it. In this way, he allowed the markets to teach him the cause of specific price moves rather than trade on his debatable assumptions. 


Although Dhaliwal trades mainly based on his fundamental analysis, he does use technical analysis as a supplementary tool. One technical event that has important price indications is a breakout from a long-term trading range. If it sustains then these breakouts lead to an extended price movement in the same direction. 

The point is that the fascination to be intellectually correct leads many traders adrift. The only thing that matters is whether you are profitable or not. 


One of Dhaliwal’s rules is to seek clarity over certainty. The markets are not about certainty but about probabilities. Waiting for trades that are certain, will lead to inaction and missing many trades that offer good prospective bets. 


One common trait among many traders who achieve spectacular success is a love of effort. They often compare trading with a game. Dhaliwal refers to trading as a chess game. Whether you trade because you love the game of trading or because it is a possible means to make a lot of money? The odds are much better in the preceding case.

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