Zerodha founder & CEO Nithin Kamath has emphasised on the critical role of risk management in ensuring the success of traders, particularly in volatile market conditions.
In a X (formerly Twitter) post, Kamath shared insights based on his experience as both a trader and broker. Kamath noted that in his career, he has interacted with hundreds of successful traders, both large and small. The one consistent trait among them, he pointed out, is strong risk management.
“The one common element to their success and longevity is risk management,” Kamath wrote. “This has become all the more important in markets like these when fear takes over and having an objective mindset becomes harder.”
His remarks come amid a challenging period for the Indian stock markets, marked by a prolonged downturn.
As of February, the Nifty index recorded its longest-ever streak of five consecutive monthly declines. The benchmark Nifty50 index, which has fallen 17% from its all-time high of 26,277.35, closed Monday with a modest gain of 0.5% at 22,508.75.
Kamath shared an old podcast of Jerry Parker, Chairman of Chesapeake Capital. Parker emphasized two key principles of successful trading: living to play another day and cutting your losers while letting your winners run.
Living to play another day
Parker’s first key insight, which Kamath shared, is rooted in the “Turtle Rule”—a guideline for navigating drawdowns.
When facing a drawdown, traders should reduce their positions by twice the size of the drawdown. For instance, if a trader is down 10%, they should reduce their positions by 20%. Kamath highlighted this as a fundamental strategy that helps protect traders from deeper losses. “It’s always going to work. It’s going to keep you from losing too much,” he said. “That is just to reduce your positions and live to play another day.”
Cutting losers and letting winners ride
The second principle Kamath echoed is the idea of cutting losers early and allowing winning positions to grow. “When you have a loss, you’re thinking, I’m hopeful that it’s going to come back and turn into a winner, but that’s when you should be fearful that the loss is going to get bigger,” Kamath noted in his post on X.
On the flip side, when profits are growing, traders often become fearful that the gains will shrink. However, Kamath noted Parker’s wisdom that it is precisely when profits are high that traders should remain hopeful, allowing their positions to grow further.
Lessons on mistakes
Kamath also reflected on mistakes, sharing that many of the past errors stemmed from over-trading and not strictly adhering to his trading systems. “Most of that has come from, honestly, from over-trading and not following my systems to a T,” Kamath tweeted.
“Most of that was all self-induced anxiety.” He emphasized that while the markets can be challenging, having a clear system to follow is essential in managing stress and reducing mistakes.
Kamath concluded by recalling advice he received from a mentor, Rich, about the biggest mistakes traders often make: “Over-trading and not following your system.” he noted.
