Trading in Stock Market is a highly rewarding business. Lot of people start trading , thinking of making quick money but end up loosing. It is a fact that 80 % traders loose money, only 20 % make it big when it comes to stock markets.
My purpose of writing this is not to dishearten or discourage you of trading. There are certain basic things about trading which if followed strictly may help you to shift into the category of 20 % lucky people and become a successful trader.
You should always remember that these 20 % folks are not any extraordinary people. They also make mistakes, their trades also go wrong but the trading plan and the rules make them extraordinary. Let’s have a look at the basics, you need to follow when you start trading :-
Trading is not a game. Take it as a Business. After all, you are putting your money at stake and you would never want to lose it like that. So be serious and professional in your approach towards trading.
2. Sufficient Capital
Some traders enter in to a trade without sufficient capital. So when it comes to managing a trade in case of unfavourable market move, they have already exhausted their capital.
They are left with no other option than to exit with loss. Trading should always be done by sufficient capital and the cash you don’t need urgently or you can afford to loose.
3. Trading Plan
A successful trader always has a plan. Before entering a trade, you should have prepared your trading plan. You should be aware of your entry price, exit price in case of unfavourable market move and target price for the trade.
It is always better if you write down your trading plan on a paper. A written plan eliminates the possibility of deviating from the plan.
4. Charting Software
To prepare a trading plan, you need a charting software for technical analysis. With the help of chart reading, you shall be able to find the entry price, stop loss price and the target price.
Make sure to have a good quality charting software available to you and follow the charting patterns. The real work starts when the market is closed. That is the time you prepare a plan. On the opening of the market, you are there only to implement it.
5. Keep Emotions Away
Two human emotions are the biggest enemy to the success of a trader – Greed when you are going into a profit and Fear when the trade is going against you. A proper trading plan followed strictly helps you to control these emotions. Exit the trade when your target has been achieved or you have made enough money on the trade.
Always keep strict stop loss. Exit in case of adverse market move and exit without waiting for the market reversal. Market may or may not reverse. Once your stop loss is triggered, you should be out of the trade even if price again comes above that level.
6. Capital Protection
This should be the top most priority of a market trader. Letting the losses piling up in hope of market reversal will erode your capital. Respect the market. Cut short losses by following strict stop loss and book reasonable profits in case you have made. If you keep your capital protected, you can get profit in next trade.
7. Avoid Overtrading
Mere buying and selling is not trading. Enter a trade only if you see an opportunity of making enough money that it covers your brokerage charges and is worth risk taking,
Trades worth risk taking have risk to reward ratio of 1:3 or 1:4. Remember, you are putting your hard earned money on risk. It is always better to fix the number of trades you want to make in a day, week or month according to your risk profile. Stick to that irrespective of you make or loose money.
8. Avoid Trading Tips
You should avoid the trading tips you may get by SMS or email or anything like that. Only you by yourself know your risk profile. The person giving you tips does not know your risk profile. So, learn technical analysis and chart reading by your self if you want to be a professional trader.
9. Quantity or Volume
Trade the quantity only you are comfortable in holding or as per your risk profile. A large quantity trade going against you may trigger emotions which are always harmful to a trader.
This little word is very powerful when trading in market. Never be in hurry to jump into a trade. Wait patiently when your desired price is away. Don’t think that it will run away. Little patience can give you a better entry and exit price.
Avoid trading in first and last half an hour of a trading day. During this time, volumes are usually high and moves are sharp and markets are in the hangover of previous day’s moves and news. Let the market cool off for an hour or two after opening.
Another point of significant importance along with the above mentioned rules is that you always identify and follow the market trend. Don’t attempt to fight the trend. The advantage of going with the trend is that even if you could not make accurate entry into the trade, the chances of going to into losses reduce significantly than otherwise.
The mantra to become a successful trader is to Follow The Trend. Always remember :-
“ Trend is Your Friend “