Stock trading is a way to create wealth over time periods. Stock market in itself is an ocean of wealth where you can make handsome money by trading stocks successfully. The beauty of this business is that you can trade stocks with minimal effort for whole of your life. It gives you much needed time to enjoy your life along with the financial freedom.
If you want to know the top jobs that create millionaires, then an article at jobmonkey enlists 11 jobs ;
- Doctor
- Investment Banker
- Real Estate Agent
- Lawyer
- Engineer
- Day Trader/ Stock Trader
- Air Traffic Controller
- Athlete
- Insurance Agent
- Entrepreneur
- Actor/Actress
A stock trader occupies the sixth position in this list. It is actually day trader in the list but we take it as stock trader in broader sense. Stock trading can surely be your path to be a millionaire. However, it requires to know some very basic things to learn trading and execute and keep trading as simple as possible to be successful.
I will be talking about these very things which I learnt in my trading experience and by reading various books about trading. My early time in trading was very painful with multiple losses repeatedly although I was applying everything I learnt about chart reading and technical analysis of stocks.
What Is Stock Trading
Stock trading means buying and selling of stocks of various publicly listed companies at the stock exchanges. The price difference between selling and buying of stocks is the profit earned.
You can buy stocks at a certain price in expectation of selling them later at higher price. This is called ‘going long’ or ‘long position’. Conversely, you can also sell stocks at a certain price in expectation of buying back those stocks at lower price later on when you expect stock prices to fall in near future. This is called ‘going short’, ‘short position’ or short selling.
In nutshell, the idea is to buy low and sell high to make money in stock market trading. The more simple this idea looks to read, the more difficult it is to execute in the stock market. However, if you learn trading well and apply the most basic things without making trading complicated or attempting to do something extraordinary while trading stocks, you will definitely see yourself making money in the stock markets.
Coming back to stock market trading, there are three ways you can start trading stocks; you can buy a stock for trading and keep the stocks in your trading account to sell them after one or more than one days. This is called delivery trading.
With delivery trading, you can buy stocks only equal to the cash in your trading account. However, stock brokers also provide cash leverage allowing to buy much higher number of stocks than otherwise you could buy in delivery trading. This is called as margin trading.
Otherwise, you can use derivatives to trade stocks – this is futures trading and options trading. Derivatives offer cash leverage resulting in potential bigger profits or losses.
The Secrets to Profitable Stock Trading
Technical Chart Analysis
Studying technical charts for stock analysis is the most basic and important thing to do before you go for stock market trading. Technical analysis of stock charts tells us the price action of stocks on which stock trading works.
There is no need to look for complex and advanced technical indicators on stock charts. You can succeed using simple and most commonly used technical indicators to get reliable trading signals. Build a trading system consisting of two or three technical indicators to study technical charts.
I use daily or end of the day candlestick charts for stock analysis. The technical indicators I use are 20 day exponential moving average (EMA) along with relative strength index (RSI) and stochastics. This system gives me reliable trading signals. I also use a trading system consisting of 10 day and 30 day EMA along MACD (moving average convergence divergence) indicator.
I go long or short only when all or most of the indicators are aligned in one direction. For going long, prices should be trading above the moving averages while for going short, the prices should be trading below the moving averages.
To get more conviction to the trade, I also use parabolic SAR or ADX indicator. You can use whatever indicators you like and do backtesting by looking at the past data of technical charts to see how the stock prices behaved with those indicators. If you find it reliable, then keep using it for at least one year and do not jump to different indicators too frequently.
The crux is to keep things as simple as possible and easy to understand.
Using complex indicators is no guarantee to more accurate prediction of stock prices.
Enough Trading Capital
It is important to have enough capital to get significant gains in stock trading. It is worth mentioning that this the capital or the cash you can afford to loose. Of course, there is no lower limit to the money required to test waters in stock market trading.
Having enough capital allows you to manage the trades, add additional positions when trade starts working and gives the luxury of selling half position with notable profits while letting the remaining positions for further gains with trailing stop losses.
Risk Management
Risk management holds the utmost important place in stock trading. Actually, this is the thing which decides how long will you survive in the share market. Majority of the traders do not pay heed to risk management and consequently leave trading within an year of starting while suffering big losses.
Risk management helps you to decide how much money you can lose in any particular trade. Follow rule of 1% to manage the risks of trading.
Rule of 1% says that you should not risk more than 1% of your total trading capital in any trade. You can increase it to 2% but not more than that.
If you have trading capital of ₹ 10,000,00, you should risk ₹10000 only. If your stop loss is placed ₹40 below your buying price for any trade, then you should buy only 10000/40 = 250 shares and not use your entire capital. This keeps your losses fixed.
No trading system is foolproof that can give you 100% correct trading signals. You get winning as well as losing trades. Trading losses are bound to occur in stock trading. Keeping losses short and fixed and letting the profitable trades going on makes trading profitable.
Keep your losses short and the profits bigger.
You can keep losses short by exiting the trade when your stop loss is hit. Do not wait for the trade to reverse to be profitable or cover the losses. Profits can be made bigger by using trailing stop losses.
Proper risk management allows you to stay in the market for longer. Otherwise, one bad trade can wash away the major chunk of your capital.
Choosing Right Trading Tool And Time Frame
Stock trading can be done as delivery trading, margin trading, futures trading and options trading. Except delivery trading, all other are cash leverage based trading tools. Higher the cash leverage, higher the profit potentials and bigger the potential losses.
What tool suits you best, you have to decide it according to your risk profile and comfort level. Majority of the traders get attracted to leverage based trading and suffer losses. I also lost so much of money in futures and options trading and shifted to delivery trading. This has turned my trading profitable. Small profits are far better than big losses.
Futures and options trading makes us take larger positions which can make us uncomfortable in case of adverse market movements. Delivery trading allows us to take positions according to our comfort levels. Delivery trading is much better for stock trading for beginners.
Coming to time frame for trading, there is no denying that larger the time frame for a trade, the higher the probability of making profits. Depending upon the time frame, you can opt for day trading, swing trading or positional trading.
Day trading is for the traders who have sufficient experience of market and free time to keep watching the stock prices whole day in search of trades. If you are in a full time job, you should never go for day trading. It is always better to switch to swing trading or positional trading for extra income while doing your regular job.
Human Emotions Control
Stock trading is not just limited to the facts I mentioned above. The biggest deciding factors for the success of your trading can be the two human emotions ;
- Fear
- Greed
Both of them keep playing their role as you enter the stock market. A random market fall can make you panic, especially if you are holding big positions without proper risk management. This may lead you exiting the market immediately fearing further fall. That becomes even more painful when you exit and you see market coming back to those levels again sooner than later.
On the other hand, a decent favourable market move can put you in profits sooner than expected and you try to exit even before the targets are met. This makes you missing the potential profits due to greed or fear.
You can overcome the human emotions of fear and greed by using a proper trading plan. A trading plan gives you clear trading signal with entry price, target price and stop loss price. Before taking a trade, write this trading plan on a paper and execute when the market opens. It will make you feel confident in the market.
The entry , exit and stop loss prices of a trading plan are determined by chart reading and trading system we discussed above.
Maintain A Trading Journal
A trading journal is like a trading dairy. It is used to record each and every trade you execute. The records help you to take feedback and review your past performance in stock trading.
Trading journal includes different aspects of a trade like the date of trade, the amount invested or the number of shares traded, outcome of the trade and the important notes about each particular trade.
To succeed in trading, you must adhere to maintain a trading journal on regular basis.
