BULLS BUY! BEARS SELL! THEY BOTH MAKE MONEY, BUT ONLY THE PIGS GET SLAUGHTERED.
WHY?
BECAUSE PIGS DON’T HAVE AN APPROACH.
So, if you are planning to enter into the world of stock trading but are afraid of failing, here are the golden rules which can help you to start, ace the trading world, and improve your odds of driving a profitable trading journey.
Many are interlinked, but all are worth entertaining.
1. Build your own system:
You need to create a sound strategy, and system considering your trading style, profession, and risk appetite, which can make you money in the long run. Your system must match your risk tolerance and return expectations.
2. Trade the methodology that fits your personality:
Successful: Scalpers make money. Intraday traders make money. Swing traders make money. Positional traders make money. Short term-Long term investors both make money. So, you need to choose your trading style and the time frame, that fits your personality and your profession.
3. Always plan your trade and then trade your plan:
In life, as in trading, people with a written plan accomplish more than people without a plan. Having a trading plan gives you an edge over other traders that rely on emotions, predictions, and opinions to make trading decisions.
4. Stick to your trade plan:
Trading is 20% buying and selling while 80% is sitting. Once you execute a trade, always stick to your trade plan until and unless either your target or your stop loss gets triggered. Don’t let fear or greed make you do something destructive; always stick to your plan.
5. Know your risk appetite:
Always trade while considering your risk appetite. Market reward those who respect risk. Risk Management is the key to unlocking a profitable trading journey. Successful trading is based on ever-increasing account equity and ‘minimum drawdowns’.
6. Ideal Position Sizing:
Proper position sizing limits the emotional impact of a single trade. Aggressive position sizing can cause accelerated heart rate or a high level of stress which can cause you to make irrational decisions.
The smaller you keep your trades in the beginning, the easier it will be to accept if goes wrong and build positions when the trade moves in the desired direction.
7. Accept the stop loss:
Never average down the losers and don’t let your losses compound. Honor your stops when they hit the first time. Take a small hit when the trades get failed and move out of that trade without involving your ego in it and fighting against the market.
8. Win Big, Lose small:
It’s not important what your accuracy is, but what matters is how much you make when you are right and how much you lose when you are wrong. Your account can grow rapidly by compounding the big gains.
9. Ideal capital allocation:
Diversification is the key. Never allocate more than 10% of total capital in any trade and never take more than 1-2% risk per trade.
10. Trade your system and not your emotions:
Always trade when your system gives the signal. Maintain a difference between your system and your emotions. Don’t execute the trade until and unless it hasn’t happened what you thought can happen. Let the action happen first, and then execute the trade as per the plan.
11. Learn to sit and wait for opportunities:
Profit preservation has its importance. As a trader, you have to wait for days and months to wait for the right opportunities as per your system.
Patience can pay big dividends in life and can protect you from irrational emotions and feelings. So, always remain patient if you want to survive in the market for the long term.
12. Have an exit plan:
Always have an exit plan in place and take your profits when you win big. Either follow a ‘partial booking exit strategy’ or a ‘trailing stop loss’ exit strategy. But make sure that you must have an exit strategy and take the money off the table.
13. Big time frames remove noise:
The bigger the time frame of your trade-in, the more you will likely improve your odds of success and remove the noise.
14. Trade favorable R2R setups:
Every day in the markets you get multiple trading opportunities ranging from low risk to high risk. But you need to stick with those opportunities that offer favorable R2R, i.e., greater or equal to 2:1.
15. Trade with conviction:
Don’t trade something you don’t understand 100%. Don’t trade for the sake of it. If worthwhile opportunities (on which to risk your money) can’t be identified, you may be best looking elsewhere or even sitting on your hands.
16. Minimize Intraday trading as much as you can:
The biggest money has always been made by sitting into a trade and rising the trend till it last, but intraday trading completely lacks here because here you have time restrictions. Also today, the markets are being driven by also traders which leads to big spikes during the day, making it very laborious to do intraday trading.
17. Lock profits with trailing Stop Losses
Trailing stop loss is the most underrated tool as it keeps on locking the profits as the price moves in the desired direction. A trend trader should always use trailing stop losses to take the money off the table when the trend changes its direction.
18. Work on Psychology:
The success of trading does not lie in the first quadrant of technical analysis but in the third quadrant, i.e., psychology. Trading psychology can be improved by having a systematic approach, trade plan, quantified position sizing, discipline, and the right mindset.
19. Never do revenge trading:
Never trade to recover the previous losses, because that harms psychology which increases the odds of making more losses. Profitable trading is often boring. You will learn that your system makes you money in the long term, but your ego loses you money in the short term. Rich traders never fight against the markets. They simply take a small hit when they are wrong and the big money off the table when proved right. So, always respect the market and don’t become arrogant.
20. Don’t attach your ego to your trades:
Go with the flow of price action and not the flow of their emotions. Be the trader that witnesses the trade from an emotional distance, with respect and curiosity.
21. Never chase stocks too far beyond the buy point:
Chasing stock too far beyond their buying point will lead you to make add more quantity when the scrip comes to your buying price, leading to improper position sizing and risk management.
22. Always trade derivatives with Hedging:
For 90%, derivatives are weapons of mass destruction but still, the 10% successfully make a living out of it.
Derivatives are extremely high risky financial trading instruments. So always make sure that you must hedge your position to avoid the extreme risk of ‘gap up & gap down’.
23. Don’t trade illiquid stocks:
Illiquid stocks are stocks of penny companies and they are difficult to sell as a result of a lack of ready buyers, low trading activity, and other such factors.
These stocks witness high circuit activities, thus causing very difficulty in trading.
24. Trade like each trade is one of the next 100:
Always treat each trade like an individual one, just like each trade is one of the next 100. Never attach your ego to any of your trades because that will harm your trading psychology and you won’t be able to exit at the planned stop loss point which may result in a big loss.
25. Over-analysis leads to paralysis:
Don’t over-complicate the process of analyzing the markets/charts and finding trades. The market will generate signals for you when it’s ready, all you need to do is learn what the signals look like and where to look for them at.
So, while trading, one should keep his analysis simple and put high significance on price action (Price & Volume) instead of relying upon so many indicators.
26. Just specialize in 1-2 indicators:
A jack of all trades is a master of none.
Moving Averages, RSI, RS, Bollinger Bands, MACD, and ADX are all great indicators but all won’t take you anywhere in the markets. So, you need to specialize in 1-2 indicators per your feasibility and backtest them on your system.
27. Don’t buy in FOMO and sell in greed:
Warren Buffet said and we quote, ‘Be greedy when everybody is fearful and be fearful when everybody is greedy.
Fear can cripple a trader and make him buy in a fear of missing out on the rally, instead of waiting for the right signal and sticking to your trade plan while greed can ruin his profitability by booking smaller profit in a panic situation, instead of riding the trend.
28. Follow the smart money:
Smart money is where Mutual funds, Institutional Investors, and banks get into any stock. Monster stocks are never generally popular names, these are low cap companies with huge growth potential, but price and volume can get you there. Smart money knows where the action and profits are, so it’s up to you to catch them.
29. Learn from your mistakes & Always stay humble:
Markets are never wrong. The market gives great instant feedback about your performance but you have to pay attention. Great traders never stop learning and are lifelong learners. To be successful in anything you have to learn from your mistakes and correct them. The market is supreme. Always know that the market is too big for anyone to master. Never try to be egoistic and fight against the market.
30. Never trade with borrowed money and don’t use excess leverage:
Trading with borrowed causes stresses to generate returns consistently and initiate trades even if ‘it’s a no to trade phase’ because of the extreme volatility as the amount has to be paid along with the interest. This harms psychology and causes the trader to make irrational decisions which increases the odds of more failure.
32. Maintain a trading journal:
A trading journal is like having a teacher who teaches traders about themselves. Maintain a trading journal that keeps all the records of your entry, exit, stop loss, target, P/L, the reason for initiating the trade, etc. You will be able to see what is causing your good trades and your bad traders. What you were thinking, and what caused you to go against your plan.
33. Don’t lose hope & Never give up:
As a trader, the first few years would be difficult. But as soon as you move forward and develop your system and start trading with proper risk management, position-sizing, and psychology, all the experience will start yielding results. Trading is a great business. What other businesses offered this kind of money, opportunity, freedom, and these odds of success? It’s like a lottery. You can win based on hard work and discipline.
