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GOLDEN RULES FOR
TRADING
Divide
your Risk Capital in 10 Equal Parts.
As part
of the Successful money management, it is always advised to divide your Risk
Capital (which you can afford to lose) into 10 equal Parts and at any given time
none of your Single Trade should have more than 3 parts of your capital in it
even if you are in a winning position. At the same time always keep some spare
money for any Buying Opportunity, which may come any time.
Trade
ONLY in active & high Volume Stocks/ Futures.
Many
Traders get stuck with stocks for want of liquidity. Always rely upon Stocks
which have reasonably high volume over a period of time. High Volume are always
advised for easy Entry, Exit and Stop Loss. In low volume stocks the spread is
too high and chance of Stop Loss limit getting failed is too high as there would
be no Buyer or seller at your Stop Loss Level.
Come
Prepared with a Trading Plan
Successful traders always keep their Trading
Plans ready before entering into any transactions. One must prepare a Watch List
or Probable candidates for Day's trading and remain focused on the movement of
those stocks only. For example a Stock 'X' is on verge of a Bullish Breakout
from any pattern or stock 'Y' has declined substantially after an initial sharp
upmove or stock 'Z' is close to an important support level. Successful trader
would concentrate on the movement of those stocks only and enter the trade as
soon as stock 'X' gives the anticipated breakout or stock 'Y' starts an upmove
or stock 'Z' breaks the support level to initiate a trade for quick gains.
Never
Over Trade
This is the most common mistake committed by
Traders, particularly after a Streak of winning Trades. This mistake Generally
not only wipes off all the profits, but puts traders in heavy losses. In order
to remain in market while making consistent Profits, under no circumstances,
traders should go beyond their Risk Capital.
Trade
in 2 to 4 Stocks at a time with strict Stop Loss.
In a Bull
move, most of the stocks move up and similarly in any Bear Move, most of the
stock moves southwards. As a Trader you know this fact but can you Buy 20 Stocks
and try to make profit in all the 20 stocks just because all are moving up or
vice versa in a Down trend? What will happen if market reverses without any
indication on any bad news? Would you be able to monitor all your trades in such
situation? Smart and Successful trader would trade in 2 to 4 stocks with strict
Stop Loss and keep a strict vigil to avoid any misfortune in case of any
eventuality.
Sell
Short as often as you go Long.
More than
90% of common investors/ Traders are 'Bulls' by nature. Because they love to see
prices going up only. Stocks are bought by anybody/ corporate/ financial
institutions/ Mutual Funds to make profit on rise. They have large holdings and
mentally they wish and pray for the market to rise only. But facts are
different. History shows that Bull Phases have shorter duration that Bear
phases. So every stock that moves up will retrace back to 38%-50%-66%. Since 90%
investors are Bulls by heart they normally do not book profit at higher levels
to re-enter later at lower levels instead they prefer to increase their
portfolio at lower levels. Successful Traders know how to capitalize such
correction. They are always prepared to go 'Short' as often as they trade on
'Long' side.
Don't
Trade if you are not Clear.
Many
Traders, because of their daily habits trade even when there are no signals to
buy or short. Normally such situation arrives after a sharp rise or decline when
stocks are adjusting their values. While some stocks attempt to move up, few may
be taking breather before next move. Such situation are often confusing. There
is no harm in taking rest for a day or two or short period if the trend is
choppy, unclear or doubtful, instead of putting your money at higher risk.
Don't
expect Profit on Every Trade.
If you consider you are a smart trader who can
make profit on every trade, you are 100% wrong. Always be flexible and accept
the fact as soon as you realize that you are on wrong side of the trade. Simply
get out of the trade without changing your strategy during the market; it may
cause you double losses.
Withdraw portion of your profits.
The business of Trading is excellent as long as
you are making profits. Unlike other business your losses can be unlimited and
rapid if market does not move as per your expectations. While in other
businesses you may have other remedial measures available but in trading it is
you only who has to control it. Traders have large egos particularly after
series of successful trades and their tendency to enlarge commitments in
overconfidence may cause major financial set back. There fore it is must that
trader must take a portion of the profit and put it in separate account. This is
absolutely must for long term stability in the market. |
