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 up move 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 setback. Therefore 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.
