#1. Don`t be too Anxious to Start Big Early
Today, many new traders are interested to know how they can make some “Quick Money” in the markets. Surely there are many ways but they are going to be disappointed as these so called quick rich ways are the short term solutions to the long term problem for those “Quick Rich Philosophers”.
It should be kept in your mind that trading is a long term learning process which requires a lot of efforts on the part of the trader that can help them create and acquire long term valuable assets – Knowledge, Skills, Positive Belief, Experience and Psychological Control. These valuable assets will not only help you make money from the market but also help you learn the skills to keep them forever.
So, the objective of every new aspiring trader should be to have a “Long Term Vision” to attain the market knowledge, learn and understand the wide aspects of trading business, frame up trading rules which can help you learn the art of successful trading rather than being bothered for making short term money as and when you start.
New traders should always “Start with a Small Account” with which you can open a trading account with a broker as during your initial trading days unavoidable stupid mistakes will be there and the initial objective is to keep them small. These mistakes will in turn help you understand what works and what not works in the market and refine your trading plan, entry setups, risk management, capital protection rules, exit strategies, etc and when your knowledge and experience grows and if your seed capital shows you positive results then you can add up to your responsibility to manage and trade a big account.
Have You Ever Wondered Why Starting Small Always Work in Trading Business?
Read the Eight steps to get started with making money from trading in India.
#2. Know Who You Are?
Psychology plays a big role in the trading business as your emotions, mental attitude, temperament, and human nature has a direct effect on your trading decisions and in turn the trading results. Every individual interested to be a participant in the market should analyze self on parameters like how good you are at controlling your emotions, Analyzing the charts or balance sheets and business prospects, Your own traits, habits and psychological temperaments? as these factors will help you finalize and come to a conclusion of whether you are a Trader or an Investor or an InvesTrader?
Any confusion will surely put the trader in trouble as very soon you will have stocks in your portfolio which were not supposed to be there. The stocks which you traded for the short term can become your long term investments if you did not followed up your short term trading rules, capital protection rules and reluctance to book small losses.
The idea is that you trading calls should not became a part of your long term investments. Many individual are a combination of both who are very good at differentiating their trades as investments vs trading like Mr. Rakesh Jhunjhunwala who is combination of an Investor and a Trader (an InvesTrader) where he do short term trading as well as long term investments and allocates all the profits from short term trading for long term investments.
Be clear with why you are buying or selling a market or a stock?
Read how a young dreamer with no capital become the investment guru and a role model for all aspiring traders and investors entering the trading arena. Read from the link below the investing and trading philosophy of the most admired Indian Stock Trader & Investor – Rakesh Jhunjhunwala. How he spotted some of his best investments that worked well for him and became his multi-bagger investments? The Story behind investments in Titan, Lupin, Crisil which generated him returns of more than 13000%, 8000% and 5000% respectively.
Rakesh Jhunjhunwala – The Inspiring Story & Philosophy of India`s Most Successful InvesTrader
Also read, Rakesh Jhunjhunwala Trading Rules
#3. Choose & Know Your Market
In India, at present there are four markets which are available for a trader or investor to choose from – Equities, Commodities, Currencies and Bonds. New participant should first list and filter out the stocks or market to follow, track and spend quality time and effort researching and analyzing the filtered list.
An investor, would prefer to choose equity market (NSE / BSE) to invest in stocks for medium to long term while on the other hand, Speculators, Arbitrageurs, or Hedgers would prefer to choose Futures & Options market by trading in Equity Index F&O (NSE / BSE), Stocks F&O (NSE / BSE), Currency F&O (NSE / BSE) or Commodities F&O (MCX) to achieve diverse trading objectives.
Never put all of your eggs in a single basket; this is the only best thought to help you learn the importance of diversification. Traders should divide their capital amongst stocks, futures, and index etfs and never put more than 10% of the capital in a single stock or market. Do not be interested in too many stocks or markets at any time. Restrict yourself in your trading plan with the number of market or stocks to analyse and trade.
After choosing a market, it completely make sense for any trader or investor to “Know Your Market”. The Idea is to know a market deep, be familiar with it, its habits and trade big.
An investor would follows a top down approach and get deep into analysis of economy then further down to the industry and find the company he feels could be a valuable asset to invest in. He invests all his time, researching a company by studying the companies fundamentals including the product, financials, future prospects, competition and investing his capital for long term and makes it a wealth creating asset.
Similarly, a trader should develop an insight and deep understanding of a market or stock he or she is interested to trade in. Markets are regulated by rules designed by humans and surely traded by them too. So all the markets or stocks are driven by human traits, habits and in-turn has its own individual habits, characteristics, features which leads to formation of repetitive patters, setups and behaviors. People generally has a dilemma that trading is about playing the price momentum of the stocks but its actually trading the behavior or patters or psychological repetitions in the market or stocks. Apply and check all the tools to the market or stocks of your choice and see how well the market fits and works on those criteria`s.
Knowing a market or a stock in deep will give the trader/investor a positive edge that will help him to manage his risk wisely, be safe and remain in the market forever. Ask yourself how can you make it big trading & investing stocks or markets you know nothing about?
#4. Always have Reasons or Facts to Enter a Trade
Trading decisions which are based on any unknown reason will lead to only one result – Losses & Yes More Big Losses. To overcome taking decisions on these inherent human habits, traders need to frame up mechanical ways to trade the markets and that can be achieved only by developing and framing “A Right Trading Plan”.
A pre-defined plan will help you take your trading decisions only on your willful thoughts and on pre-verified rules and reasons. These rules will reduce and help control your eagerness to enter and exit the market more often and trading on news, rumors, greed, fear will ensure you are trading according to your planned rules and setups. Framing your trading plan and developing a habit of following your plan strictly go hand in hand.
This part of trading plan is to answer and prepare an entry system to answer all if`s and how’s well before you enter a trade. Traders task is to work on pre-defining the entry plan defining the price & time of your entry? Your reasons to enter a trade? All this on your risk management rules. So if your idea is to take smaller risk then you need to make your entry more effective and proper to enter on small charts according to big setups or patterns.
Any right entry will make your complete trade process much easier and surely profit driven. Always have reasons to answer the thoughts why I am entering this market at this time and why at this price? This will make sure you are free from all the regrets later.
#5. Don`t Screw with the Market – Follow the Trend or Market
The secret recipe of success of some of the best known traders in the world is that these successful traders are always the market followers and not the market makers. They are the one who follows the trend of the market blindly. Successful investing or trading requires you to believe the fact that market knows everything and it always make sense to follow the one who knows and digests each piece of information and every participant bahavior and actions. Markets discounts all the future events well in advance. To follow the market, you need to get this into your instinct that the markets are always right, a reality to be followed.
Habits of a person here becomes a stepping stone for some traders specially those who are used to have some control over others as they have a habit of thinking that the other person should follow their theories and move their way. But with the market, it do not care any way about what we feel or think or out predictions. So, always be a market follower and dont try to feel that the markets should move your way.
#6. Know where to Place Stop losses before Entering the Trade – Protect Your Capital
Capital is an important asset for a new trader and utmost care must be taken during the initial trading days to protect your seed-up capital. New traders enter the market enthusiastically with a thought to make big profits but they fail to see the other side of the trading that they can be wrong with their decision making and can incur capital losses. Therefore, Capital protection is not just a need for any trader but a necessity for long term survival and performance and the only way to guard your capital is by using stop losses.
Stop losses are just like a saving sword for the fighter. It helps protects a trader in every stage and aspect of the trading business financially, emotionally and psychologically. Using strict stop losses will help you to test your trading system in your early trading days and will give you more trading chances to refine your strategy.
There are many ways pro traders use to determine the right place to put their stop losses like according to Swing Charts, few points below or above psychological levels like Double Bottom or Double Top, in some percentage of capital like 2% or 3%.
Stop losses are another way to determining and deciding the trades to take and avoid. Many traders avoid some trades as there actual stop losses are far away from their trade entry price thus in turn not under the criteria of say 2-3% of their total capital.
#7. Enter each Trade as per Risk Reward Trade-off
Professional traders always evaluate profile of any trade on the basis of how much they are going to lose with how much profits they can make from that very trade? There ultimate evaluation is determining the maximum risk and minimum profit they can make from a trade to judge the risk reward profile of each individual trade. Beginners can target on achieving a ratio of 2:1 and target on improving the ratio further to 3:1, 4:1, 5:1 and so on. that is for any Rs. x loss on any trade how many x you are expecting to make.
Even a trade who has a 50% accuracy with 2:1 reward risk trades profile has a resultant of generating positive returns on his portfolio or trades. Working and refining your entry system can help you achieve a higher end of the reward risk ratio and same can be achieved by evaluating a trade as per the big setups and charts but entering that trade on small charts with close stop losses.
The difference between the successful and a very successful trader is that very successful trades strive to aim for higher end of reward risk trades and they are willing to give market small losses while generating big profits on any single trades. Traders or investors generally have a tendency to book small profits and letting their losses go big while they should do and follow opposite to trade wisely and become successful and profitable at the end. The goal is to let go off from the losing trades and stick to and follow the winning ones.
How a trader with an accuracy of 50% can be a profitable trader?
#8. Never Change your Stop losses without Good Reasons
Stop losses are used for the safety of the capital of the traders and they should be decided well before entering any trade. So, traders should ensure that the stop losses once placed should not be modified with the changing market moves. Many new traders have a tendency to remove their stop losses as and when the market starts going close to their stop losses feeling scared to book the losses. So, whenever you enter a trade, decided and placed a stop loss order, do not change it without good reasons. It always make sense in the trading business to book small losses and stay at a distance from losing trades.
Always be eager and ready to book small losses rather than letting your losses run big.
#9. Always Shift & Trail Stop losses to Protect Capital & Profits
This is the only exception to the rule of not changing your stop losses any time. There are actually two aspects of using stop losses – One is to protect you capital after a trade moves in your favor and the other is to keep on trailing stop losses to protect your paper profits.
Rule #6 says that stop losses should be used always to protect your capital and get out with small loss if market moves against your trade. But shifting stop loss to protect your capital fully requires any trader to shift the stop losses at-least to the break even point as market starts to move in your favor. This means whenever a trade goes in your favor, the first thing a trader has to do is to shift the stop loss to a place where there is no risk to your capital. This will ensure that even if the market didn’t reach up your target levels and reverse soon then you will be stopped out of the market at “No Profit No Loss” situation.
Extending the strategy further, as the market keep on going in the trade direction then stop losses must be trailed further to protect some paper profits. This will make sure that that if market reverses it trend after getting in the direction of your trade then trader should be able to book some profits.
#10. Always have Reasons or Facts to Exit a Trade
Whenever in doubt or you feel you have done a mistake or market is changing the trend. Get out soon. Any delays are dangerous.. Always be free from lot of worries. Get out and let the market gives you right indications to enter again..
Believe me staying with the trade with a lack of confidence and confusion of any kind will not do any good to the you but will worsen the situation. You can reenter the market whenever you feel market is showing indications to enter again.
#11. Do not Over-trade
Always determine the maximum number of trade you are allowed to take in your trading plan. Over-trading is one of the culprit of success of traders which can turn your profitable account into losses and will increase trading cost. This is one if the biggest reason for losses for day traders especially futures trader. Whether it is profitable or losing trades, restrict yourself with number of trades.
After having 2-3 positive trades in day trading .. Call it a day.. Close your terminal and spend time on researching and analyzing the past movements. Market will surely open tomorrow or for the some 200 days in a year. Don`t be too much eager to trade today or cover you losses intraday. Trader should focus and stress on finding trade opportunities rather than restricting self according to the time lines of the market.
#12. Don`t have too Many Open Positions at any Time
Traders should not have many open positions at any given time. This generally reduces the efficiency of a trader and probabilities of successful trades.
Recap of 12 Action Steps
#1. Don`t be too Anxious to Start Big Early
#2. Know Who You Are?
#3. Choose & Know Your Market
#4. Always have Reasons or Facts to Enter a Trade
#5. Don`t Screw with the Market – Follow the Trend or Market
#6. Know where to Place Stop losses before Entering the Trade – Protect Your Capital
#7. Enter each Trade as per Risk Reward Trade-off
#8. Never Change your Stop losses without Good Reasons
#9. Always Shift & Trail Stop losses to Protect Capital & Profits
#10. Always have Reasons or Facts to Exit a Trade
#11. Do not Over-trade
#12. Don`t have too Many Open Positions at any Time
KNOWLEDGE IS POWER!
