February, 29 2024 Thursday 17:15 Hrs
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Knowledge Corner

Do’s & Don’ts of Trading

  • Stick to trading plan: A carefully planned trade should not involve emotions. Any trade which involve a buy or sell should follow the limits set out in a plan but not be guided by the emotions of the individual doing the trade. Very often, emotions will tell something totally different from what has been planned. It is only by adhering to a preconceived formula that one can resist the emotional temptations and stresses that are constantly present in a speculative situation.
  • Not sure, don’t trade: A trade should not be undertaken if an individual is not sure of success. Once a trade is undertaken, it is wise to book a loss and discontinue the trade no sooner he feels unsure of himself.
  • Being right less than 50% of the time is enough to show handsome profits: A trader is seldom right in every trade he undertakes. This is because they generally fail to adopt disciplined trading techniques. An individual with proper trading techniques should be able to cut his losses short and let his profits run so that even being right less than half the time will show excellent profits.
  • Cut losses and ride profits: The basic fault of most traders is that they put a limit on their profits and no limit on their losses. A man hates to admit he’s wrong. Once a trade is undertaken, if it starts showing losses, instead of admitting that an error has been committed in entering the trade, a trader waits relentlessly riding his losses and believing that the market will turn around and prove him correct. After long tired wait, he accepts to take a small loss instead of taking a profit after further wait. On the other hand, he displays his emotions immediately, by booking profits in a trade where a longer wait would have fetched him multiple gains. But no one certainly get richer this way. Being satisfied with small profits is the wrong mental approach for making money in speculation. If one is correct when entering a speculative situation, one will know it almost immediately that it will show a profit quickly.
  • The crux of the entire argument is, on one hand, by taking a small loss, in a wrong trade, a trader should not feel that he has erred in thinking but should know that he has timed it wrong while entering the trade and on the other hand, in a right trade, he should be patient to ride the gains and book large profits. An individual must let the market tell him when he is wrong and when he is right.

  • Fear has no place in markets: Losing is a natural part of trading. Fear has no place here. If one has decided to trade, it is assumed that he/she is prepared to take losses. In additions, trading should be done only with surplus funds that are not vital to daily expenses.
  • Don’t trade too many markets: It is difficult to successfully trade and understand a specific market. It is next to impossible for an individual, especially a beginner, to be successful in several markets at the same time. The fundamental, technical, and psychological information necessary to trade successfully in more than a few markets is beyond a normal individual’s reach.
  • Don’t trade in a market that is too thin: A market or a counter where the trading volume is less would serve no good purpose for a trader. Lack of public participation in a market will make it difficult, if not impossible, to liquidate a position at anywhere near the price he/she wants.
  • Be aware of your friend “the trend”: Good understanding of price trends, either bullish or bearish is vital for a trader. Over a period of time a trader should learn the general price behavior. This means a trader should learn to recognize when a trend is about to run its course or is near a period of exhaustion. By an ability to recognize the early signs of exhaustions, the trader can protect himself from staying in the market too long and will be able to change direction when the trend changes. Many a traders therefore operate in few counters where they have mastered the trend behavior.
  • Don’t attempt to buy the bottom or sell the top: Attempting to buy the lowest price and sell the highest price is next to impossible. If one does it by way of luck only. Try to identify the trend and buy the fall and sell the rise. Be content to wait for the trend to develop and then take advantage of it once it has been established.
  • Sell the first rally or buy the first break: Generally, a market which has just established a trend either up or down will have reaction and good interim profits can be made by recognizing this reaction and taking advantage of it. For example, in a bull market, the first reaction will generally met by the investors waiting to buy the break. This support generally causes the market to rally. The reverse is true of a bear market.
  • The stock does not know what you own it: Be impersonal to trading. Once the trade is undertaken and it is know that it has gone wrong, it is better to get out immediately. The trader should know that market will not feed badly if he exits but he will if he does not exit.
  • The market always looks its worst at its bottom, and the best at the top: It is important to remember that a market would look worst at its bottom and best at its top. Knowing this and preparing oneself to treat each day independently a trader can set aside the emotional fever to carry over and cloud his/her judgment.
  • Do not demand consistency in your returns: No trader has ever made consistent returns. No trader is successful in all trades. A few good trades can wipe out losses of many trades. Therefore it is futile to expect consistency in returns from trading. Overall money can be earned over a period by being consistent in trade discipline.
  • Trade within your “core position”: Only trade a small percentage of available capital at any one time. A trader should always earmark an amount for trade and ensure that he does not cross that level.
  • The final ‘Mantra’ of trading: Decide the exit before entry and the best way to do is to log on the exit trade first and then the entry trade. This way one can build up the certainty of acceptable profits or manageable losses.
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