Things that beginners in trading should consider

Traders look to capitalize on short term trends. Trading could be based purely on technical charts, earnings announcements, corporate actions or impact of policy announcements. The recently announced Rs.25,000 crore package for real estate was a big boost for DLF. Traders can look at opportunities intraday or over a few days or even months. How to find the best stocks to invest in the short term? How to identify the best trading strategies in the market? Here is a quick rundown on what a beginner in trading must consider.

If you are a beginner in trading; here is what you must know

1. Trading is not just about punting in the market. It is a lot more organized and a lot more knowledge driven. Even through trading pertains to the short term there is a method you need to follow. For example, you need to understand how events will impact stocks and how to read and interpret technical charts. Be self-driven; you cannot be a successful trader relying on calls and tips from sources.

2. Trade with the money you are willing to lose. Trading is not about shooting in the dark. Instead, you must be clear about how much you are willing to lose. When you allocate capital to trading, focus on protecting this capital. Document how much you are willing to lose in any trade; in a day and overall depletion in capital you can tolerate. Once these limits are breached, have the discipline to sit in the sidelines and re-assess.

3. There is nothing like a part-time trader. You need to allocate full time and effort to be a successful trader. It entails monitoring stocks, monitoring positions and reviewing risk in the market. Be ready to invest your time in trading.

4. As a beginner, keep your stock universe and number of open positions in check. Focus on a maximum of one or two stocks during a session. Tracking and finding opportunities is easier with just a few stocks. Don’t take too much risk or don’t stake all your capital in one go. Keep your capital and profits separately. You can take higher risk on your profits than on your core capital.

5. Cheap crap is crap anyway. Don’t get obsessed with the lure of penny stocks and beaten down stocks. Especially, be wary of stocks that have corrected 80-90% from their peaks. They could be classic value traps.

6. For a long term investor, time matters more than timing. But, if you are a trader with a short term view, then timing can make all the difference to your performance. When you are trading a stock for a 10% return in a month, a 3-4% difference can have a substantial impact on your eventual returns. Use supports and resistances as well as momentum indicators to time trades as close to the tipping points as possible.

7. Just as traders have an entry rule, they must also have a “rush for the exits” rule. Stop loss is one approach, but even otherwise, you must identify certain macro conditions that could trigger exit. For example, it could be a sharp fall in GDP growth, or a sharp fall in quarterly margins, or a rise in inflation or even a sharp fall in the rupee. Once you see the triggers, just rush for the exit.

8. How you place the order is important when you are a beginner in trading. A trade in a volatile market should ideally be a limit order. But if you are buying in a falling market or if you are selling in a rising market, then market orders work better. When the stock liquidity is thin, market orders are preferred over limit orders.

9. If you earned 30% on a stock in a month; remember it is an exception not the rule. If something is too good to be true, then it is probably not true. You need to be realistic about profits. A strategy doesn't have to win all the time to be profitable. What is important is that you hold winning trades long enough and cut losing trades quickly.

10. Develop the discipline of trading to a plan early on. Such a trading plan will have simple answers and ensure that you are not consumed by fear or greed at extreme levels of the market. It is important to follow your formula closely rather than try to chase profits.

There is no rocket science about trading. If you get the above 10 basics right, you can actually make a success of your trading journey.