Article

Top 10 Rules for Successful Trading

07 Aug 2019

The gist of trading was best captured by the legendary trader, Jesse Livermore. According to Livermore, “In trading there is no bull side and bear side. There is only the right side”. Traders don’t bother about the long term and they are not really worried about getting the market view right. The concern is whether they have properly understood the underlying trend of the market? That is the key to trading.

Obviously, trading is a complex game otherwise there could have been scores of successful traders in the world. So what is it that elevates a good trader into a successful trader?

10 rules to be a successful trader in the markets

While we are broadly talking with reference to the equity market, these rules can apply to all kinds of trading; be it equities, futures, options, commodities or even currencies.

  • Successful traders begin with capital protection in mind. What does that mean? You must be clear about how much capital you are willing to lose. This includes how much you are willing to lose in a trade; how much you are willing to lose in a day and how much capital erosion you can afford overall.
  • When you get into any uncertain activity you need insurance. In trading, that insurance comes in the form of a stop loss. Your stop loss can be based on technical levels, events or affordability. You set the stop loss with a positive risk trade-off. Earnings Rs.3 for Rs.1 of risk is a 3:1 trade-off. But 1:1 is a bad trade-off. More importantly, you must adhere to the stop loss as a discipline.
  • When you trade don’t think and behave like Warren Buffett, who takes a 10 year view. As a trader, you are not in the buy-and-hold game. The more you use each opportunity to take profits off the table, the more your money churns and the more funds you have available to buy when corrections present themselves. That is how you enhance ROI.
  • The market is right, even if you don’t agree with it. The rule of successful trading is to always stay on the side of momentum because trend is your friend. In short, don’t try to short a raging bull market or catch a falling knife. The market is always giving you a message about the underlying trend. Learn to read that message.
  • When you lose money, take away the lessons, but don’t take the losses to bed. Don’t look back and regret trades. Also, when traders book profits and the stock goes further up, they tend to look back at notional losses. A good trader never looks back at trades except for taking the hard lessons. Trading is all about moving on to the next trade.
  • Leverage and average are the two cardinal sins of trading. Don’t try to overtrade in a volatile market; don’t try to recover losses by overtrading and don’t try to average your wrong trades. It is OK to be wrong once, not to be wrong twice!
  • There are 3 actions in trading; buying, selling and doing nothing. Quite often, the most productive action is doing nothing. You can save your capital a lot more by staying out of a volatile market. The sign of a good trader is to know when to sit out and watch the market without committing funds.
  • If your well-wisher had a hot trading tip, he would be trading himself. Don’t get carried away by trading tips. Free tips are never worthwhile and you will eventually end up losing money in the bargain. Be your own analyst if you want to be successful in trading.
  • Successful traders fight for pennies because the pound normally takes care of itself. When you trade, your cost includes brokerage, statutory charges, demat charges and liquidity costs. Get the best deal on costs to be profitable.
  • Successful traders are wary of overnight risks, especially when there are domestic and global headwinds. One of the biggest risks you need to be conscious of if the overnight risk. When there is economic or geopolitical risk or a major event coming up, stay light.

Discipline and adherence to trading rules can bridge any gap. That is a good enough reason to start following these trading rules!

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Top 10 Rules for Successful Trading

07 Aug 2019

The gist of trading was best captured by the legendary trader, Jesse Livermore. According to Livermore, “In trading there is no bull side and bear side. There is only the right side”. Traders don’t bother about the long term and they are not really worried about getting the market view right. The concern is whether they have properly understood the underlying trend of the market? That is the key to trading.

Obviously, trading is a complex game otherwise there could have been scores of successful traders in the world. So what is it that elevates a good trader into a successful trader?

10 rules to be a successful trader in the markets

While we are broadly talking with reference to the equity market, these rules can apply to all kinds of trading; be it equities, futures, options, commodities or even currencies.

  • Successful traders begin with capital protection in mind. What does that mean? You must be clear about how much capital you are willing to lose. This includes how much you are willing to lose in a trade; how much you are willing to lose in a day and how much capital erosion you can afford overall.
  • When you get into any uncertain activity you need insurance. In trading, that insurance comes in the form of a stop loss. Your stop loss can be based on technical levels, events or affordability. You set the stop loss with a positive risk trade-off. Earnings Rs.3 for Rs.1 of risk is a 3:1 trade-off. But 1:1 is a bad trade-off. More importantly, you must adhere to the stop loss as a discipline.
  • When you trade don’t think and behave like Warren Buffett, who takes a 10 year view. As a trader, you are not in the buy-and-hold game. The more you use each opportunity to take profits off the table, the more your money churns and the more funds you have available to buy when corrections present themselves. That is how you enhance ROI.
  • The market is right, even if you don’t agree with it. The rule of successful trading is to always stay on the side of momentum because trend is your friend. In short, don’t try to short a raging bull market or catch a falling knife. The market is always giving you a message about the underlying trend. Learn to read that message.
  • When you lose money, take away the lessons, but don’t take the losses to bed. Don’t look back and regret trades. Also, when traders book profits and the stock goes further up, they tend to look back at notional losses. A good trader never looks back at trades except for taking the hard lessons. Trading is all about moving on to the next trade.
  • Leverage and average are the two cardinal sins of trading. Don’t try to overtrade in a volatile market; don’t try to recover losses by overtrading and don’t try to average your wrong trades. It is OK to be wrong once, not to be wrong twice!
  • There are 3 actions in trading; buying, selling and doing nothing. Quite often, the most productive action is doing nothing. You can save your capital a lot more by staying out of a volatile market. The sign of a good trader is to know when to sit out and watch the market without committing funds.
  • If your well-wisher had a hot trading tip, he would be trading himself. Don’t get carried away by trading tips. Free tips are never worthwhile and you will eventually end up losing money in the bargain. Be your own analyst if you want to be successful in trading.
  • Successful traders fight for pennies because the pound normally takes care of itself. When you trade, your cost includes brokerage, statutory charges, demat charges and liquidity costs. Get the best deal on costs to be profitable.
  • Successful traders are wary of overnight risks, especially when there are domestic and global headwinds. One of the biggest risks you need to be conscious of if the overnight risk. When there is economic or geopolitical risk or a major event coming up, stay light.

Discipline and adherence to trading rules can bridge any gap. That is a good enough reason to start following these trading rules!