Trading Rules for Trading calls:
Many traders trade markets like Gambling. But trading is a serious business like any other business. Trading in financial markets, especially in leveraged markets demands lot of discipline, skill and strategizing. Anyone of them can literally destroy one's financial dreams and goals!
# Money you can't afford to lose.
Some traders think that trading is gambling. They throw away their money (which we call sacred money) in the . Trading is a serious business, which needs meticulous planning. Examples of this would be money that is supposed to be used in any other business, money to be paid for college/school fee, trading with borrowed money etc. Ultimately what happens is that when someone knows in the back of their mind that they are risking the money they can not afford to lose, they trade out of fear and emotion versus logic and no emotion. If you are in this situation It is highly recommend that you stop trading until you earn enough to put into an account that you truly can afford to lose without causing major financial setbacks.
# RISK MANAGEMENT
Define the risk per trade. The loss should be limited to risk bearing capacity. Trading call recommendation can go right or wrong. The performance is dependent on market conditions on a particular day. Volatile and choppy market on intra-day can take off the stop loss. In this process a trader must not incur larger losses. If the risk per trade is defined then the loss will be limited to the risk defined.
If a trader is willing to loose per trade Rs 1000/-. Then the recommendation is as follows:
Buy X stock at Rs 100 Stop loss Rs 98
Difference of buy price and stop loss = Rs 2/-
Amount Willing to Risk or Amount willing to loose per trade= Rs 1000/-
How much volumes to trade= Amount willing to loose divided by the
Difference of buy price and stop loss= 1000/ 2= 500.
The volume that a trader can trade in the recommendation is 500 shares.
In this case if the recommendation fails on account of stop loss violation the loss is restricted to Rs 1000.
# Excitement & thrill Not for profits.
Many traders consider stock market as casino and trade for thrill and fun only. As soon as one has a losing trade, he wants to quickly make back the lost money. He thinks about the other things he could have done with the money, regret taking the trade and want to recover as quickly as possible. This in turn leads to further mistakes. Be patient and wait for the next high probability opportunity. Don't rush back in.
# Learn to Loose.
As the saying goes "LOOSE a battle(s) WIN a war". It is observed that many traders end up holding a trading position especially if it is running way out of money beyond his plan and end up marrying a losing trade. This leads to a situation wherein you try to justify bad trades. Remember, “Today’s Big loss was Yesterday’s Small loss”
# High Ego.
Many individuals who have remained highly successful in other business ventures have failed miserably in trading game. Because they have a fairly big ego and thought they couldn't fail. Their egos become their downfall because they cannot except that they would be wrong and refuse to get out of bad trades. Once again, whoever or wherever has any one come from does not concern the markets. All the charm, powers of persuasion, number of degrees & diplomas of business management on the wall or business savvy will not budge the market when you are wrong.
# SURVIVING EVERY DAY IS KEY FOR OVERALL TRADING SUCCESS
A trader needs to limit the losses and survive every day with limited loss. So, that he can bounce back the next day and make the most on the next favourable day. If you loose trading capital in short time or in one day then you are not giving yourself a chance to play the next day.
# No Trading Plan
If you consider yourself a trader, ask yourself these questions: Do I have a set of rules that tell me what to buy, when to buy and how much to buy, not just for the next trade, but for the next 10 trades? Before I enter a trade, do I know when I will take profits? Do I know when I will get out if I am wrong? These questions form the first part of a trading strategy. There simply cannot be any expectation of success if we can't answer these questions clearly and concisely.
# DO NOT OVER COMMIT YOUR VOLUMES WHEN TRADING
The loss bearing capacity is Rs 1000 but a trader has done volumes of 1000 shares. That means effectively, if the stop loss is violated then the loss, which a trader can incur, is Rs 2000/. This means the loss bearing capacity is Rs 1000 per trade and the risk undertaken is Rs 2000/-.
# Always trade with stop-loss.
While trading, if a stop-loss gets triggered in anticipated direction, a trader tends to curse the stop-loss. Stop-loss in itself is not a wrong strategy, where you put a stop-loss matters the most. If a stop-loss gets triggered often, rethink why your stop-loss is getting triggered. Remember, “Stop-loss is inevitable evil”.
# Falling in love with a stock (Just Flirt).
Many traders get fascinated by just a stock or two and look for opportunities to trade in those stocks only ignoring the other profitable trading opportunities. It is because they have simply fallen in love with a stock to trade with. Such tendencies can be suicidal as for as trading is concerned. It may cost any one dearly.
# NEVER TAKE DELIVERY OF INTRA-DAY TRADE
It is possible that if the overall market gets into a corrective phase then the loss that you can incur by taking the intra-day trade into a delivery trade will be very heavy. Therefore, defining the risk per trade is very important.
# FINANCIAL, PSYCHOLOGICAL AND MENTAL PREPARATION REMOVES THE FEAR OF LOOSING
When we define risk per trade, we become mentally, psychological and financially prepared to take the risk. You are also feeding the stop loss in the terminal and when executed, a trader is willing to take it. That means, a trader is removing the fear of losing. The moment, you have removed the fear of loosing then effective implementation of trade begins and a trader will be focused to implement the next trade.
# Take care of your trading costs.
While trading, costs like brokerage, taxes and other statutory charges are actual costs. It is observed that many traders end up paying about 20% to 30% of their profits or losses towards trading costs. If you are losing then you are losing 20% of your losses due to the virtue of trading costs. If you are making profit, you are actually losing 20-30% of your profits.
# Spending profits before you make them.
Nothing is more exciting then getting into a trade that blasts off and puts you into a highly profitable situation. This can cause major problems however, because this type of trade puts you in a highly euphoric state and leads to daydreaming about the huge profits still to come. The real problem occurs as you get caught up in the daydream and expectations. This causes you to not be prepared to get out as the market reverses and wipes off all your profits because you have convinced yourself of the eventual outcome and will deny the reality of the situation. The simple remedy for this is to know where and how you will take profits once you enter the trade.
# Not Sticking to your plans & Changing strategies During Market hours
If you find yourself changing your strategy during the day while the markets are still open, be mindful of the fact that you are likely to be subject to emotional reactions of fear and greed. With rare exception, the most prudent thing to do is to plan your trading strategy before the market opens and then strictly stick to it during trading hours.
# TRADE AS PER ONE'S OWN FUNDS AND DON'T TAKE OVER EXPOSURE LIMITS
A trader has Rs 1 Lakh trading capital then generally broker gives 2 times or 3 times the exposure. Trade as per the amount of money you have. Taking multiple exposures means taking bigger risks and if trades go wrong then you have a deficit to be paid to the broker. So, in a way there is imbalance between the capital in hand and the risk a trader is actually taking.
# FOR TRADERS NET LEDGER - CREDIT OR DEBIT IS IMPORTANT
Trades will go right or wrong what matter is net position over a period of time, which reflects, in the net ledger. Wrong and right trades will keep happening. If the risk per trades are defined well then few wrong trades do not matter, as overall net positions should remain positive. Working in a methodical way helps to protect capital and maximize gains. Indirectly this keeps you mentally, physically and financially healthy.
# WHEN ARE PROFIT MADE GENERALLY
Market has its up's and down's, not only on intra-day but on day to day basis, week to week basis, month to month basis, quarter to quarter basis and year to year basis. When do people make money?
Money is made generally when the market rallies. On correction traders and short-term investors lose money. Traders are bruised on correction and when market rallies again they cannot come back strongly to participate. Traders in such situation miss the moves and come back on later stage of the rally, when it is another round of correction. Defining risk per trade protects the trader from big losses in corrections and enables traders to come back in the next phase of the rising move.
Protecting loss in correction phase is key point for overall success in trading and short-term investment. Most of the traders get into bad habit like not observing stop loss; over trading and feeling left out in the rally only to take drastic buying decisions which are the reasons why the losses are witnessed heavy on correction. Most importantly not observing stop loss takes a heavy toll on capital in the event of correction and deeper correction.
Subsequently, traders start living in a hope that recovery could be seen in their respective positions. But invariably, that is not to be seen and losses get aggravated, to finally surrender at positions in losses. Trader tired of carry positions, losses keep increasing, this builds a mental pressure to take wrong decisions on many occasions.
# CLUE HOW TO MANAGE TRADING CAPITAL
1) Rs 2 Lakh trading capital
2) To loose in 2 months
3) That mean per month risk of Rs 1Lakh.
4) It also means a risk of Rs 5000 per day
5) If we decide to do 3 trades in a day
6) Per trade risk will be around Rs 1666.
7) At this point we assume that all day are not going to be wrong and you are unlikely to loose all trades every day.
8) A buy call: Buy X stock at Rs 100 SL Rs 2
9) In this trade effectively as per risk per trade, a trader can do 834 shares
10) Target a trader can calculate is 1 time the difference between the buy price and stop loss or 1.168 times.
11) In that case target will be Rs 102 and Rs 103.20
12) Effectively if the trade goes right the trader can earn Rs 2 or Rs 3.20
13) In terms of money- Rs 1666 to Rs 2696 can be profit.
14) If the trades go wrong then the loss can be of Rs 1666.
15) If all the 3 trades wrong then stop trading for the day
16) If all the 3 trades right then also stop trading
17) If a trader wants to continue trading then per trade risk will be pegged at Rs 1666. Just because all the trades have gone right you should not increase the exposure and the risk per trade.
The above illustrated example is a step to throw light on how trading can get organized methodically. Recommendations are required but ultimately, how you can manage your trade and risk is important. Innumerable methods of risk management are available. The objective is to give another stream of thinking to traders so that they can plan the trading capital well and protect themselves from heavy losses when market offers sharp, sudden and drastic corrections.
# Trade with clear mind.
Finally, last but not least, trade only when your mind is in a position to think. Sometimes, even due to a small fight with your spouse or brother or sister or your kid or your friend or may be some stranger on your way to office or for any reason if you are disturbed, don’t trade. Trade with clear mind.