The DOs and The DONTs of The Market

What are the DOs and the DONTs to make profit in the Market, based on your own trading/investing experience?

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Hello Trader,

  1. Have the right computer hardware and setup if you are a day trader.
  2. Start trading with money you can afford to loose without being accountable.
  3. Fund money to your trading account in stages 50:30:20
  4. Look for support and resistance levels before opening a trade position.
  5. Avoid illiquid and operator manipulated quick rich stocks.
  6. Be updated on Indian indices and International Market trends regularly.
  7. Watch CNBC, Bloomberg and ETNOW : not for tips but to learn the tricks of the trade.
  8. Planning to be a daytrader, then better have a brain with good memory retention capacity to avoid repeating the same trading mistakes over and quickly recognizing trading opportunities and candlestick patterns.

And do not forget to watch 30 Days to Master Day Trading from Ashu Dutt, now freely available on youtube, thanks to him:

  1. Stop Loss and Trailing Stop Loss are very important. Stop Loss to avoid Huge Losses and Trailing Stop Loss to avoid profitable positions from turning into Losses.
  2. Learning to keep losses small is one of the most difficult but most important traits of succeeding in stock markets
  3. There is no place for your Ego while trading. If you got into the wrong side of a trade, exit, book losses. Look for the correct time to reenter the same stock or look out for some different stock.  
  4. If you are having a bad day (consecutive losing trades) take a break. Refresh and start again.
  5. Devise a simple trade setup or use one of the many available on the internet. Backtest it, before you actually use it. Try to use it like a robot - keeping your emotions aside.
  6. Don't blindly follow "Tips". Check out for yourself on the charts, if you feel it is technically correct follow the recommendation. Many a times the stock behaves exactly opposite of the recommendation.
  7. "Trend is your best friend"
  8. Avoid shorting Top Day Gainers on a day when most stocks / indices are in the red and vice versa - Avoid going Long on  Top Day Losers on a day when most stocks / indices are in the green.
  9. Take extra care while trading news driven Stocks. e.g. If there is a major movement in a particular stock, checkout on Google news, if there is some particular reason specific to the Company / Sector, etc and trade / don't trade accordingly.
  10. Keep yourself updated about major economic /political developments / results calendar / RBI policy dates as these could have a general effect on all stocks.
  11. Plan for Contingencies - e.g System Down, Mobile should be ready. Net down - Mobile Internet should be available. Mobile App / Call N Trade nos ready for squaring off trades.
  12.  Yoga and Meditation can help in keeping calm during trading hours.

The above is based on my own experience and books / blogs I have read. Hope you find it useful.

 Wish you success in trading....

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Few of the Dont's which should be definitely avoided by any trader:

1. Trading for Fun: Most of the people who start trading don’t take it seriously for the first 1 year. They just trade to experience that feeling to anxiety and excitement when the stock prices change every second. Initially, it doesn’t matter to them whether the they are making loss or profit, but soon they realize that their whole capital is eroded. It’s more like a gambling for them.

2. Trading on Gut feeling: This is yet another dangerous thing which makes people lose money. You might have heard people saying about a particular stock that it has bottomed out, and it will start moving upwards soon. People tend to assume such things irrespective of any rationale behind those. And when the same stock goes down by another 10-20%, these people say good-bye to markets. This is nothing but gut feeling which should be avoided in stock markets.

3. Over-trading on margins: Concept of margins was introduced to help retail traders with inadequate capital. But most of them haven’t used this rationally. People started over-trading as they could now trade for as much as 10 times of their capital. Small profits made them happy but a big loss wiped off their entire trading capital. Read my article on how to use Margin trading effectively here.

4. No Stop Loss: Stop Loss is the price where your positions are automatically squared off. It’s a measure to limit your losses. But generally beginners don’t put stop loss order, thinking that their position would break even or move to profit zone in a course of time. But eventually the losses grow and these people regret of not putting a stop loss order. Every novice trader has this trait that they limit their profits and let their losses to grow.

5. Naked Options trading: Basically options were introduced in markets as a hedging instrument, but people started trading on naked options. Internet is full of crap stories about people who quadrupled their money trading in options. Amateur traders believe in these one time wonders and start trying their luck on options. They don’t realize that options are one of the most complicated trading instruments and it requires years of practice to tame options.

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Following are the main points a trader should adopt -

  1. Plan your trade – A trading plan is that specifies an investor’s entry, his exit and money management criteria, it includes all the activities of the trader. A trading plan should be well structured and capable to achieve what you actually want. The main key is to stick with the plan. Doing trades outside of the trading plan, no matter if they turn out to be gainers, is also considered as a poor trading.There are many financial advisors providing stock tips and other trading tips online with an aim to provide investment guidance to the traders.

  2. Use latest technologies - Trading is a competitive as well as complex business, in this, you will have to change your plans according to the technologies. Stay updated with the latest techniques of the market. Like now there are smartphones available in the market and getting market updates on smartphones allows us to monitor market anywhere and anytime.

  3. Always try to learn something new – Almost every trader required to remain focused on learning on every day. Since in each field you need a prerequisite knowledge, it is important to consider that understanding the markets is an ongoing and a lifelong process.

  4. Risk only what you can afford - Always take a risk that you can really afford. Risk management is an important thing in the trading, so it is must that an investor know how much risk he can bear in the market. Start with small amount and see how well you can handle your trade.

Following are the don’ts for trader -

  1. Don’t go what other people say -
    Taking suggestions from experts is good but sometimes what your mind says is also important for you.When we start trading, we talk of people for suggestions the and everyone provides their different judgement for better trading. It’s good to talk with experienced, but traders should not talk too many people to avoid confusion.

2.Don’t be hurry while booking your profit -
Don’t show hurry while selling a stock, of the market goes negative and situations are not good in the market please do not sell your quality stocks because we can’t predict a single moment in the stock market.One should not sell a stock in panic situations.

3.Never purchase a share based on past performance -
Suppose a stock giving a profitable return in previous years it does not mean that it also gives a similar return in the current year also.Return on investment depends on company performance