Trading Tips
World markets attract speculative capital like moths to a flame, with most throwing money at securities without understanding why prices move higher or lower. Instead, they chase hot tips, make binary bets and sit at the feet of gurus, letting them make buy and sell decisions that make no sense. A better path is to learn how to trade the markets with skill and authority.
In this article, we would majorly be talking about ten such rules novices should abide by to not rack up such losses. Following are the ten laws new entrants should follow to succeed in the speculative markets.
1. Always Use a Protective Stop
With so many things to consider when deciding whether or not to buy a stock, it's easy to omit some important considerations. The stop-loss order may be one of those factors. When used appropriately, a stop-loss order can make a world of a difference. And just about everybody can benefit from this tool.
A stop-loss order is an order placed with a broker to buy or sell a specific stock once the stock reaches a certain price. A stop-loss is designed to limit an investor's loss on a security position. Stop-limit orders are similar to stop-loss orders. However, as their name states, there is a limit on the price at which they will execute. There are then two prices specified in a stop-limit order: the stop price, which will convert the order to a sell order, and the limit price. Instead of the order becoming a market order to sell, the sell order becomes a limit order that will only execute at the limit price
The most important benefit of a stop-loss order is that it costs nothing to implement. Your regular commission is charged only once the stop-loss price has been reached and the stock must be sold. One way to think of a stop-loss order is as a free insurance policy.
An additional benefit of a stop-loss order is that it allows decision-making to be free from any emotional influences. People tend to "fall in love" with stocks. For example, they may maintain the false belief that if they give a stock another chance, it will come around. In actuality, this delay may only cause losses to mount.
No matter what type of investor you are, you should be able to easily identify why you own a stock. A value investor's criteria will be different from the criteria of a growth investor, which will be different from the criteria of an active trader. No matter what the strategy is, the strategy will only work if you stick to the strategy. So, if you are a hardcore buy-and-hold investor, your stop-loss orders are next to useless.
At the end of the day, if you are going to be a successful investor, you have to be confident in your strategy. This means carrying through with your plan. The advantage of stop-loss orders is that they can help you stay on track and prevent your judgment from getting clouded with emotion.
2. Discipline
Trading with discipline should reward you with positive money flow. The point of trading with discipline is to have more pips in your account and fewer pips out. The one constant truth concerning the markets is that trading with discipline should provide you with bigger profit potential.
Discipline can’t be taught in a seminar or found in expensive trading software. Traders spend a lot of money trying to compensate for their lack of self-control but few realize that a long look in the mirror accomplishes the same task at a much lower price. The important lesson is that, once a trader has confidence in their trading plan, they must have the discipline to stay the course, even when there are the inevitable losing streaks.
3. Overtrading
Traders can get so engrossed in trading that they begin to have a world of their own. This is well and good. However, common pitfalls can emerge when they hope to maximize profits at all costs at the expense of sound judgment. One of the common pitfalls is overtrading; and if left unchecked, there are several risks and dangers that we have to be aware of.
In the hopes of increasing returns of trading capital, a trader may open many positions all at once. Many factors and situations can push a trader to overtrade. One is the lack of a solid trading plan. When a trader doesn’t have a clear and definite strategy for entering and exiting a trade, he will see many opportunities and he’ll try to ride on it; and cash in on every seemingly “good opportunity” that presents itself. Without a solid strategy to guide him, it could result in a massive heartbreak for such a trader. One of the most common dangers of overtrading is the loss of capital. Often traders, commit the mistake of opening many positions in the belief of hitting the jackpot on some of those trades. However, the sad reality is, most of these trades will result in the opposite – losses instead of gains. That’s why common sense would tell us that it’s always better to go for moderate yet consistent returns; rather than go for the jackpot in one go and expose yourself to greater trading risks.
4. Emergencies
While uncommon, systemic failures can make trade execution impossible and act as catalysts for financial loss. Remaining calm and quickly rectifying an untimely market disconnect is a critical part of successfully navigating a trade-related emergency.
Aside from running ping tests and updating your hardware and software to enhance your performance, it's challenging to address an unexpected system failure in real-time. In fact, many issues causing system outages fall completely outside of the trader's control.
In this situation, traders are advised not to trade and wait for the trade-related emergency to be resolved.
5. No Gambling
Trading in the stock markets is not like a dice game, while gambling is a zero-sum game of playing the available odds. Trading involves examining past information and analyzing available data to trade or invest in stocks. Unlike gambling, trading has no ultimate win or loss. Companies compete with others to innovate their products and provide better services, thus leading their stock prices to rise. This, in turn, leads the stockholders of that firm to earn greater profits. Hence, trading is not gambling.
6. Daily Loss Limit for Day Traders
It is simply not possible for any trader - whether amateur, professional or anywhere in between - to avoid losses completely. The disciplined trader is fully cognizant of the inevitability of losing hard-earned profits and able to accept losses without emotional upheaval. At the same time, however, there are systematic methods by which you can ensure that losses are kept to a minimum.
Set your daily stop loss and write down what it is before each trading day begins. Depending on the method chosen for determining your daily stop loss it may fluctuate daily. If you are new to trading and don't have a track record, your daily stop will need to be based on losing trades in a row, or a percentage loss. Using both of these methods is ideal.
No matter which daily stop method you choose, reaching your daily stop level shouldn't be a common occurrence. Reaching it once or twice or month is manageable, but if you are reaching it more often than that then your method may need refining, risk needs to reduce on each trade, or current market conditions are not favourable for your strategy.
7. Position Size
Determining how much of a currency, stock, or commodity to accumulate on trade is an often-overlooked aspect of trading. Traders frequently take a random position size. This may look like them deciding to take a larger position if they feel confident about a trade, or opting to take a smaller position if they feel a little less confident. However, this may not be the most informed or strategic methodology for determining the size of an investment.
Similarly, a trader should not just elect a pre-determined position size for all trades, regardless of how the trade sets up; this style of trading will likely lead to underperformance in the long run. So, if it's not in the best interest of an investor to select a random position size, and it's not a good idea to set a uniform size for all trades, what is the best way to evaluate the optimal position for a trade? Here are some different methods for traders to determine an optimal position size that may also reduce their risk.
8. Trade Your Plan
Beginner forex traders are typically advised to create and stick to a trading plan that is designed to meet their trading goals. However, one of the biggest challenges facing new forex traders is their inability to stick to a plan. This issue not only affects newbie traders, but is also a defining character trait of many losing forex traders. In this article, we cover some of the most common reasons why traders struggle to stick to their trading plans. Most traders who do not stick to their trading plans are driven by the fear of their trades not going according to plan. Faced with such a scenario, most inexperienced traders panic and take actions that are not in line with their trading plan.
In order to avoid making trading decisions driven by panic, you should always plan for all possible outcomes before initiating a trade. Statistics prove that most trades do not go according to plan, and having a full understanding of how your trade might unfold can help you adequately prepare for any potential shocks. This includes making sure that your take profit and stop-loss orders are set appropriately.
Not sticking to your trading plan is a major reason why traders often encounter significant losses. Therefore, it is essential to stay disciplined and stick to your well-thought-out trading plan through all the ups and downs of the market, in order to increase your chances of success.
9. Don’t Add to a Losing Trade
Averaging down is an investing strategy in which a stock owner purchases additional shares of a previously initiated investment after the price has dropped further. The result of this second purchase is a decrease in the average price at which the investor purchased the stock.
The averaging down trading strategy can be ruinous if you suffer from loss aversion bias. At its heart, loss aversion is an intense unwillingness to sell loss-making stocks or trades even when they’ve turned rancid.
Sometimes traders need to sell at a loss and put it down to experience. Loss version bias stops you taking that sensible, if painful, decision.
When loss aversion bias is aligned to the averaging down trading strategy – buying stocks that are losing value in the hope they will turn around – it’s the perfect toxic relationship: an unwillingness to move on and get over it, twinned to a lack of market interest.
If you buy more and more stock as the price falls, because you refuse to believe the evidence that this stock was fundamentally overvalued and has turned sour, you are not averaging down – you are throwing away good money after bad.
10. Learn How to Not Lose Money
Risk management helps cut down losses. It can also help protect a trader's account from losing all of his or her money. The risk occurs when the trader suffers a loss. If it can be managed, the trader can open him or herself up to making money in the market.
It is an essential but often overlooked prerequisite to successful active trading. After all, a trader who has generated substantial profits can lose it all in just one or two bad trades without a proper risk management strategy.
Traders should always know when they plan to enter or exit a trade before they execute. By using stop losses effectively, a trader can minimize not only losses but also the number of times a trade is exited needlessly. In conclusion, make your battle plan ahead of time so you'll already know you've won the war.
If you want to make real money in the stock market then you can afford to miss our Bank Nifty option tips or Intraday Trading tips at your own peril as opportunity knocks once at the door.
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should Trade Less But Trade Accurately & this is Achieved with our Tip.
