By: Tejas Khoday, Co-Founder & CEO, FYERS
In spite of the vast resources of free tips available for new traders to learn about the stock market, if you feel that there’s something missing and you’re looking for more genuine advice, then this article might be just right for you. More often than not, new traders succumb to various different pitfalls due to the lack of knowledge, lack of capital and emotional excesses like excitement, greed and fear. In this post, I will give you 5 unique Do’s and Don’ts that will help you survive in the markets for the years to come!
1. Be sure of the fact that you can never always be sure – Just as in life, there are no guarantees in the stock market. In a large marketplace where there are active buyers and sellers, there is always an element of uncertainty. The stock market is an information discounting mechanism which means that the future expectations are factored in even before they happen. It’s great to be sure of something, but as a trader you’ll need to make peace with that fact you can be wrong too. It paves the way for a winner’s mind-set.
2. Stable returns are more important than jackpot trades – Steady regular returns are more important than jackpot trades because they are generally more cautious and justify the risk you take per trade. Always stick to a trading plan which has a higher probability of success even if the returns are lower. When huge profit making opportunities arise from time to time you will be in a better position to exploit them. Trading is like driving on the road. You will have to wait for a freeway to hit top speed, until then you must be sustainable.
3. Take home some profits before profits are taken away from you – In trading, it is important to book your profits regularly because unrealized (MTM) profits is not equal to money in the bank. Unless you close your positions, your profitability is vulnerable and subject to change. Of course, you can end up making more profits if you hold on too but as a rule of thumb, it is important to realize your profits. This will motivate you to maintain discipline and become a long-term player in the stock markets.
4. Increase your hit rate instead of spinning in fortune’s wheel – To be a successful trader, you will have to have a good success ratio per trade. In other words, you should be able to have higher number of winning trades on average. A higher success ratio will increase your confidence in the long-run and also help you scale up your trading significantly as you will trust your decisions. With a mediocre success ratio per trade, you will be highly dependent on probability and luck.
5. Make hay when the sun shines – In other words, take advantage of the opportunities available currently and make the most of them while the conditions are good. As a trader, you will have to be able to recognize and call a trend right. The maximum amount of money is made when the going is good. During such times is when the multi bagger opportunities present themselves.
1. Never go against the trend – This is a universally preached rule but hardly practiced with sincerity. Traders tend to hunt for discount while picking stocks and it’s generally a good thing but there is a catch. Bargain hunting along the trend is advisable but not against it. More amount of money is lost trying to catch a reversal than any other behavioral trading error in the markets.
2. Never go long in a falling market with leverage – Buying a stock cheap is a good thing but not when you’re buying in a falling market with a leveraged position (Margin/ futures/options). Be aware of the fact that leverage reduces your tolerance to volatility and time. To add to the risk, traders often average down buying more in the hope of breaking even on the losing trade. This strategy is a risky one and must be avoided all costs. Rupee cost averaging is only appropriate for medium to long-term investors. If you intend to average your costs, avoid leverage. Instead utilize the power of leverage to trade with the wind rather than against it.
3. Never wait for the top to sell because it’s like aiming in the dark – Trying to call a high is a difficult endeavour. The presence of a large number of buyers and sellers makes it difficult to predict the exact number which will mark the peak of a stock. Hence, it is best to avoid doing that. It is more beneficial to look at the range of stock prices. This is how successful professional investors enter and exit trades. There are different ways of determining the range but some useful ones are average traded price (ATP) and volume weighted average price (VWAP).
4. Never expect markets to be rational unless you want to be wrong – The famous economist John Maynard Keynes said, ”Markets can remain irrational longer than you can remain solvent.”. Another famous quote from him was “There is nothing so disastrous as a rational investment policy in an irrational world.” Stock valuations are a result of investors’ expectations. Hence if the expectations are irrational, the prices of stocks will be too. The takeaway from this is that as a trader, it is best to give the market the benefit of the doubt and listen to what it is saying rather than trying to impose rationality upon it.
5. Don’t overtrade – When you feel like you’re overtrading, it’s best to take a break and go away. It is important to observe your own behaviour and know when to take a step back. It’s important to understand that the markets are always ripe with opportunities and taking a break doesn’t deprive you of them.
Trading is a journey rather than a destination. Much like an athlete, constant focus and improvisation will lead to fruitful results in the long-run. The education aspect of trading lasts a lifetime and is very useful in running any business enterprise because the rules are essentially the same.