7 basic rules for successful trading

If you are determined to be a trader, you should know the fundamental rules of success. There are seven key rules.

Arjun Parthasarathy December 20, 2014 05:29:17 IST
7 basic rules for successful trading

You have taken up trading as a means to make money in markets. It does not matter whether it is equity, commodity, currency, bonds or credits - the principles of trading do not change. The difference between a good and bad trader is a good trader makes money while a bad one loses money. How do you become a good trader?

There are pages and pages written on trading and trading strategies. You may want to read about successful traders and follow their strategies or you may want to listen to the advice given on trading by the authors of the trading books.

7 basic rules for successful trading

You cannot use half-baked technical analysis and half-baked fundamental analysis for trading. AFP

If you do not want to do both and follow your own course, you will have to adhere to seven basic principles of trading. These principles are fundamental to trading and if you follow them you will find that a greater percentage of your trades go right than wrong. The seven basic principles of trading are:

1. Stick to your time horizon: You define your time horizon. If you are a day trader, then make sure you close out your positions by end of day. A loss-making position carried into the next trading day will go into more losses. If you have a longer time span, do not close out loss-making trades the next day. It will come into the money during your defined time span if you have analysed the trade correctly.

2. Technical or fundamental: Follow one trading style. If you are using technical analysis, your positions will have to be based only on technical analysis. If you are following fundamentals, your position will be based only on fundamental analysis. You cannot use half-baked technical analysis and half-baked fundamental analysis for trading. Technicals and fundamentals do not marry. Technical analysis is backward looking while fundamental analysis is forward looking.

3. Justify your positions: You have put on a trading position. The position may be based on technical or fundamental analysis. Once you have put on the position, you have to keep on justifying the position. For example, if you have leveraged yourself in Nifty index futures and the trade has made money for you and you are still running the position, you must look at your positions and justify to yourself that the position will make money for you everyday. Past profits are not a justification of holding on to positions.

4. Calibrate your positions: The leverage you put on in a position is very important. If you have strong conviction trades backed by full analysis you should put more leverage on those trades. If you run high leverage on weak conviction, the position is sure to give you high losses. If you have lost money in previous trades, do not use high leverage to make up for the losses; it will only lead to more losses. If you have made money in your previous trades use those profits as a means of leverage on your future trades. For example, if you have made Rs 100,000 as trading profits, you can afford to risk Rs 100,000 for future trades. You can also put away your profits in the bank if you believe that you may not make as much money in future trades.

5. Judge the impact cost of entry and exit: If your trading horizon is short, you should be aware of the impact cost of entry and exit. Short-term trades will require quick entry and exit and your positions should be in highly liquid counters where impact costs are extremely low. Short-term trades on illiquid counters will lead to high impact costs on entry and exit and will only increase losses.

6. Take profits, book losses: Trading is all about closing out positions. You are not an investor, you are a trader. If you see profits you take it and then look for the next trade. If you are running losses on your positions, book the losses to live for another day. There is always a next day in trading.

7. Learn to handle stress: Trading is stressful. You are risking money to make money and that is a highly stressful activity. You will need to handle the stress that comes along with positions running into losses. There are many ways to handle stress and you will have to find your own way. If you cannot handle stress, stop trading, its not meant for you.

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