According to a market analysis of traders, nearly 70% of the traders stop trading within the first year and over 90% of them give up trading after 3 years. One of the key reasons for this high casualty rate is that traders do not follow the right trading path. Trading stocks is all about rules and planning and the more meticulous you are, the more likely you are to succeed. Right type of trading in markets is about doing these 5 things right -
- Adhere to a documented trading plan
- Protect your trading capital first
- Never try to outsmart the market and listen to the market
- Stop loss and profit targets are your key weapons
- Don't forget the importance of a trading diary
Adhere to a documented trading plan
What do we understand by an online trading plan? It is the broad constitution around which you will trade. How will you take a position on a stock or the index? When will you trade more aggressively and when will you take a decision to cease trading? How will you protect your capital while trading? How will you handle the plethora of information sources while trading and how will you use market intelligence to take smart trading calls? Above all, how will you ensure that your cost of trading is minimized and your ROI is maximized? When all these aspects are clearly addressed and documented, it becomes your trading plan. As a trader, you need to adhere to your trading plan under all circumstances.
Protect your trading capital first
Before you worry about making profits on your trade, your primary focus should be to protect your capital. You must document how much you are willing to lose on a single trade. You must also document how much you are willing to lose in a single trading day. Also, document what overall loss to capital you will stop trading and go back to the drawing board. The bottom-line is that while trading you must risk what you can afford to lose. If you learn to protect your capital and manage the risk, returns will follow automatically.
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Never try to outsmart the market and listen to the market
When you are a trader don't try to behave like an investor. It is OK for investors to be contrarian and try to outsmart the market. As a trader, your focus should always be about being on the right side of the market. The market has an underlying momentum and as a trader, you need to understand the market message and trade accordingly. Always trade on the side of momentum, not against it! If the market is giving you a strong signal, then use every dip to buy. If the market is giving you a weak signal, then use every rise to sell. Problems for a trader start only when they try to outsmart the market.
Stop loss and profit targets are your key weapons
Yes, they really are your weapons when you trade in the markets. A stop loss is about protecting your maximum risk. When you are long on a trade, the stop loss is below the buy price and when you are short, then the stop loss is above the selling price. Also set profit targets in advance. But more importantly, keep discipline. If you have taken a long position and the stop loss is nearing, don’t try to average your position by buying more. You have been wrong once, now don't be doubly wrong. Exit at the stop loss and then take a fresh view. Even in the case of profits, you need to keep churning your money rapidly. That is the only way you can improve your return on capital. Don’t become an investor by default.
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Don't forget the importance of a trading diary
Last, but not the least, your key to success is a trading diary. What does the trading diary consist of? The trading diary basically has two parts. The first part is a record of all your transactions with the idea behind the trade and outcome of the trade. Try to be as transparent as possible here. The second part of the trading diary is your evening review. At the end of each trading day, you must at least spend an hour reviewing your trades and analyzing where you went right and where you went wrong. Remember, trading is all about inculcating the right habits. This trading diary will help you to show a mirror to your best option trading strategy and gradually build good trading habits in you.