The typical image we have of a successful trader is that of a high-risk player, willing to bet big money on every available opportunity. In reality, successful trading is less about taking risks and more about managing it. Smart traders have to also be smart risk-managers. That means you don’t have to think and behave like a seafarer to be a successful trader. All you need to do is get your basics right; adopt a disciplined approach; and manage risk, smartly. Here’s how it is done:
Step 1: Be fanatical about protecting your capital
Without this, you cannot be successful in trading. Protection of trading capital has to happen at various levels. You must be clear about how much capital you are willing to lose per day, per week, per month, and overall. This should be your guiding principle in trading.
Step 2: Think in terms of Stop Loss
If you are not a stop loss person, then trading is not for you. Stop loss should basically reflect the loss that you are willing to accept on a trading position. The best of traders, worldwide, always trade with a stop loss. Whether you are trading long (buy) or trading short (sell), always ensure that you only trade with an in-built stop loss.
Step 3: Stop thinking like an investor
A trader is not an investor; so don’t think like one! For a trader, profit is what is booked; all else is book profits. Keep taking profits off the table at regular intervals. The more you use each opportunity to take profits off the table, the more your money churns and the better your Return On Investment.
Step 4: Tune into the trend
Locate the market momentum and latch on to it. In short, trend is your friend. Trying to sell during a bull market or buy during a falling knife is pointless.The market is always trying to tell you something you do not know and as a trader it is your job to listen. A good trader never tries to outsmart the market.
Step 5: Learn and move on
When you have a loss, take the lesson and move on. When you miss out on a bigger profit, don’t obsess over it. As a trader, don’t fall into the overanalysis trap. Profits and losses are part of the game, so take it in your stride.
Step 6: Leverage with care
Ensure that you always have sufficient balance before you opt for leverage. Take special care in a volatile market. That is where most traders get hit. In such markets, focus on cutting losses than making profits.
Step 7: Focus on the B, S and D
A trader takes three key decisions: Buying, Selling and Doing nothing. Traders believe that strategy means to buy or to sell in the market. But waiting on the sidelines can also be very productive; especially when the market is confusing.
Step 8: Stay away from free advice
Don’t get carried away by trading calls on WhatsApp and SMS. Quick money can be quite tempting but free stock tips are rarely worthwhile. Eventually, you will end up losing money or helping someone exit their position.
Step 9: Keep your costs low.
Apart from brokerage costs (companies like Upstox charge zero brokerage for equity and Rs. 20/order for intraday), there are statutory costs like STT, stamp duty, GST, turnover tax, exchange fees etc. All these costs must be factored in when you project your trading profits.
Step 10: Overnight may not be right
Overnight risk is a big question mark for a trader. When there is uncertainty on the economic/geopolitical front or there is a major event coming up, it is always advisable to be as light in the market as possible.
Of course, none of these rules are guaranteed to make you fantastic profits for you but it can definitely save a hole from being made in your pocket. And that is a good enough reason for you to follow these 10 steps!