Guide to Successful Trading

Successful Trading requires discipline. By following some trading rules, your approach towards the quest for profitability would be far superior. All trading rules are based on the principle that the main objective for all of us is to maximize profits while minimizing losses along the way.

1.  Evaluate your Trading Capital

Before you start trading, its important to evaluate your trading capital. If your trading capital is too small, the effects of each trade gets magnified which keeps us from thinking rationally. As such its imperative to balance the volume of trades with respect to your trading capital.

2.  Forget the Get-Rich-Quick attitude

Many enter the financial markets thinking it to be a form of legal gambling. If you think you can become a millionaire overnight, seriously you are out of business. However, if you are serious about making money in the financial markets, learn the virtue of patience.

3.  Learn basics of Technical Analysis

Learning about trends, supports, resistances, chart patterns and price/volume action will help a lot in your quest for making money in the financial markets. Take some time to study about the basics of Technical Analysis.

4.  Do not dig a hole early in your career

Before you are familiar with the ways of the financial markets, be willing to observe the markets. Even after that, do not jump to trading, but take some time to paper trade. Take an informed decision only after you gain some confidence and start trading with low volumes.

5.  Devise a sound trading strategy

Its important to focus on your trading strategy rather than on your scoreboard. Trade with discipline and follow your strategy and winnings will take care of themselves.

6.  Plan a trade, trade the plan

Plan every trade before you enter it. Identify your entry level and set your target level. Also plan the stop loss level, in case the trade goes against you. Also plan the action taken when the target or stop loss is hit

7.  Have a bird's eye view

Always look at the larger picture when planning a trade. What may seems as a strong uptrend in the smaller time-frame may just be a short covering rally on the larger time-frame and what may look as a strong downtrend in the smaller time-frame may just be a minor correction on the larger time-frame

8.  Keep your risk/reward ratio in check

Profits can exceed losses even if the number of losing trades exceeds the number of winning trades. Keeping a low risk/reward ratio gives you an edge on winning trades compared to losing ones. Proper money management, obeying stops and protecting profits will always keep you in the game.

9.  Avoid scheduled news

We are unable to foresee breaking news. But we can always step aside ahead of scheduled news. Corporate earnings announcements, interest rate announcements, various economic data releases are mostly scheduled. Its best to trade when the conditions are most favourable.

10.  Control your emotions

It is very important to control your emotions, mainly fear and greed. The fear of losing makes you book profits in winning trades early and does not allow you cut losses early. The greed on the other hand forces you to enter trades at inappropriate levels. Being mechanical while trading is the best approach.

11. Scale out your profits

Once your trade gains a respectable profit, its wise to protect your profits. One may book part profits and hold onto rest with a trailing stop. In case the trade reverses, we booked part profits at good levels. However, if the trend continues, we are still in the ride for maximum profits.

12. Book losses with strict discipline

The most important part of trading is to protect your trading capital at all times. Losing is part of trading, but opportunity cost is to be considered when hoping for a losing trade to reverse course. If your trade moves against your expectation and violates the stop loss, its prudent to exit the trade and book the loss. Be willing to re-enter, if the trade turns favourable again.

13. When you lose, remember the lesson

Whenever you lose a trade, accept it with composure and character without blaming it on others. Remember your mistake made, but do not dwell on the guilt of it. Those who do not remember their mistakes, are doomed to repeat them.

14. When in doubt, stay out!

Scrutinize your positions at all times, and you would not be left in a trade without reason. If you are not confident about a trade, step aside. Lost opportunity is better than lost money. Your flexibility to change direction at any time gives you an edge as an individual trader.

15. Blend anticipation with confirmation

There are times when you get an anticipation that a particular support or resistance is about to be broken. Do not hurry to enter the trade. Instead, keep a close watch on it. Keep your plan ready. But react only after that particular support or resistance is actually broken.

16. Do not over-trade

Never hurry to enter any trade especially after a lost trade. The attitude to recover losses instantly makes us think irrationally. Trade with the attitude that this trade was just 1 of the next 1000 trades you would be entering. The financial markets will be open day after day, month after month and year after year. Wait for your pitch to enter the next trade.

17. Beware of winning streaks

After a winning streak, be extra cautious. Making money in the financial markets may seem easy, but discipline is required to keep it. Its easy to get carried off after a winning streak. But its important to stick to your same trading strategy.

18. Beware of herd mentality

When a trade seems too obvious and most retail investors seem to plunge into it and the price move is too rapid, its time for caution. Take out your money off the table. It may be quite likely to be the formation of a peak.

19. Monitor your P/L account regularly

Monitor your profit and loss at least once a month. Also keep track of your win/loss ratio and the ratio of the biggest win to the biggest loss. Reviewing these results helps you continually improve your understanding of the markets and yourself.

20. Know when to stop trading

Successful trading is not solely about trading. Its also about being emotionally and physically strong. There are times when stress levels impair us to think rationally. If you find you are unable to follow any of the above rules at any point of time, its time for a break. Reduce the stress every day by taking time off the computer and working on other areas of your life.

Success does not come in easy and fortunes are not made overnight. Pay your dues and put in your hard work in order to achieve your goals. Wish you all the best for a profitable future.