Trading has a potential and you may read stories of traders making 34 million dollars in a day but it also has the potential to make people bankrupt and though these stories don’t make the social media headlines, you can read find on Wikipedia here or read about Société Générale trading loss.
Those are extreme stories on either side but it can happen to any trader who gets carried away in the market. Keep these tactics in mind when trading and you can definitely avoid trading disasters.
1. Trade with money you can lose
We start trading with a very high expectation of double the money in less than a year’s time.
It never happens and not even to pro traders on a continuous basis.
Start with the money you are ready to lose in the market and it will set your expectations right.
2. Never leverage your position
Once you start with the mindset to lose the money in the market, you will never ever take a leveraged position (margin trading) because if you take leverage position, you can actually loose lot more than you have started within your trading account.
Leveraged position is one of the major reasons for people becoming bankrupt.
3. Don’t Trade Everything
a. Only trade patterns you are comfortable
There is always a tendency that you trade anything and everything that come your way but pro traders not only trade perfect setups but also wait for a perfect setup to take a trading call.
b. Only trade few stocks in your list
It is not only important that you trade few patterns but is also important that you trade in few stocks only where you know a lot more about the stock than just the price it is trading at.
Pro traders has a list of stocks to trade and they know lot more about the stock before they add a stock to their trading list. Things like stock peers, other brokers and investment house’s view on the sector, earnings and financials of the company, dates when management shares those earnings, how stock price moves on good earnings, market expectation etc.
4. Have a Trading Plan
You should always have a trading plan.
- What type of trade suits you – long or short?
- What is your trading methodology – technical analysis, price action, fractal analysis…?
- Will you be trading in cash, futures, options, commodities, forex, ETF’s.
5. Have a Trading Goal
If you don’t have a goal, you will be driven by the trading hours (start when the market opens and end when the market ends) instead.
Have a goal that you want to be making in each trade or each day and what is the risk you take for each trade or each day. How much you want to make a profit per day and what is the maximum loss you can bear per day etc.
6. Have an Exit Strategy
- What if your trade goes wrong?
- What happen if your trade performs as expected?
No one can predict each and every movement to perfection and so you should have an exit plan for both target and stop loss along with your calculations for return on your investment of time and money.
7. Always Paper Trade
Always start with paper trading and not with your hard earned money. You can be tempted to trade with real money, but you should be doing paper trading as often as you can.
Even pro trader when hits a series of stop losses moves away from market and switch to paper trading before re-entering the market.
8. Write your losses
Believe me once you write your losses, it really works and I am not sure why it works but it just works.
The only reason I can apply to why it works is – it helps you analyze things you should be doing and things you should be avoiding.
Just do it and see the magic when you write your trades on a piece of paper.
9. Manage Emotions
There can be various emotions like getting attached to a stock which has given handsome returns in the past. You may want to be trading in a stock not because it has given you better returns but it should be based on trade setup.
Pro traders trade with a plan and without emotions.
Apart from being emotional about the stock, traders should also avoid being greedy for profits and fearful about losses.
10. Never Trade Against A Trend
Last but not the least is never ever trade against the trend. Identify the trend and try to trade with the trend and never against it.
There is nothing wrong in identifying the trend reversal patterns and trading those patterns as long as you are trading within a bigger trend, identifying the smaller trends for better entry level.
Market can be unpredictable and traders task is to predict the unpredictable which can be tough but it is not something that is too difficult if you know where to look for what.