Golden Rules for Trade

Rule No.1 Every Trade is a Business

When you enter in to share trading, remember each trade is a business. The ultimate motive of the business is to have profit. When it comes in to business, even though profit booking is ultimate objective and equally important is to avoid loss. The focus should be consistent profit rather than huge profit or loss at a single trade. Booking small profit in each trade will accumulate wealth – the ultimate aim of doing the trading business. Greediness is the first enemy of trade. Set your target profit and of course the loss also for each trade. Once your target is reached you must book profit or if you feel the share price is strongly moves in the direction you desire, you can use Trailing Stop Loss (TSL). Refer Rule 4 for details of TSL. Booking profit is the ultimate of the trading business. When the trade is in profit, your greediness kills your gain. If your target profit is set to 2% on a particular trade and the trade is now moving faster and it reaches the profit of 3% or above, greediness will not allow you book profit giving a feel that the trade will give more profit. This is one of the major mistakes of not booking profit due to greediness. If you feel the trade will give more profit then use TSL roder.

Rule No.2 Determine the size of your trade

Nowadays your share broker might give you high level of margin trade –having little money in your account as margin and allowing you to trade five or ten times of your money. If you have Rs.10,000 in your account you may be allowed to trade for Rs.50,000 to One Lakh worth of shares. If the trade goes in your favour you may get profit which will give you high return on your money. Say for example, with your ten thousand rupees, you are trading for one lack value of shares and the trade gives you 2% profit which is Rs.2,000 which will be 20% of your capital of Rs.10,000.. Amazing??? Yes it is, but the risk is if the trade turns against your plan then the loss might also be like this high percentage. Hence you must determine the size of your trade. It is always better to trade with your own money and you have to trade within the risk bearing capacity.

Rule No.3 Avoid overtrading

Rule No.4 Use Stop Loss, Trailing Stop Loss and limit orders

These are the terms you will have to understand and follow when planning to trade. There are two types of orders both for buying and selling – one is the market order and another one is Limit order. When you place an order with market price then your order will be executed at the prevailing market price and if you place order with a limit price (to buy / sell any particular share at a price specified by you) the order will be executed at the price you mentioned. You may have to wait for little time to get your order executed. Sometime in case of fast moving share, there is a possibility, you may not be able to get at your limit price and you may have to increase the price. Anyway, by following limit order you will not get a shock of your executed order at market price.
Stop Loss order is useful when the trade goes against your expectation. If you buy a share at Rs.100 and you want to limit your loss to Rs.2 then you can place an order saying if the price reaches Rs.98, then your sell order will be sent to exchange. This will avoid your panic selling if the price falls.

Rule No.5 Don’t miss the large market moves

When trading some shares may be keep on moving and it may have the strength to still move further. In such a trade, instead of your predetermined profit booking, you may follow trailing stop loss so that your trade will have more profit and by following trailing stop loss order the profit will not be missed.

Rule No.6 Every trade is a learning opportunity

One cannot become a successful trader in a day or two. Every trade is a lesson and that learning will help the trader in his future trades. Some trade might become failure but the strong commitment and willing to learn will make one as a successful trader.

Rule No.7 Understand market will not move the direction we want

Market will have its own way of moving. To be a successful trader you must go along with the market mood. Entering in a trade and waiting for the market to behave in the desired direction may not be advisable when the market moves the other way around. If the trade goes in opposite way, it is better to change the trading methodology and you have to fly with the market mood. Instead, blaming and complaining the market for our own loss will not give any benefit to the trader. It is better to be with the market sentiment and learn from such trade to follow in future trades.

Rule No.8 Close the trade if its flat

It happens sometime, the trade will not be moving in any direction and flat (like an empty zone). If the trade is not moving in any direction, it is advisable to close the trade at the minimal profit or little loss so that this blocked money can be used in another trade. Because we need profit on our money so that our return on investment will be increased

Rule No.9 Use discipline and patience

To be a successful trader one must be having discipline in entering in to trade, having patience till the target is reached and must be able to exit from the particular trade if it is not moving in the desired direction. You must apply your experience in deciding size of the trade avoiding overtrade, when to enter, when to exit, how to keep stop loss, how to maintain trailing stop loss, etc.

Rule No.10 Record Keeping

This is the last rule but not the least. Keeping a record of your trades will help you find your strength and weakness in trade. By reviewing your trades periodically, you will be able to see your strength in successful trades and the wrong doings in a trade if it ended in loss