Is it possible to earn consistently higher returns in stock trading? While trading is by default a risky game, there are ways to enhance your returns on share trading. It calls for a more systematic and disciplined approach. Success in trading is all about discipline rather than about getting your calls right. Most investors lose money in trading because they take decisions in a random manner. Traders can be a lot more successful in the equity trading by following some basic trading tips.
Some important tips for smart and profitable trading…
• Trading always begins with protecting your capital. There is no escaping capital protection. You need to be clear about how much capital you are willing to lose. Any trade that you take must be monitored based on the risk to your capital. The best way to survive as a trader is to ensure that your capital is protected.
• Always trade with a stop loss. Stop loss is your insurance against market volatility. Your stop loss can either be set on technical, events or based on your affordability. It should reflect the loss that you are willing to accept. Irrespective of whether you are trading on the long side or on the short side, ensure that you trade with an in-built stop loss.
• Profit is what is booked; all else is book profits. Keep taking your money off the table at regular intervals. As a trader, you are not in the buy-and-hold game. The more you use each opportunity to take profits off the table, the more your money churns and the more funds you have available to buy when there are corrections in the market.
• Always stay in sync with the market momentum. When you are a trader, trend is your friend. You are more likely to profit as a trader if you trade in sync with momentum. Trying to short a bull market or buying into a bear market is pointless. Your trading strategy should be aligned to the direction of the momentum.
• Don’t look back with regret, ever. This is very important especially if you have had to book losses. Traders tend to look back and overanalyse. Also, when traders book profits and the stock goes further up, they tend to look back at the notional losses. Both tend to detract from your core trading strategy. It is best avoided.
• As a trader be cautious about leverage in an uncertain market. It is one thing to leverage in a normal and tepid market. But that strategy cannot apply when we are in a volatile market. That is just too much of a risk. If you keep your leverage to the bare minimum then you can avoid burgeoning of losses.
• In markets there are 3 strategies; buying, selling and doing nothing. This is something most traders tend to miss. Traders believe that trading strategy either means to buy or to sell in the market. At times doing nothing can also be profitable and more often it is. This is relevant when the market is confusing and traders can get hit either ways.
• Trading tips and WhatsApp forwards are best avoided. Remember, trading tips come with the promise of quick money and hence can be quite tempting. You end up being the sucker in such cases. Talk to your broker and rely on your judgement. Free tips are never worthwhile and you will eventually end up losing.
• Costs of trading and statutory costs may look minor but they matter a lot to a trader. Remember, when you trade your cost is not just the brokerage you pay. There are statutory charges like STT, stamp duty, GST, turnover tax, exchange fees etc. When you take delivery of shares, there are expenses related to demat account. All these costs must be factored in when you project your trading profits.
• Overnight risk can be the bugbear for traders. A trader typically operates at the short end of the market. Positions are normally intraday or for a few days. One of the biggest risks you need to be conscious of if the overnight risk. When there is uncertainty on the economic or geopolitical risk or there is a major event coming up, it is advisable to be as light in the market as possible. This specifically applies to traders who focus on BTST and STBT trades.
The list can go on but this is indicative of some key trading rules that traders should predicate their trades on. These rules may not result in fantastic profits for you but it can definitely save the embarrassment of huge losses in your trades. In the process you build the base for healthy returns in trading.