“Not to have control over the senses is like sailing in a rudderless ship, bound to break to pieces on coming in contact with the very first rock.”
Trading rules form an important component of the basics of the stock market. Join the Online NSE Academy Certificate in Research, Trading & Advisory course on Elearnmarkets to learn more about them.
Most of the Traders these days come across phrases on the internet such as “plan your trade and trade your plan” and “Trend is your friend”.
But do you actually follow all of these?
Most of the novice traders just open their charts in their screens and dream of making tons of money.
But, to be successful in trading, you need rules.
Trading Rules are established to provide guidelines to overcome emotions and opinions to successfully follow your trading strategy.
When investors have the ability to identify reversal signals, this becomes an extremely beneficial advantage for them.
Also Read: Mastering Trading Psychology and Money Management to Trade Effectively
It becomes comfortable for the investors to follow their investment or trading rules when their trading signals represent high-probability situations.
Hence the prime goal of investors would be the elimination of the emotions of Greed and Fear.
Emotion is the factor that causes the biggest failures for most traders like you and me.
Your emotions become skewed with ‘hopes’ rather than what the technical indicators are indicating.
Every time you take a trade or close one, a mental decision is made.
Now, bear in mind that human mental decisions involve a lot of things.
Your egos play a major role in your trading decisions.
To buy a stock and then watch it go down not only hurts your capital but also your ego.
Why should you go wrong? Aren’t you smart enough?
When you start making profits, you start postponing your decision to close the trade.
You start to ignore your original trading plan and start to wait for more profits.
Greed gets to the better of you.
The “sell” decision now becomes based on the opinion of other people.
Maybe a few more points can get you a better Smartphone or a better deal at the holiday package that you were dreaming of.
But what you need to realize is that none of this has got anything to do with what the price of the scrip should do.
After many years of trading in the stock markets, I have formulated a set of 6 basic trading rules that you must follow for surviving the tough world of trading and investing in the financial markets:
However, the mental state of an investor, as well as mechanically imposed disciplines, is important to invest successfully.
1. Cut your losses short, Let your profits run:
Almost every investment adviser in the world will tell you this.
But the problem is they don’t tell you how.
Had it worked for you before, you would not have been reading this article right now.
If a technical indicator gives you a buy signal which shows an upward trend but immediately after that a negative candle appears, it means that the sellers are still present in the market.
So it is better to close the position immediately as the buy signal didn’t work.
If a trade is not working, get back out immediately and use the funds to take advantage of another high-probability trade.
Read more: 5 Reasons why traders lose money in trading stocks
2. Set your stops right:
A major problem with most traders, including myself in the early trading days, is that we set a stop and then change our mind when the price comes near the stop price.
Changing the price decision defeats the purpose of setting the stop-loss order in the first place.
Why do you change your mind?
You might have properly analyzed the trading strategy and entered the trade.
But in the heat of the moment, your fear comes into play.
If you find yourself in a situation where you are questioning your own stop-loss decision, remember that you decided the stop-loss price based upon clear, non-pressured analysis.
So why change it in the heat of the moment?
3. Do not formulate new strategies or opinions as the trade progresses:
If you are taking your buying decisions based on the daily charts, then the sell decision should also be based on the daily charts.
It is a common mistake of technical traders to change their trading decisions on the price action of a shorter timeframe.
For example, Plan to buy a scrip based on the daily chart which has provided solid bullish signals according to your strategy.
But after you take the trade, you see negative signals in the 15mins chart and decide to sell the stock.
This is where all your research and effort go bust.
You might notice that at the end of the day, the trade resumes its prior trend.
Also Read: A complete overview on trend and theory of retracement
4. Watch the charts, Not the News:
There are very few surprises in the investment world.
Someone usually knows the important announcements that a company will report in the news in advance.
When news stories are reported on major news channels, in most cases the news has already built into the stock for a long time.
So taking trading decisions based on the news announcements is futile as the major move of the price action has already taken place days ago.
5.Trade the Chart Pattern, Not the Name:
Often an investor will not put money into a trading entity when they have lost money in it before
“I lost money in that stock in the past; I don’t want to touch it again.”
You should remember that the markets and the stocks do not care what opinion we have about the stock or what trades we took in the past.
If you run across a chart pattern that shows a very strong signal but then you see that it is a position that lost you money before, do this simple procedure.
Put your hand over the name and look at the chart.
If the chart reveals a strong reason to buy, do not let the name influence your decision.
6. Stay with your trading Program:
Trading programs should be defined.
If you do not understand what your trading program should be, you will not make any money, rather lose it all.
A large percentage of investors do not have a trading program.
They get money to invest and then look for something to buy immediately.
Once you have developed your trading program, stick to it.
First of all, it will help to identify which trading techniques are working.
To move from one investment program to another whenever something is not working never allow you to correct what is wrong with your trading strategy.
Secondly, learn a trading strategy extremely well.
Constantly tweak your plan to suit the market conditions.
But do not change it entirely.
If someone recommends another trading strategy or system, research it before jumping into it.
Once it is researched, experiment by taking its good points and applying it to your existing trading strategy.
Ignore what the news has to say or that your uncle incurred losses in that scrip 10 years ago.
You have made your analysis and judgment and taken the trade.
Stick to it. Period!
Trading in shares requires patience, hard work, smart planning in order to be successful.
Just like any other money making process traing in shares involves taking risks and sometimes some risks may not pay off .
You should be practical and understand that it may not be possible to make profit out of every trade , although your objective should be to make profit out of every trade.
If you find that your frequency of loss from trades is higher as compared to the profit made by you, you need to stop trading, introspect and make some changes.
Some simple changes in your habbits and your approach to trading in stocks can help you to reduce your losses and help you to trade stocks in a better and effective way.
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thnksss a lot 🙂
Very good advice. As a beginner it helps me set my own rules. Thanks very much.
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