Stock Market is an exciting platform to grow hard earned money through trading and investing in stocks. History and survey reports say - less than 10% make good profits on their investments while rest fail to do so , a surprising figure.
We explore from our trading community experience what is it that results in loss , pressure , mental tension and how they did learn from those losses and overcome them to create profit strategies. While we keep hearing news how the market turn the fortunes from some turning them richer , also wiping out for some. In this article we share all such experiences and tips shared by our community.
- Risk Management with Stop Loss
- Entry and Exit Discipline
- Do not time the market
- Stay away when unsure about direction
- Diversify investment in multiple stock sectors
- Be aware of market players game
- Be future ready with a checklist of decision points
- Study the fundamentals
- Exercise with Paper Trade or Virtual trade
1. Risk Management with Stop Loss
The beauty of stock markets is one make profits when it moves in either direction . When the sentiments are high good profits are made with buy decisions , when its low , profits booked by selling. With lot of tools and information around , company events , technical analysis charts , advise and opinions one makes a buy / sell decision.
Risk Management involves in answering below questions
- What happens if market moves in opposite direction to our decision
- What percentage of our investment we are ready to risk in such cases
- At what price level we decide to exit the trade
- For how long are we ready to hold the trade
Before placing the the trade order , trader has to work on above questions and quantify the decision . For example , if trader has a medium risk appetite and can afford to risk 5% of the investment , if capital investment on a buy trade is $1000 , then a stop loss order should also be executed triggering at $950 which is 5% loss on investment. Trader can cover this loss in next trade using the remaining $950 investment when the market is in good sentiment . In absence of stop loss , if market makes a adverse move resulting in say 10 to 15% loss of a trade , then to cover this loss - the time , energy spend may be more. Such repeated trades may ruin the capital investment and one may even quit the stock market thinking its not for them. Wise trader always understand loss and gains are common in a stock market , they know they have good chance to win 70% of their trades and always trades with a stop loss. This is the number one and most important must practice for a trader to grow capital and improve profits. In April 2020 during COVID19 pandemic , Crude oil hit a steep negative closing value of -$37 from a opening price of $20 , imagine what may have happened for a future trade bought without stop loss. Traders who took such trades may have long stories.
2. Entry and Exit Discipline
Trader must decide on the discipline strategy for the day. For example - Trader A decides to take 2 trades of stock S1 with a profit target of 2% for the day . Once the target price is hit , irrespective of market further movements close the trade for the day. Market movements may be luring to trade again , but if done without proper price action analysis in greed may result in a reverse trend resulting in pressure and tension to the trader. Fixed trade irrespective of the market conditions once a price target is hit helps in reducing trading stress in the long term , consistent profits and capital growth.
3. Do not Time the Market
Market may either be in an uptrend or downtrend or at resisting any further upward movement or finding Support at downward levels. Most successful traders respect the trend before entering into a trade . Sometimes market make good moves when news is supporting , It may not be wise to expect that market will fall in next few minutes without a solid price analysis and trade the reverse direction. For example in the recent COVID pandemic , NIFTY 50 touched record levels when each sector started improving in subsequent months and induction of new retail traders , expecting that it will fall blindly may result in wrong decisions. This may build pressure waiting for market to touch a figure while its moving away every moment .Respect the trend
4. Stay Away when Unsure about Direction
Securing your capital and profits is very important when trading in volatile markets. There may be situations such as emergency declaration , monetary policy changes etc where traders may be unsure which direction market may move and in ambiguity. A wrong decision in such situations may deplete the capital in no time. In such ambiguous moments , it is wise to protect your profits and capital , stay out of market till volatility settles down and enter the market when there is stability in price
5. Diversify Investments in multiple stock sectors
Unless a trader is good in tracking the industry trend very closely , it is wise to diversify the investments into multiple sectors. For example rather than investing 100% of the capital into Banking , a diversified portfolio with 60% in Banking , 20% in Auto and 20% in IT may help as probability of all sectors moving down is less compared to individual sectors. Rather than Investing all capital in one company , its wise to invest in similar companies of Industry to mitigate risks.
6. Beware of big market players game
Surprising movements in the stock prices even when there is no major corporate update or event indicate the presence of big market players . Action of such players may appear to a retail trader that there is a trend change and prompt to trade. Once the big players sufficiently reach their profit target they exit the their positions which causes a sharp reverse trend and the retail traders may be trapped . Experienced traders track this price action movement , think twice before taking a trade which has seen sharp movements in very small amount of time.
7. Be Future Ready with a checklist of decision points
Nobody will be able to decide the future of the market direction. It takes its own twists and turns based on the traders sentiments. However when it comes to factor of time , some points help in guessing this movement by answering these questions on future events before taking a long trade
- Is there any holiday or long weekend nearing in the country.
- Is there any holiday nearing in US , because some markets closely follow US . Market movements will be less on those days.
- is there any major climate nearing especially for commodities stocks
- Is there any major economic decision in upcoming days like Reserve Bank Interest change , Reverse Interest rates , Budget decisions which may trigger volatility.
- Is there any major political events such as country border issues , policy changes , election results
- For Options traders , how near is the option expiry date
By taking a trade after answering these questions , trader will not regret for their decisions as its not a naked trade but a wisely thought decision.
8. Study the fundamentals
This is specifically for beginners. Many beginners who are influenced by their trading friends enter the market , take some tips on where to invest and draw out profits when it hits the target price. Such trades which are done without any proper analysis and understanding of the market conditions are called Naked trades. While such trades may return profits , when hit with a loss - it may be difficult for the trader to understand the reason as they are unaware of the basics of markets. It is at this stage when they pour more money , thinking market trends will change but end up losing it , increased tensions and decisions to quit stock markets . Such loses can be avoided by understanding some fundamental concepts of trading . For example -
- Understanding basic concept of Stop Loss , Triggers , Cover Orders , Bracket orders etc
- Understanding basic concept of Candle chart indicators - Hammers , Twizzers , Shooting star , morning star , evening star etc
- Understanding the market trend and range analysis - Upward , Downward , Sideways , Resistance , Support etc
- Understanding how the option premium value changes with time , volatility etc
- Understanding how to use charts - RSI , Oscillators , Bollinger Bands etc
- Understanding how to draw trend lines - Parallel lines, Downward Triangle etc
- Understanding factors which affects margins , brokerage rates etc
Studying once such topics will help a trader to form a solid and wise decision . It will maximum take a week time to understand these concepts . There are lot of informative video content on Youtube.
9. Exercise with Paper Trade or Virtual trade
This is another tip for beginners , to use paper trade or virtual trade as part of their decision building exercise. Rather than directly investing the hard earned money to play , using virtual trading platforms help to exercise the decisions taken and gain confidence . After all traders are not going to lose any money with virtual or paper trades. At the end of each trade , introspect what went right and wrong and improve each day before entering live market.
We believe above tips shared may be useful in your trading to reduce loses and pressure. Do share your comments and suggestions in the comments section. If you find this useful help out to reach your community by sharing this article.