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10 Trading rules that every trader must diligently follow

07 Sep 2023

It is by now well known that success in trading is all about discipline rather than about getting your calls right. Trading in stocks is not rocket science. Most people lose money in trading because they take decisions in a random manner. In fact, traders can be a lot more successful in the equity markets by following some basic trading rules. Here are 10 such rules to abide by..
10 key rules that can form the basis for smart trading
1.  Trading begins with protecting your capital. That is the first principle. 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.
2.  Always trade with a stop loss. This is related to the first point. Your stop loss can either be set based on technical, events or based on your affordability. It should basically reflect the loss that you are willing to accept on a position. Irrespective of whether you are trading on the long side or on the short side, always ensure that you only trade with an in-built stop loss.
3.  Profit is what is booked; all else is book profits. This is a key rule for any trader. 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 corrections present themselves.
4.  Always stay on the side of momentum. When you are a trader, trend is your friend. You are more likely to make money as a trader if you trade according to the momentum. Trying to short a bull market does not make sense. Similarly, trying to catch a falling knife is also not the right idea. You trading strategy should be aligned to the direction of the momentum.
5.  Don't look back and rue trades. This is very important especially if you have had to book losses. Traders tend to look back and over analyse. Also, when traders book profits and the stock goes further up, they tend to look back at the notional losses. Both are not advisable as they tend to detract from your core trading strategy.
6.  Don't over leverage in a volatile 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. Leverage can hit your trades big time when markets are volatile. On such occasions try to keep your leverage to the bare minimum so that you can avoid burgeoning of losses.
7.  Not doing anything is also a trading strategy. This is something most traders tend to miss. Traders believe that trading strategy either means to buy or to sell in the market. But the most productive strategy in most cases is to not do anything. This is very relevant when the market is very confusing and traders can get hit either ways.
8.  Don't get carried away by trading tips. Remember, trading tips come with the promise of quick money and hence can be quite tempting. More often than not, you will end up helping somebody exit their position in the market. Talk to your broker and rely on your judgement. Free tips are never worthwhile and you will eventually end up losing money in the bargain.
9.  Costs matter a lot when you are 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. If you take delivery of shares, there are also expenses related to your demat account. All these costs need to be factored in when you project your trading profits.
10.  Beware of overnight risk. 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 always advisable to be as light in the market as possible. This also applies to traders who focus on BTST and STBT trades.
These rules are just indicative and not exactly exhaustive. The list can go on but this is broadly indicative of some key trading rules that traders should predicate their trades on. These rules may n not result in fantastic profits for you but it can definitely save the embarrassment of huge losses in your trades. That is a good enough reason to follow these trading rules!

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