Opening a trading account and starting to trade is just a small part of the story. The real challenge is to sustain yourself in the trading business for long enough to make money. It is estimated that only 10% of traders survive beyond the 1st year and just about 20% of them survive beyond the third year. As much as it looks awesomely simple to buy low and sell high, trading is a very hard and long drawn game. Here are 10 mantras to improve your trading experience in the markets..
1. When in doubt step back
You could be ambiguous about markets for a variety of reasons. The markets may be just too volatile, the macros may be sending confusing signals or your own conviction may be lacking. What should you do in such circumstances? Remember, there are 3 decisions in trading; when to buy, when to sell and when to do nothing. When you find yourself in doubt the trick is to just step back and do nothing. At the end of the day you will find yourself better off.
2. Focus on probabilities rather than profits
Trading is all about probabilities; that means uncertainties. Every trade has a probability of being right and a certain probability of being wrong. You can never get a fool-proof trade and therefore you must focus on trades where you perceive the probability of winning to be high. As you trade and recap your experiences, you will be able to improve your ability to catch the probability of winning more realistically.
3. Understand the essence of momentum and price action
Trading is all about momentum; or put more loosely which way the wind is blowing. When you are trading, the trend is always your friend and therefore you must ensure that the momentum of the trade is in your favour. Don’t try to second-guess the market or don’t try to trade contrarian. You are most likely to have a good trading experience if you are closer to the market momentum. Spend more time on understanding the message sent out by market and catching the momentum rather than trying to beat the market.
4. Focus on where to put your stop losses
If you want to be a successful trader, you need to learn where to put stop losses. Learn to read technical charts, understand what are supports and resistances, gauge the volatility, measure your risk taking capacity and then put a stop loss. A stop loss can be based on technical levels or based on your affordability and risk appetite. The moral of the story is never to get into a trade without a stop loss.
5. Avoid the cardinal sin of averaging
This is so common among most traders. You buy the wrong stock, the stock price goes down and then you buy more hoping that the stock will bounce back. It never does! There are 2 things to understand here. Firstly, when you are already wrong once, no point in being wrong twice. Secondly, you are overexposing yourself to a particular sector or theme that is against the basic rules of trading. When the stop loss is triggered, just exit the position and then don’t look back.
6. Become tech savvy; that is the future
Today information technology is an integral part of your trading experience. You can use screeners to identify stocks to suit your needs. You can use software that applies artificial intelligence and machine learning that can help you better identify stocks and improve your trading experience. Trading platforms also offer you simulators wherein you can check your trade under various situations. Use all these to enhance your trading experience.
7. Don’t overtrade to recover your losses
When you trade, losses are part of the trading experience. Even the best of traders get some of their trades wrong. The only difference is that smart traders are quick to exit losing positions and channelize the capital to winning positions. The biggest mistake you can make is to try and recover your trading loss by trading too much. As a matter of principle, avoid overtrading in the markets.
8. Manage your risk by diversifying
Whatever the merits of concentration that great investors like Warren Buffett may preach, every smart trader diversifies risk adequately. This could include diversification within stocks, across sectors or even across asset classes. The whole of diversification is to reduce your risk and that lies at the core of your trading experience. The better you manage your risk, the more successful your trading experience is likely to be.
9. Increase your position size gradually
We all know of the old trading wisdom, “Don’t rush your bottom dollar into a single trade”. Trading is all about conviction and it takes time to build your conviction. You need to build expertise and that come with small positions. As your expertise, performance and conviction grow you should gradually increase your exposure and the size of your positions. Never stake too much of your capital when you are just about starting out.
10. Always trade with a Plan-B in place
What do we understand by a Plan-B here? Plan B is all about having back up ideas of what you should do under various alternative circumstances. If you enter a trade and a global risk emerges what should you do? If you get into a trade and there is a governance issue surrounding the stock what should you do? If 3 of your trading positions simultaneously become loss making then what should you do? Once you have a back-up game plan for as many scenarios as possible, your trading experience is likely to vastly improve.
Remember, the trading experience has to be created by you. It will largely depend on how well you manage your trades and more importantly how you manage your risk!