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9 mins read . 30 Dec 2022
A short-term trader has a number of considerations in the market. They must make profits more often than losses. They need to enhance ROI and at the same time protect their capital. They must churn capital aggressively, yet keep costs low. Now, these are diverse requirements and not easy to reconcile. But then, nobody said that trading was a cakewalk. It is not for the mild-hearted and even the people with the best skills do take losses in trading. As you commence your trading for 2023, here are 10 ideas to ensure that you have a more successful journey in your trading activity. Trading is for the short term, so it has a very unique set of requirements and eccentricities. That is what, perhaps, makes it so exciting.
The most important thing in trading is to know how much you are willing to lose. When you touch that point, show discipline and return to your trading board. How do you implement it practically? Define the amount you are willing to lose in a day, in a week and in a month. Also define, how much of your overall capital you are willing to lose. Once that is defined, you know your trading limits. Always start trading with your capital limits because that is your raw material and that has to be preserved at all costs.
Not two opinions about it; stop loss is mandatory. It is the level at which you just terminate the position and move out. Set the stock loss based on technical charts and also based on your risk appetite. But the most important thing is to put the stop loss into the system when you initiate the trade. That is how you protect your trade. Once the stop loss is hit, don’t have second thoughts. Also, at times, the stock may hit the stop loss and bounce back. That should not change your stop-loss strategy.
In trading, booked profits matter a lot more than book profits. You must encash and monetize profits at regular intervals so that money can be deployed to fresh trade positions. You can only improve your return on investment (ROI) in trading by churning your capital more aggressively. Don’t go overboard and overtrade, but use opportunities to cash out and redeploy funds to other opportunities.
Traders often blame the market volatility and the suddenness of the fall for their losses. Remember, markets are markets and it charts its own course. What matters is how well you protect your risk. In short-term trading, there are going to be disappointments more often than good days. But the trick here is to adapt your approach to the market signals and not to question the wisdom of the market or to blame the market.
Quite often, traders believe that trading is about either buying or selling stocks. That is not the case. A very important decision in trading is when to sit out. There are times when you are just getting your analysis wrong or the markets are just too unpredictable. That is the time to just stay out. In retrospect, that quite often ends up being the most productive period for your trading performance.
People can debate endlessly about the use of charts and the superiority of fundamentals. That is not your concern. It has been empirically proven that chart patterns repeat over time and therefore technical analysis works. But the most important part here is that you, as a trader, must understand how to read charts. Don’t leave it to the chartists and the analysts. There is no alternative to reading charts on your own.
What this means is that trading can never be a part-time activity that you can do during lunch hours. It does not work that way. Trading is a serious business so you need to spend time understanding your trades, monitoring your trades, seeking market feedback, listening to market intelligence etc. Unless you give enough time to your trading activity, you are unlikely to really be able to perform in this space. Take trading seriously as a full-time activity and invest your monetary and intellectual capital into it.
In trading, it is said that when you panic, you subsidize the other person who does not panic. You cannot keep your cool always, but the idea is to think and act with your head rather than with your heart. Just because the stock is falling, don’t panic and start looking for other options. Keep a stop loss discipline and a profit booking discipline. Once that is done you know your risk-return trade-off. After that, you have fewer reasons to panic.
What do we mean by a trading diary? It is a diary where you daily record your trades and the reason for initiating the trade. This is for your consumption only. Once that is done, review your trades each week and see if your perception of the market and the justification for the trade was working. If not, it is time to get back to the drawing board and rethink your assumptions. This is a tough job since you need to accept your mistakes. But it helps in the long run to set a clear trading path.
Here is a word of caution. You don’t have to follow what other traders are doing, but you are always better off with some market intelligence. Talk to dealers at broking houses and find out the nature of institutional and retail orders. That gives you an idea of what the other traders in the market are thinking. In a crowded and complex trading ecosystem, such insights can surely be useful.