Before entering the stock market you should follow some rules for the protection of your investment and improve your trading decisions:
-
Know your trading concept/prospective:
Always know your best trading perspective before you enter the stock market. You can be an investor, you can be a short-term trader or you can be a day trader. If you have a conservative risk profile, your trading concept should be of an investor. If you have a moderate risk profile, your concept can be of a short-term trader. If you have an aggressive risk profile your trading concept can be of a day trader.
-
Always have an investment strategy:
When you initiate a position in the stock market whether trading or investment, make sure that you have a back tested investment strategy. If you make profits in a stock without employing a strategy, it can be a dangerous thing for your profits as well as your investment. When unexpected panic strikes in the market, you will end up burning your hands. However, if you make profits with a proven back-tested strategy, you will have a chance to win in every next move.
-
Don’t let the losses run:
Many traders make this mistake and keep repeating it. They cut their position taking small profits but don’t keep their losses. If you want to make profits than first protect your investment from big losses and this requires placing a stop loss at every position. But most people fail to do so because it is very difficult for them to book a loss and to accept the fact that they can be wrong. Only hoping that prices will rebind again and losses will become profits again, is nothing but a gambling because it can ruin your entire investment. Holding a losing position without a stop loss is like driving a car without the brakes.
-
Don’t average your losses:
A declining stock is like a sinking ship and if you average your losses it is like sailing on a sinking ship. In such a condition many traders buy more stocks with the hope that their loss will become profit. It is advisable to close the position when a trend is reversing. You can average the position once if it is a major support and the trend is an established bull trend. But averaging your position in an established downtrend is never advisable.
-
Stick to your strategy:
Never change your investment strategy without any appropriate reason. Most traders jump from one strategy to another because it is not working. It is not a strategy but it is discipline and practice that makes you successful in the stock market. Everything in this world has its advantages and disadvantages. If you choose and continue to use your strategy, you will expertise it very soon. Always feel good about your strategy as long as you are in profits.
-
Diversify your portfolio:
Diversifying your portfolio means diversifying your risk. Diversification means dividing the capital into some equal segments. Diversification reduces the sudden impact of a reversed trend. But too little diversification does not help also over-diversified portfolio do not help because it becomes very difficult to monitor all the stock simultaneously. So diversifying a Portfolio with a systematic approach always results in a stable profit curve and reduce risk levels.
-
Do your own analysis before making a position:
Everyone wants to make a lot of money from the stock market and believe that it is an easy task. But the opposite is true. Only educated people who make a deep research about the stock make big profits. But if you have knowledge of technical analysis with the holding capacity you could get far greater returns on your investment. If you have a good knowledge of Technical Analysis and you are able to analyze the chart accurately, you will realize that whatever is going to happen with the trend, you already get signals in the charts itself. With the help of technical analysis, you know how long to hold and where to exit.
-
Avoid thinly traded stocks:
A thinly traded stock is a stock that doesn’t trade on some days or trades less than 5000 shares a day. You can trade the stocks for day trading if you get heavy volume due to any positive news. But for an investment, you should avoid such stocks in your portfolio. These stocks have low prices and often called penny stocks. Thinly traded stocks are not suitable for a growth or income portfolio. Thinly traded stocks easily tend to fraud and very difficult to detect. A fraud is unpredictable in the stock market so it is advisable to research and learn about the company before selecting a stock. Sometimes stock prices drop suddenly in the anticipation of a bad news that can lead to a fraudulent activity. In such a situation you must quickly sell your positions and try to find out the content of bad news about the stock.
-
Never stick to one kind of trades:
If you stick to only one kind of trades, you can not succeed in the stock market. If you want to succeed in trading, you have to change your outlook among with the changing trend. Your trade should be in the direction of the trend. If it is a bull trend, you should follow your buying strategy and you must focus on the buying at supports instead of selling at highs. In case of a downtrend, we should focus on selling at highs, near resistance levels instead of focusing on buying at supports. But most traders stick to only one kind of positions that results in big losses. Trading in the direction of a trend enables to make more profitable trades. So you should neither be a bull trader nor a bear trader instead you should master both the trading styles.
-
Discipline is the secret of success:
Discipline is the most important factor for your success in the stock market. Most people fail in the stock market because they are not able to control their emotions or execute their trading strategy with discipline. You must have a systematic approach based on your analysis and you must stick to your trading plans. Fear and greed are two main emotions that drive the psyche of most traders. only the people who can control these emotions and think rationally can win in this market. you must have a proper trading plan, all the action points must be written on a paper and every action should be based on proper analysis and calculations, not on assumptions.
