Saturday, November 17, 2012

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Ten Basic Rules of Stock Trading

I believe just this kind of listed rules is not good to follow. There is a heirarchy for rules. For money management, trade management, filtering stock lists and loss management. After these some more rules for emotional management. Separating that way will make a good foundation for every trader/investor.

One simple but very crucial rule is to pay ultra caution to a position for which you have huge exposure. If your exposure is not much to the market or a particular stock, let it swing as much as it can. This is very important and should be integral part of your trading psyche. Once you master this one, the below ones will show their positive effect.

Ten basic rules of stock trading:
  1. Always follow stop losses. 3%, 5% or 20% or 40% based on your strategy. Never let a fast moving stock get past the loss limit. If you keep thinking, you will be made to wait longer before a recovery if there were any and the longer you wait for recover, the longer you will be expected to wait. So be early, the loss is just a number. But the loss of time is real –ve number. Just like unexpected loss, believe that unexpected profits too come.
  2. Don’t buy on dips
  3. Never do averaging down
  4. Average up as the stock trends upwards
  5. Always avoid stocks at all time lows (or those that have fallen a lot)
  6. Avoid stocks that have fallen below moving average and off by 30% or more from recent highs (unless the stock starts moving up fast)
  7. Follow the pace of the trend. Uptrending stocks should move fast up. It doesn’t matter if it happens rare but we should wait as long as the stock doesn’t move down by a big % in a single day. We wait tolerating daily little % moves up/down/concurrent till it makes a single day big % gain. The idea is to never miss these big +ve days and always avoid big –ve days even if it means to exit a good stock. It doesn’t matter if it goes up or down afterwards. This is the logic of the stock market. You can certainly avoid big drawdowns, if you always quit stocks that go down badly (big –ve %) in a single day.
  8. Always stick to stocks that are at all time high. This is another logic of stock market. How would you see a stock in its early days of uptrend before you know that has gone up to greatest heights? Every time it goes up it keeps making new highs and it looks like it is at all time highs. History is made after the fact. But a stock trader doesn’t gain anything after the events, but only journalists, news websites and Moneycontrol/TV18 does. A stock trader takes chances while the situation is developing. A journalist’s goal is to capture an event without becoming a part of it. But a stock trader’s goal is to capture an event by becoming a part of it. You participate in one big event and you get to talk about it for the rest of your life.
  9. Don’t do second-guessing after the events happened. Losses and missed opportunities cause lot more pain that goes over and above the compensating experience of +ve trades. This happens because of second guessing. We keep thinking if I didn’t do that, if I sold it there, if only I avoided buying there etc. The only way to get over this is to convince yourself what you did could not be avoided as per your strategy. There is no way one can do well in all situations, unless you are a superman or are on NZT. So get over second-guessing and move on to next good bets.
  10. No matter what kind of market you face any time, always keep your commitment to trading with all above rules in mind. You do not need to give much of dedication but the commitment to act when the time comes, the time windows can even be very short for you to take decisions, so be committed to be on alert. It won’t cost your time. If you avoid second-guessing you will also not get mental fatigue. Always keep in mind that once you get into a lucky streak, there will be no looking back.

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