Some Trading Rules:
Quora is a good place for market related answers. Sharing one of my articles written two years ago:
Please read on:
The same question has been asked multiple times with some change in the wording. Basically we are looking for a set of guidelines which shall keep the losses on the lower side and make us profitable too.
I have answered this few times in the past.
Let us do it again but based on a previous answer which was written about two years ago.
Experiences teach us and then we convert those teachings into trading rules.
There are lessons to be learnt from trading. Every person is different. So lessons learnt will be different.
These are my 5 rules based on trading experience over many years.
Do not put all the eggs in one basket:
Whether trading or investing it pays to be diversified. One can go wrong heavily in a single trade. Allocation to different stocks helps in mitigating that risk.
That is why experts never tire telling you about virtues of diversified portfolio.
Do not bite off more than you can chew:
This is about the trade size.
Never take a position in the market disproportionate to your capital in the hope of a windfall.
Lotteries do exist in the market and at times you may get lucky.
But more often, you will only keep chewing and not getting anything to eat.
The big position size can cause a big loss which will reduce your capital and thereby your trading ability and confidence.
Try not to risk more than 5% of your capital in a single trade.
( This is just an indicator figure, one has to find own comfort level )
Trade with the money you can afford to lose: ( Really ? )
The statement above is the conventional wisdom.
Then there is another advice from one of the greatest masterminds:
With greater risk one can look for greater rewards. But one can be wiped out as well.
Markets are not one day event. The situation there is not like war.
It is like daily skirmishes where you will be bloodied one day and be a victor next day. So do not bleed out in search of glory. There is always a next day. Learn from small losses. Occasional big loss will eventually come some day to test you. Do not go looking for it. That is asking for trouble.
I am personally of the opinion that I can not classify my money as something I can afford to lose.
If I classify it that way, I have already distanced myself from money and it will surely find a way to go away from me.
I trade with the money I can not afford to lose. That makes me take my trades seriously. They are not for some entertainment or ego trip. Trades are there for making money. Some will go wrong, but the right ones have to make more money than the losing ones are taking away.
One has to strike a balance in risking the money.
The above advice is a good lesson to be learnt.
Go with the trend- Trend is friend :
There is money to be made by being a contrarian i.e. by going against the market trend. For that to happen you need perfect timing and a good dose of luck.
For a normal good trader, it is best to follow the trend.
Be a buyer when the markets are moving up and do not hesitate to be in short trades when the trend is down.
It is similar to swimming with the current or against the current in a river.
Do not struggle unnecessarily.
But get out of the trade when the trend reverses.
Patience pays: Stay with the right trades:
In almost all my answers about trading ( whether day trades or positional, futures or options ) I have always emphasized on patience with your winning trades.
These are the trades which will generate the surplus which shall keep you afloat. Big profits are good for the trading psyche also.
One big profit should be able to take care of many small losses.
Remeber what Jesse Livermore , one of the greatest wall street traders said about being patient:
Few other answers on the same theme:
Only time goes away. Markets, traders and their questions remain the same. Answers are always there but the results remain unchanged. This cycle goes on with 90% of traders ending up on the losing side all the time.
Thanks for reading.
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