Some Basic Thumb Rules for Trading
Posted On June 26, 2018
There are some very basic thumb rules of trading before one should actually start. Knowing those rules is of prime importance as these help people take a more informed decision on aspects like the amount to be invested, what type of trading is suited to an individual and diversification.
The first and major thumb rule is regarding the amount to be used for trading.
The rule is the one should only invest with the amount he/she is can afford to lose. It should be a scene that someone became broke as he/she invest the entire or majority of the capital in the bank account into trading of stocks and lost all the money. We all know stock trading is a bit risky prospect. A single bad news can cause you a loss of your capital, while a single good news can skyrocket your bank balance. Hence, it is always safe to play with the money which won’t impact your standard of living.
The second thumb rule is that profits are not made every day.
Yes, no matter how good your strategy is, there will always be days when you will lose money. Hardly anyone can claim that he/she has had a 100% success record. A success ratio of 60% is considered to be really good and even the big hedge funds and investment management firm strive for that. So, its okay to have a losing day.
The third thumb rule is, never put all your eggs in one basket.
Never put the entire or majority of your money in a single stock. Because it works its awesome, but if it doesn’t, it will take you weeks to recover the lost amount, put aside making a profit. There have been such instances in the past, and there will be in the future also. So, as an informed trader or investor, this rule will prevent any catastrophic loss from happening to an extent.
The fourth and one of the most important rule is that, don’t trade randomly.
Have a disciplined trading rule. Always has a fixed strategy or logic in mind while doing trading. Random trades will work at best 50%, out of while the transaction costs of the wining and also the losing trades will do much damage. Always trades with certain rules, having at least the following attributes:
- Entry point
- Exit point
As soon as any of these are met, do the needful. If a stop-loss is hit, exit the position. Don’t keep on holding the position with an expectation that the price will recover and profits will eventually be made. It happens 3 of the 10 times only at max. The rest 7 of the 10 times, losses are doubles. Following a disciplined approach is often the trait the differentiates between a good trader or a bad trader.
The final thumb rule is always knowing your risk profile.
A risk profile is an indication of how much risks can you take up without much impacting you. It depends on your age, profession, and financial status primarily and differs from person to person. You risk profile will tell you the following things:
- Whether you should trade in the equity markets segments only, or also into options and futures;
- Whether you should be an intra-day trader or a long-term positional trader;
- What levels of stop-loss can you play with
It is said that younger people can afford to take higher risks as compared to others while working professional will have been better a long-term investor rather than a trader. And if you are socially single, with no financially dependent family members, some risks can be taken up.