InvestorQ : Are there ground rules I need to follow to be a successful trader in the equity market and will these rules really work I practice?
swati Bakhda made post

Are there ground rules I need to follow to be a successful trader in the equity market and will these rules really work I practice?

Dia Deshpande answered.
2 years ago

Unlike what you think, a trader is not exactly a high risk player willing to bet big money on every opportunity. In reality, successful trading is less about taking risk and more about managing risk. Really good traders are extremely smart risk managers. That means you don’t have to think and behave like a sailor to be a successful trader. All you need is to get your basics right, adopt a disciplined approach and manage risk smartly. Now let us look at some of the ground rules.

Ground rules for you to be a successful trader

Contrary to what you may think, a good trader must be fanatical about protecting capital. You cannot be successful in trading without that. Protecting of trading capital has to happen at various levels. You must be clear about how much capital you are willing to lose per day, per week, per month and overall. This should be your guiding principle in trading and there must be risk management that is inbuilt at every level of trading.

Stop loss is mandatory and if you are not a “stop loss person” then trading is not for you. The best of traders in the world always trade with a stop loss. Stop loss should basically reflect the loss that you are willing to accept on a trading position. Whether you are trading long (buy) or trading short (sell), always ensure that you only trade with an in-built stop loss.

Don not ever try to be an investor by default that is becoming an investor because you can afford to hold on. That is not for you. A trader is not an investor, so don’t think like an investor. For a trader, profit is what is booked; all else is book profits. Keep taking profits off the table at regular intervals. The more you use each opportunity to take profits off the table, the more your money churns and the better your ROI. That should be your focus.

Always stick to the direction of the market momentum and latch on to it. In short, trend is your friend. Trying to sell a bull market or buy a falling knife is pointless. Market is always trying to tell you something you do not know and as a trader it is your job to listen to the market. A good trader never tries to outsmart the market. Be humble enough to accept that the market is smarter than you.

Profits and losses are part of the trading game. When you have a loss, take the lesson and move on. When you miss out bigger profit, don’t obsess over it. As a trader, don’t fall into the overanalyses trap. Profits and losses are part of the game, so take it in your stride. As long as you follow a discipline, you should be able to manage most of your profits and losses.

Leverage is a double edged sword. Take care of your leverage and margin positions in a volatile market. That is where most traders get hit. Leverage can hit your trade big time when markets are volatile. In such markets, focus on cutting losses than making profits.

Don’t nothing is also a strategy. A trader takes 3 key decisions; buying, selling and doing nothing. Traders believe that strategy means to buy or to sell in the market. But waiting on the sidelines can be very productive when the market is confusing. A lot of money can be made by doing nothing.

Don’t spend too much time on your WhatsApp chat and following groups. Quick money can be tempting but free stock tips are rarely worthwhile. Eventually, you will end up losing money or helping someone exit their position. As they say, in economics there is nothing like a free lunch.

Costs matter a lot to a trader so think and act like a miser. Trader must learn to keep costs low. Apart from brokerage costs (Upstox charges zero brokerage), there are statutory costs like STT, stamp duty, GST, turnover tax, exchange fees etc. All these costs must be factored in when you project your trading profits. That is the only way to be consistently profitable.

Finally, as a trader always be wary of the overnight risk as it can be a big question mark for a trader. Overnight risk is when you carry forward positions to the next day. When there is uncertainty on the economic or geopolitical front or there is a major event coming up, it is always advisable to be as light in the market as possible. You can always miss out the outliers and trade the trend when it is clear.

Last, but not the least, these rules will not help you to make fantastic profits but it can definitely save the embarrassment of huge losses in your trades. That should be the focus in trading. Profits will following when you hold long enough to your correct trades.