stock trading dos and donts

Do’s and Don’ts for traders

Short term trading, whether it is delivery based trading and/or intraday trading is primarily based on technical analysis which helps traders capture short term price movements. The main advantage of trading over investing is that traders can make money irrespective of whether the price moves up or down. Because of the speculative nature inherent to trading, it should be done with discipline.

For many, investing and trading might seem like the same thing. It’s the intention and definition of objectives which separate trading from investing. The basic difference between trading and investing is that in trading, one should have an exit expectation which could be in terms of a price target, i.e. a trade has a finite life. Investing on the other hand is more open ended, where an investor when he/she buys into a stock they have no predefined notion of when or if they would sell.

Do’s:

  1. Short term trading involves risk, it is advisable to trade with money one can afford to lose.
  2. Gaining knowledge on the principles of technical analysis and tools used to implement the same gives traders an edge.
  3. Use stop losses & trailing stop losses to your advantage. Stop Losses are essential to trading and help manage risk associated with trading while trailing stop losses help the traders protect their profits while riding the momentum.
  4. Keep a track of executed trades and review them to see if there is room for improvement in the methodology used to trade.
  5. Buy into strengths and sell into weakness.
  6. Consider transactions costs and calculate your break-even points while entering a trade.
  7. Trade in a style with which you are most comfortable, which could be using technical analysis, fundamental analysis or both to form a sound trading decision.

Don’ts:

  1. Don’t convert trading positions into investment positions.
  2. Don’t try to catch the bottom of a falling stock. Being counter trend and buying into weakness would result in losses.
  3. Don’t trade on speculative news and market rumors.
  4. Don’t take positions larger than your comfort zone.
  5. Don’t let a profit turn into a loss (use trailing stop losses).
  6. Don’t take too many trading positions at any given time, while some diversification is good, it becomes harder to track and any adverse movement in the market could result in bigger losses.
  7. Don’t buy just because the price is low or sell because the price is high.

To conclude, trading inherently carries risk, a way to manage this risk is to understand the trading principles and practices like the ones mentioned above, as it would go a long way in creating the right trading psychology and help become a successful trader.

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