Trading Rule # 5 & 6

Trading Rule # 5: Trade in 2 to 4 different Stocks at a time with strict Stop Loss.

 

As soon as you start trading in a day, you should have a protective stop loss.

In a Bull move, most of the stocks move up and similarly in any Bear Move, most of the stock moves southwards. As a Trader you know this fact but can you Buy 20 Stocks and try to make profit in all the 20 stocks just because all are moving up or in a Down trend? What will happen if market reverses without any indication on any bad news? Would you be able to monitor all your trades in such situation? Smart and Successful trader would trade in 2 to 4 stocks with strict Stop Loss and keep a strict vigil to avoid any misfortune in case of any eventuality.

The above paragraph is most important and I suggest read and re-read it. I am saying this with my personal experience. As I have mentioned earlier, long back when I started trading, I used to buy hugh quantity of only one stock where I felt of it going up, and as that stock used to go down following the news, I used to wait for some time thinking it will come up again, and, as it used to go down little more then I used to get scared of hugh loss in case if I exit. And due to this I used to incur big losses.

Now, there are many such traders who still find themselves at this stage, and as they’ll read over this line, they might be feeling the pain of losses they have already incurred.

It’s when I learned the lesson through pain that the best strategy is to follow the morning news or evening business news (One day before trading). With this you will get some insight about which sectors are expected to do well and where you may have some down fall.

Now, the important thing to keep in mind here is that the sectors which are not expected to do well or which are expected to be in bearish trend for the coming trading session are equally important for you as the ones which are expected to be in bullish trend . Because if you select 2 stocks of the bullish sector, you should select 2 stocks of the sectors which are expected to go down and short sell them, so that you will win in either of the side.

i.e. for bull market the 2 stocks that you have brought for up trend and in bear market the 2 which you have brought for down trend. Does that make sense?

To help you with this, I can provide you with an automated excel checklist which will give you entry/exit point with accuracy, its compliment from my side so leave your comment and receive it from me.

Trading Rule # 6: Be Persistent

This topic is something you would be familiar with if you have read my post “Are You Mentally Prepared before Trading”. In case if you missed, let’s just summarize it again for you here. Great personalities like Thomas Edison & Henry Ford had one thing in common- They remain persistent to one idea they thought of and as a result of this they not only became successful but, they also learnt the great lesson of life that persistence is all it takes to accomplish anything you want.

Specially if we talk about share trading then we find many people who give up at the first sign of opposition i.e. if they lose in 2-3 trading then they quite and come back after a month or so and again repeat the same trend and then keep on doing this until they realize that this market stuff is hard to crack.

On the other hand, they simply trade on their gut feelings rather then strategy. What we should keep in mind here is that once we are ready with the trading plan and strategy, we should stick to it even if we incur some losses at the early stage, its only with the time and  practice that we master it.

The best strategy I can suggest here, in fact, what I personally implemented is buy a less quantity of stocks but buy it regularly and learn to exit well in time. Mostly it happens that people hesitate to exit when they are making loss thinking that it might come up again or they even hesitate to exit in case of gain becoming greedy of making some more out of it. If you analyze it deeply you will understand that this turns out to be the most dangerous step in trading and you should never let this habit in practice. 

Always fix a percentage in either case i.e. whether you are at loss or at gain always and always exit at your fixed percentage. Keeping this in mind I have added the percentage box in my checklist where I can set my own figure of gain and stop loss percentage.

If you wish to test my checklist, leave your mail id on the comment and I can send it to your inbox.
Successful traders find a formula and stick to it. I would suggest a trader, particularly a novice trader, should adhere to one or two carefully selected trading patterns that work best for him/her. The need for a plan, a strategy and applying it in a consistent, methodical manner can not be overemphasized.

Trading Rule # 3 & 4

Trading Rule # 3: Well Defined Exit Strategy

Exit strategy is something you will read more often in most of the posts in this site, the reason is simple without a proper exit strategy your entire trading might go in a thick soup. Using stop loss courageously while in trade can be one of your most profitable decisions... Believe me!

Before entering any position, traders should have an exit strategy in place. This should be included in the trading plan and define how the trader will get out of both winning and losing positions. Many traders agree that money is made in the exit. This means that regardless of where a position is entered, it’s the exits that determine if it will be a winning or losing trade. 

While we often think of trade exits in terms of dollar-based profit targets and stop losses, there are other methods for determining exits. A trading plan could utilize a time- or activity-based exit, such as closing the trade after a certain number of bars have printed, after a specified amount of time has elapsed, or at the end of the trading session. Exits  also can be based on some type of market activity or technical analysis. For example, a trade could stop-and-reverse if a technical indicator gives an opposing signal.
Regardless of approach, it is important to have an exit strategy in place before entering any trade. It can mean the difference between not only a winning and losing trade, but a winning and losing business.




Trading Rule # 4: Capture the Market Movement

As we have discussed in previous post that most of the traders enter into stock market to trade with their gut feeling, and buy or short in first 15-20 minutes without even proper introspection of the market movement, here we will discuss in some more detail about movement watch

Novice traders often book profits too quickly because they want to enjoy the winning feeling. Sometimes even on the media one hears things like, "You never lose your shirt booking profits." I believe novice traders actually lose their account equity quickly because they do not book their losses quickly enough.
Knowledgeable traders on the other hand, will also lose their trading equity -- though slowly -- if they are satisfied in booking small profits all the time. By doing that the only person who can grow rich is your broker. And this does happen because, inevitably, you will have periods of draw downs when you are not in sync with the market. You can never cover a 15-20% draw down if you keep booking small profits. The best you will do is be at break even at the end of the day, which is not the goal of successful trading.
A trading account that is not growing is not sustainable. Thus when you believe you have entered into a large move, you need to ride it out till the market stops acting right. Traders with a lot of knowledge of technical analysis, but little experience, often get into the quagmire of following very small targets, believing the market to be overbought at every small rise  --  and uniformly so in all markets. 

Such traders are unable to make money because they are too smart for their own good. They forget to see the phase of the market. Not only do these traders book profits early, sometimes they even take short positions believing that a correction is "due". Markets do not generally correct when corrections are "due".
The best policy is to use a trailing stop loss and let the market run when it wants to run. The disciplined trader understands this and keeps stop losses wide enough so that he is balanced between staying in the move as well as protecting his equity. Capturing a few large moves every year is what really makes worthwhile trading profits.

Trading Rule # 1 & 2

Trading Rule # 1: Trading is a SIP not a Gamble

As we have discussed in the earlier chapter that most people come up with a mind set of doubling their money in share market and go back empty handed never to return again. They are the ones who enter into share market considering it as gamble and a chance of luck. whereas, their are  others who have a mind set about market as an opportunity to invest wisely and incur systematic returns with a proper planning and a well defined strategy.

No one would start a business without first ensuring everything that requires keeping up the business going, is well in place. But when it comes to trading people often try to put less money that to in one place and try to utilise more margin in terms of making profit.

Be it a trading or any other business an initial capital is required, every one has different strategy in mind as regards to the trading and, a different trading plan. When it comes to share trading we need to be very clear about the market sentiments and try not to put all the money in one stock.

When I first started trading, this was the biggest mistake I was doing by putting the entire fund in one stock and whenever the stock went down, I used to lose more than half the capital at one go. It’s with trial and error that I realized over the time and stood by a fixed plan which then worked.

On the other hand, if you are getting in to trading on your own, make sure you have the following:

·         Basic infrastructure in place.

·         Sufficient capital.

·         Computer dedicated for trading.

·         High speed internet connection

·         Best trading portal

I prefer “KEAT Prox” by Kotak Securities as my best trading portal which gives me best of the trading margin as well as a user friendly portal and best in class customer support.

Trading Rule # 2: Prepare a Trading Plan

Before you start trading in share market or in any other market a solid trading plan is absolutely essential. It is very important for your success. Without a trading plan you will be like an aeroplane which has no runway. A well defined trading plan is essential for long term trading success.

Most of the people who make a new entry in to the share market have the tendency of trading based on news and more over on chance basis. i.e. as the market opens they start buying stocks which are bullish or they start short selling stocks which are bearish during the first 15-30 minutes, thinking that they will make money fast with the stock movement and so on. However, most of the times it has been observed that they are the people who either incur great financial loss in one trade or keep losing some amount every day due to this uncertain behaviour, then their are few traders who trade on the basis of others reviews or someone else’s trading tip. Even if you make some money in this manner, it is not certain that you will be able to repeat the same profit pattern i.e. what if the next tip given by some one else doesn’t work? Or what if you didn’t get any tip or reviews? Hence, this idea can not be taken in to consideration for long trading or on a regular basis.

You need to develop a trading strategy that you yourself understand inside out.  You also need to consider the risk management because unless you know when to enter in a trade and when to exit, you will end up in losing. As mentioned earlier in my post the excel checklist designed by me will guide you more accurately about the entry and exit point for a particular stock at the beginning of the day trading.

Once you are ready with your trading strategy, it is very important to do a quality check before going live with it. As you test drive a car before buying, or you are on your way to the trial room before buying a new pair of clothe. Similarly, you need take a trial with your strategy before trading live.

Now there are many sites in the internet today who offer dummy platform with dummy cash but with live market, where you feel as if you are trading live though not with real cash. Once you have tested your strategy backward and forward here, you can be rest assured. On the other words, you will be more confident with your strategy rather than going blind.

Often, invalid trades are the result of our emotions: Fear, greed, impatience, overconfidence, etc. Other times, they stem from our mistakes, or pilot error as it is often called. Trading your plan is not as easy as it sounds, and most traders must work hard to develop the necessary skills over time. Consistently following the rules of an effective trading plan is part of what allows a trading business to make money over time. 

Nifty Futures

A future contract is a standardized contract to buy or sell a particular commodity or financial instrument at a certain date in the future at a market determined price (the future price). Future contracts are traded on a future exchange. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day’s trading session on the exchange is called the settlement price for that business day.

A future contract gives the holder the obligation to make, or take, delivery under the terms of the contract. Both parties – namely, the buyer and the seller of a future contract – must fulfil the contract on the settlement date. The seller delivers the underlying asset to the buyer or, if it is a cash-settled future contract, cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his/her position by either selling a long position or buying back (covering) a short position, effectively closing out the futures position and its contractual obligations.

The Origin

The origins of futures contract can be traced to ancient Greece. Aristotle tells the story of Thales, a poor philosopher from Miletus who developed a “financial device, which involves a principle of universal application.” Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit money with them for the guaranteed exclusive use of their olive presses when the harvest was ready. Thales could successfully negotiate low prices because on one knew whether the forthcoming harvest would be plentiful or poor and because the olive-press owners were willing to hedge against the possibility of a poor yield. At harvest time, when many presses were wanted all at once and of a sudden. He let them out at any rate he pleased, and made a large amount of money.

The first futures exchange market was the Dojima Rice Exchange, which came up in Japan in the 1730s to meet the needs of the Samurai who, being paid in rice and after a series of bad harvest, needed a stable conversion to coin. (Source – Encyclopaedia)

Understand Margin

To minimize credit risk to the exchange, traders must post a margin or a performance bond, typically 5%-20% of the contract’s value.

To minimize counterparty risk to traders, trades executed on regulated futures exchanges are guaranteed by a clearing house. Effectively, the clearing house becomes the buyer to each seller, and the seller to each buyer so that in the event of a counterparty default, the cleaner assumes the risk of loss. This enables traders to transact without performing due diligence on their counterparty.

 Futures Traders 

Futures traders are traditionally in one of two groups:

·         Hedgers, who have an interest in the underlying asses (which could include an intangible such as an index or interest rate) and are seeking to hedge out, namely insure against the risk of price changes; and

·         Speculators, or traders, who seek to make a profit by predicting market moves and opening a derivative (finance) contract related to the asses “on paper”, while they have no practical use or intent to actually take or make delivery of the underlying asset. In other words, the trader is seeking exposure to the asset in a long futures contract, or the opposite effect via a short futures contract.

Nifty Futures

In India, the National Stock Exchange (NSE) commenced trading in index futures on June 12, 2000. The index futures contracts are based on the popular market benchmark S&P CNX NIFTY index (National Index for Trading in Equity, or National Fifty). NSE defines the characteristics of the futures contracts, such as the underlying index, market lot, and the maturity date of the contract. The futures contracts are available for trading from introduction to their expiry date.

The Nifty

S&P CNX Nifty is a well diversified 50-stock index accounting for 23 sectors of the Indian economy. It is used for a variety of purposes, such as benchmarking fund portfolios, index-based derivatives and index funds. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), a joint venture between NSE and CRISIL. IISL is India’s first specialised company focused upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poor’s (S&P), the world leaders in index services.

Advantage of Trading Nifty Futures

Nifty futures allow you to trade the “entire stock market” instead of individual securities. Index futures are highly liquid, are characterized by large intraday prise swings and are easy to trade, both on buying and short selling. The advice of many experts and books is to trade in liquid markets