In this article, the staff at GFMResearch.com maps out the ten important principles that all traders should adhere to on a daily basis, regardless of what market is being traded.
Many traders trade markets like gambling. But trading is a serious business like any other business. Trading in financial markets, especially in leveraged markets, demands lot of discipline, skill, and strategizing.
For the best trading results, our philosophy revolves around the following trading principles.
1. Trading Is Not Gambling
Some traders think that
trading is gambling. They throw away their money (which we call sacred
money) in the market. Trading is a serious business, which needs meticulous
planning. Discovering your own individual optimized trading size is part of this
planning.
2. Plan Your Trading Plan and Stick to the Plan
Many traders jump into the waters without understanding the depth
of the market or without planning. And, more often, it is observed that even if
a trader does planning, he/she modifies the trading plan during the trading
session. We advice traders to plan before the market opens, and more
importantly, stick to the plan. We strongly recommend understanding your
trading style before you put a large % of your trading capital at stake.
3. Learn to Lose
As the saying goes, "Lose a
battle(s), win a war." It is observed that many traders end up holding a trading
position, especially if it is running way out-of-the-money beyond his plan and
ends up marrying a losing trade. This leads to a situation wherein you try to
justify bad trades. Remember, "Today's big loss was yesterday's small loss."
4. Define Trading Objectives
As with any other
business, the objective of trading should be very clear. Leave alone the purpose
of trading itself, many traders do not define the objective of a trade.
Investors should define their reason for trading, like some may want to buy a
new home or a car, or pay off debt, or parking their funds, etc., whatever the
reason may be. Similarly, you need to define objectives for each and every
trade. Unless your purpose is to kill time or throw away your money, we
recommend trading with clear objectives.
5. Always Trade with Stop Loss
While trading, if a
stop loss gets triggered in anticipated direction, a trader tends to curse the
stop loss. Stop loss in itself is not a wrong strategy, where you put a stop
loss matters the most. If a stop loss gets triggered often, rethink why your
stop loss is getting triggered. Remember, "Stop loss is an inevitable evil."
6. Financial Markets Are Eternal
The markets offer
endless and plentiful possibilities. Generally, a trader, especially after a
loss, tends to trade immediately to recover the loss and ends up in compounding
the loss. Or if he misses a trade, he jumps into a next trade without planning.
Missed opportunities exist only in your mind. Prices keep changing and generate
other opportunities. The goal of trading is to make a net profit after a
sequence of trades. Markets are always there whether you remain or not.
7. Be Careful of Over Leverage and Overtrading
Over
leverage makes you ignore risk
management. Over leverage has to be taken care of, especially in already
leveraged instruments like futures or in forex trading. Over trading is another
aspect of bad trading practice. Give your mind thinking time to develop a
strategy. Over trading results in tiredness, both to you and your capital.
8. Discount Market Rumors from Market Facts
Discount market rumors like interest rates policy, GDP, stocks data, and
many more. Prices digest much of the future news.
9. Take Care of Your Trading Costs
While trading,
costs like brokerage, taxes, and other statutory charges are actual, fixed
costs. It is observed that many traders end up paying about 20%-or more-of their
profits or losses towards trading costs. Shop around for the best rates for your
size and quantity of trading. Ask brokers about special offers or how to
qualify for discounts on commissions, etc.
10. Trade with a Clear Mind
Finally, last but not least,
trade only when your mind is in a position to think clearly. Sometimes, even
something like a small fight with your spouse, or brother, or sister, or your
kid, or your friend, or maybe some stranger on your way to office, or for any
reason, if you are disturbed, don't trade. Trade with a clear mind.
By the Staff at GFMResearch.com