Traders should make a virtually full proof plan before entering a trade. “Fail to plan and you plan to fail” goes the old dictum. If you scan through all successful traders you will see a common thread. They have a plan ready for the day. And in some cases even plan “B”, for minor changes, if plan “A” is steering out of the way. So you either follow your written plan systematically or perish.
Only minorities of traders have a written plan and that minority is successful ones. By writing down the process and documenting it you can easily figure out what steps work in your favor and which do not. You can avoid costly mistakes in future.
Let us see few salient features of the plan in the context of Indian stock market overview of trading.
- Testing yourself
After making a plan you can test how successful and effective your plan is by paper trading. You can judge your strong and weak points. In trading when someone wins there is someone who has lost. Those with plans make the profit from those who lose because they were not prepared any plan. It is give and take in trading.
- Be calm and cool
One should be cool, calm and composed. Should be ready to face challenges the market has to offer. There is a saying “Do not promise something when happy and do not make decisions when sad.” This holds true for trading. Because if you are mentally somewhere else and physically somewhere else, then you will not be able to take a proper decision and right direction of your planning. There is always an another day. There are many benefits of intraday trading.
- Risk tolerance
Everyone has a certain capacity to take a risk. It varies depending on person to person and time to time. Maybe today your tolerance level is 1% risk of loss (in a day trade) and maybe at other time periods, you may be in a position to take 3% risk of loss. If during any time during trading you feel like things going against you in a sequence you can call it a day off at that movement itself.
- Risk/reward ratio
One should have a realistic target for profits to be earned for the day. You can set your risk/reward ratio. Say you can risk losing Re. 1 if a reward is Rs. 3. This target you can set for daily trade or you can consolidate for weekly basis or monthly basis. One should regularly monitor these and make required changes if you are moving away from your target.
- Follow related news religiously
One should scan news regularly and religiously the before the market opens. Keeping oneself updated. Write down those important piece of information like business news, articles, an outcome of some important meeting, changes or variation in government policies, the trend of other stock exchanges, business-related economic reports.
One can scan news through the newspaper, morning news on TV on different channels, through the internet, etc. And later in the day can analysis which all news has affected today’s stock market, and which companies were most affected. Professional traders work on probability. More the probability of happening of an event, more accurate will be the trading decision and direction. There are many people who make money in Indian stock market over a long period of time.
- Clear warning system
One should keep a tab on the support (minor and major) and resistance levels. Whatever be the system or program you follow, you should set an alarm for warning when the required level is breached. An alarm can be a buzzer or be flashing signal clearly visible without any disruption or distraction. Overlooking it can be a costly affair.
- Upper and lower limit
Most traders maximize their attention and effort towards buy signals and are least bothered about when and where to exit that trade. They keep on holding onto the script even if it is going down as they do not want to take a loss. If you cannot overcome your ego for taking the loss then you will never become a good trader.
In other words, if the script is going down it means you have miscalculated something somewhere and were wrong. Even seasoned traders have their share of losing trades, but by managing your invested amount and limiting losses, they make the profit.
Traders should know when to exit the trade. They should write down both the ends of each script. The lower limit being stop loss and the upper limit the profit target they wish to earn. Once your script touches any of these levels, just exit.
- Computer programmed to buy automatically
Let us say we wish to buy certain script at Rs.100. And presently it is trading above Rs. 100, say 103 or 105. One can program the computer in such a way that it triggers a signal once the script reaches Rs. 100 and call for buy. Minimum target should be at least 3 times the stop loss and it buys the script automatically, once the required conditions are met.
- Recording minute details
It is one of the most important aspects of good traders. Good traders keep a minute account of each trade they made. Be it profit or loss. All detailed description of essential features like target prices one has set, stop loss one has set, entry and exit price, support and resistance level, time of purchase and sell, market opening and closing points, and all useful comments, news and lessons learned.
This will act as a quick reference guide in future. It will save you lot of time and energy for identifying what went wrong and what was right for your future trades.
- Careful and detailed analysis of the day
After the close of the day, one should do thoroughly analysis of the day trading. Writing down conclusions and analysis of the day with as many details as possible. This will help you know where you are going wrong and you can minimize your wrong decisions in future trades. It will improve your trading skills. By this way, you can avoid share buying and selling mistakes.
- Trading is a bread earner for you and your family
As any other businesses, you should treat trading as a business and give your due respect. After all, it gives you and your family bread and butter, and keeps you financially healthy in long run. Each trader has his personal trading methodology, style and goals. So he himself will have to prepare his plan.