1. Use money you can afford to lose. If it’s above it you won’t be able to enjoy the mental freedom to make sound trading decisions. Key is mental independence.
2. Start small. Test your trading setup and its logic through paper trading or back test it with the available data. Then start with small quantities or a single lot.
3. Be patient and disciplined with the trade setup and its logic. Have conviction in it and don’t base your trade on hope. Act as a robot without emotions and have objective temperament. Don’t try to time the market’s low & high for a trade entry. In fact let them develop so as to confirm the formation and then enter. It’s better to get in with some kind of insurance or confirmation rather getting stuck in a false formation. Impatience results in:
-jumping in trades & getting stuck in wrong direction
-getting out quickly of a potential profitable trade
4. Trade what you see, not what you want to see. Be a trend follower and ride the momentum. Don’t start the day with an opinion. Let the market tell where it wants to go. Opinions are what get you in trouble. Always trade the trend. In fact ride it. For god sake, don’t go against it.
5. Try to avoid market orders. Use of it shows lack of patience & discipline and conviction in your trade setup and its logic. Before entering a trade everything should be pre planned (entry/exit/stop loss).
6. Never enter your entire position @ one price. Do it in 2-3 installments to see if the market is moving in your direction before totally committing yourself.
7. Always trade with a strict loss. Using a stop loss is not a sign of your lack of conviction in the trade. It is a sign of lack of conviction in the mood of the market.
8. Never add to a losing position. When market has given the verdict that your trade is wrong, you are wrong. Accept it. Just get out of it and don’t average it. Don’t take it personally and bring your ego in between. Don’t fight the market. It’s not a one on one thing. It’s one on many. In fact, this situation should never arise only as stop loss will hit if market goes against you. If it doesn’t hit, adding to a losing position is still against Rule 3 of not being patient and disciplined and trading on hope.
9. Each trade is an individual trade. If you have made/lost money in particular scrip, don’t try to get more/back from it. At the end of the day or month what counts is the quantitative part i.e. net profit/loss not the qualitative part i.e. names of the winners/losers.
10. Build a trading pyramid. When you add to a winning position don’t add more than you already have in open. For example, if you have 4 contracts initially, it’s prudent to add 3-2-1 lots, provided the market is moving in your way. Avoid inverted pyramid, as more added positions would close the gap between the average and market price and a minor market reversal can wipe off the entire profits and could change a winning position to a losing one. Also, it could seriously risk money management with extra margin money added.
11. Trade divergence within related underlying (stocks/commodities). For example, if all the base metals except zinc are moving higher/lower, look for an opportunity to sell/buy it as soon as base metals in general appear to be weakening/strengthening.
12. In trading, one should kiss and flirt but marry. Simply, if the trade is not going in your direction, just exit. Move on. There are many opportunities waiting for you. Don’t get stuck up in a trade. Enjoy!
13. If you have missed an opportunity, don’t run behind it. Just wait for another one in such a big market. Remember patience always pays.
14. When you are not sure, stand aside. If you are not 100% sure of the signal generated by your trading setup and its logic, don’t trade at all. Don’t plunge for the sake of trading. If you are not sure of the trade, don’t trade. It’s not compulsory to trade daily. Compulsive trading is a sure shot recipe of a financial disaster.
15. No hard and fast rule to trade daily. Always take a break when you feel mentally exhausted.
16. Don’t trade too many indices/stocks/commodities at a time. It will only confuse & diverge attention and could play havoc in money management if market goes against you. Master one market at a time and don’t keep more than 3-4 open trades at a time.
17. Always document the trade. Write the reasons behind every trade and mark & save the final chart of the trade done with comments. This would help in fine tuning the trade setup and its logic as trading is a continuous learning process and is mastered with experience.
18. Treat trading as a BUSINESS – Earnings (profits) & Expenditure (losses). Learn to like losses as they are the part of the business. In short gain emotional stability to accept a loss without hurting your pride. Just like in any business, in trading also cut short your losses (stop loss) and let the profits run (trailing stop loss).
19. Trading is neither a science nor an art. It’s rather a “scientific art.” Practice, practice and practice the logic on a regular basis and evolve yourself.
20. If all the above rules are followed strictly and religiously, in the end, more often than not, you will end up on the winning side. Even if there are more numbers of losing trades than the winning ones, don’t worry because the sheer size of all the winning trades will overshadow the losing ones and will only increase the overall portfolio size.