Almost 90 percent of trader are net losers in stock market because they take market as casino, rely on intuition rather than strong supporting analysis. Many fail even after proper analysis because of their emotional instability. So it is important for beginners to get some tips for stock market trading (not stock recommendation tips) .
In this post I will try to throw light on some trading principles which are simple yet very powerful.
Bet on few
Everyday new things happen in market like decelerating of earning results, geopolitical news, government policy decisions and so on. Availability of many opportunities does not mean that trader should bet on every opportunity.
Best practice is to take a positions on that trade where trader thinks he have any type of competitive advantage (it may be knowledge advantage, information advantage ).
Because too many opportunities we are already too late, also focusing on many thinks at once create problems.
No matter how much knowledge, experience and information you have you are going to be wrong often.
You cannot make you every trader work no matter how hard you try . When trade goes wrong trader hold position in anticipation that direction of trend will change which cause more loss when anticipation do not convert into reality, that is why stop loss is necessary so that when trader is wrong he does not fall in psychological trap and cut his losses as early as possible.
Because of human psychological tendencies we tend to hold loosing position for too long because of greed to make profit and sell our winning trades early because of fear of losing out whatever we have.
So to increase out profit per trade target is necessary. There is no science to decide target but experience in similar trades are experience here.
Ratio of target to stop loss
Based on my experience I can assure you that you are going to be wrong on 35-45% of your positions it doesn’t matter how smart you are than rest of the crowd. Because this is inherent trait of market (there are so many factors influencing the trade that it is impossible to know, to track of to analyze each of them).
Trader can make profit even if he is wrong more than half of time subject to condition his target to stop loss ratio is 2:1 or more .
No matter how certain or how attractive trade looks trader should not position in it unless it target to stop loss is 21 or more . Such type of discipline is more valuable than knowledge of trader for success.
Intraday trading is most stupid thing done by trader. Because trader cannot get advantage of upward swing due to gaps. In one day stock has very less room to move in one directions so even stock moved in expected direction trader may face loss because of brokerages, taxes and charges.
Trading is done on the basis of technical analysis, due to short period availability it is not possible to analyze patterns correctly.
Today there are many brokers who charge few dollars per trader or very few percent of value of trade. But apart from brokerage charges there are other taxes charges and fees applicable to each trade, which is in other word initial loss to trader.
List of all charges cost applicable to trade is :
- Securities Transaction Tax (STT).
- Brokerage Charges.
- Stock Exchange charges.
- Depository Fees.
- Many types of cess .
I recommend to use Zerodha Calculator before executing any trade to know total transaction charges.
So while calculating loss trader most add brokerage charge of both buying and selling to it on the their hand while calculating profit these charge must be deducted from it.
These tips for stock trading looks no-brainer but are very powerful when executed with discipline .