An investment portfolio should be a diverse mix of low, medium and high risk investments. At the same time Short term trading, whether it is delivery trading or intraday trading, also has an important part to play in every investor’s portfolio. Short term trading is primarily based on technical analysis (also fundamental analysis to some extent) which helps capture short term price movements. An advantage of trading is that one can capture price movements in both directions, whether the price moves up or down. While trading can be an important part of one’s portfolio, because of its speculative nature it should be done in moderation and with discipline.
For many, investing and trading might seem like the same thing. The mechanics of buying and selling are the same. Sometimes the analysis employed to invest or trade might also seem the same. It’s the intention and definition of objectives which separate trading and investing. The basic difference between trading and investing is that in trading one should have an exit expectation which could be in terms of a price target or how long the position needs to be held, i.e. a trade has a finite life. Investing on the other hand is more open ended, where an investor has no predefined notion of when or if they would sell.
Do’s :
1) Since trading is about risk management, trade with money you can afford to lose.
2) Do your own research, even while trading. Study, understand and practice.
3) Know the general direction of market and various sectors you might plan to trade in.
4) Use stop losses & trailing stop losses to your advantage and stick with them.
5) Keep a journal of your trades and scrutinize your trades to see if there is room for improvement.
6) Read up and learn about basic technical analysis tools and techniques.
7) Buy into strengths and sell into weakness. Traders who are counter trend, tend to lose.
8) Consider transactions costs and always calculate your breakeven points while entering a trade.
9) Having a plan when entering a trade keeps one prepared for unexpected market movements.
10) Trade in a style with which you are most comfortable, which could be using technical analysis, fundamental analysis or both to form a sound trading decision. It is always helpful to know why one entered a trade.
11) Do keep a track on volumes, volatility and trend while trading stocks. But remember that volumes tell you how well a stock is moving not why it is moving.
12) Do back test your trading strategies and have reasonable expectations from them.
Don’t’s :
1) Don’t convert trading positions into investment positions.
2) Don’t try to catch the bottom of a falling stock. Bottoms take longer to form.
3) Don’t chase momentum if you can’t figure out your exit.
4) Don’t trade in speculative penny stocks, it carries a huge risk and it’s not worth risking one’s capital.
5) Don’t trade on speculative news and tips from message boards.
6) Don’t bet too much on a single trade. Diversify across time, stocks and sectors.
7) Don’t over trade, in other words don’t take positions larger than your comfort zone.
8) Don’t enter a trade if unsure about trend.
9) Don’t let a profit turn into a loss (use trailing stop losses).
10) Don’t get into trading if you think it’s easy; it takes a lot of preparation and discipline to trade.
11) Don’t assume you know everything, market knows better.
12) Don’t trade too many stocks, while diversification is good, trading in too many stocks can become harder to track.
13) Don’t buy because the price is low or sell because the price is high.
The very basic requirement for trading in the market is to simply know the amount you are willing to lose, i.e., controlling risk. A basic understanding of trading principles and practices like the ones mentioned above go a long way in creating the right trading psychology needed for success. A key to successful trading is the ability to acquire knowledge, develop skill, implement and learn from mistakes on a regular basis.