Lessons to be remembered to begin the stock market investment journey

(Author: Vikas Singhania, CEO, TradeSmart)

In trading, it is said the best book one can ever read is your trade log. The trade log requires a sincere trader to register his trades and lessons learned from it.

After hundreds of trades, the trader would have made all possible mistakes. Reading from them and trying not to repeat the mistakes is how one progresses as a trader.

The market is a great teacher, provided one is attentive in the class. Most losing traders do not take notes in the form of a trader log to register what the market is trying to tell us.

Here are the top 10 lessons one can learn by paying attention to what the market is saying.

1. Trading is a game of large numbers

Most traders get emotionally attached to every trade they take. They are elated when a trade is profitable or blame themselves and their luck in a losing trade. One needs to remember that this is just one of the thousand trades that they would be taking in their life. If the strategy has an edge, it will be profitable over the long run.

2. Know yourself and know what you are doing

The market is a strict teacher and does not hesitate to use the whip. A small mistake in one trade and the market can take away all your capital and more. Markets force you to look inward and trade those strategies and markets where you are comfortable. A person who is slow in taking decisions would be taking continuous losses in a volatile market. He is better off staying away from trading in such a market. Knowing what and when to trade is half the battle won.

3. Know what you are going to lose

Trading is a game of capital protection. Trading small and keeping your risk at no more than 1 percent of the capital will ensure that you are trading the market longer. This would give the law of large numbers to catch up and the trader can end up profitable even after a series of small losses. As far as the risk reward is favourable and the strategy has an edge, trading small will ensure you stay in the game and come out victorious.

4. Do not tweak your strategy regularly

Traders have a habit of tweaking the strategy after a series of losses. Expert traders say that since markets are ever changing, it is best to take 20 trades without tweaking the strategy. After watching the results of 20 trades one should then tweak the parameters and allow them another 20 trades to test. Giving a strategy time will allow you to know under what circumstances they work and when they do not. This will help one to cope with periods of drawdown.

5. No substitute for hard word

Every successful trader has gone through the grind, both emotionally and financially. There are hardly any traders who have not gone bankrupt. It is the ability to dust yourself and come back to the market the next day with perseverance and a positive attitude that makes a successful trader. It takes hours of back breaking work to test a hypothesis before applying it to the market. Yet many traders would still prefer to copy the strategies of other traders without understanding them. This is the reason that the confidence with which the main traders take the trade is missing in other traders.

6. Never stop learning

In today’s world, one needs to run in order to stay in the same place. Learning new strategies or studying the markets and understanding their behavior is an ongoing process. A trader cannot afford to sit on his laurels and come to the market with a relaxed attitude. He needs to play the game with the same alertness that was needed when he first came to the market.

7. Stop outsourcing

Trading and investing is a personal game. As a trader, you need to invest both money and time into learning the skills. Depending on calls from friends or other sources would work for a while when the markets are good but one would be left to fend for themselves when things go bad.

8. Treat trading as a business

Trading and investing should be given the same respect as one does when starting a business. A proper business plan from the capital requirement, sources of capital, revenue source, expenditure, and scenario planning should all be considered before putting in a single rupee in the market. Most traders think trading is the simplest thing to do, all it needs is to open a trading account, put money in the account and start taking buy and sell calls. Trading is said to be one of the toughest endeavors taken by man as it requires balancing both the external (information) and internal (emotional) environment.

9. There will be more failure than success in trading

Every trend following trader knows that market will give them only a few opportunities to make money, which is why they need to be patient and wait for the right trade to come their way. Some of the best trend following traders are right only 3 or 4 times out of 10. But those few times that they are right they make it count by money management and risk management.

10. Do not punish yourself

Markets are a great and tough teacher. It will not spare the cane but at the same time it will also not hold back on its blessings. One should not take a series of losses personally nor should one feel that they have the Holy Grail after a few wins. One should always be on guard and at the same time not get into depression after a series of losses. Trading is like a machine, it requires all parts to function properly in order to be successful. A strong strategy without proper money management and risk management of a strong mindset is useless. At the same time, it has been proven, that a trader with a strong mindset, money, and risk management rules can come out profitable even while trading a bad strategy.