Here are the 12 golden rules of stock market traders and investors to succeed in stock market by avoiding loss and making profit consistently.
1. Be Mentally Prepared
Remember that stock market trading is the game of 80 % psychology and 20 % ability. Therefore success in stock market mostly depends on your mental strength. So always keep your mind in control.
I have met many people asking me questions like : “Will the market be up tomorrow, or down?” , “Is the market going to crash?” or “Economy is weak , is this right time to buy stocks?”
Believe me nobody can be 100% sure whether market will be positive or negative tomorrow. Because there are many economic factors that we are not certain about. The only one thing that is certain from the beginning of the stock market is that eventually market goes up.
Therefore don’t mind about it too much and don’t try to control what you can not control. Instead focus on what you can control.
In order to master this rule of stock market, you should start meditation.
2. Buy When Everyone Is Selling And Sell When Everyone Is Buying.
This is the rule of stock market that one of the greatest investor Mr Warren buffet strongly advocates.
The two emotions that dominate the market are greed and fear. When stocks are making new highs we become greedy and get trapped at high price.
When stocks are going down we become fearful and sell our stocks at low price making huge losses.
The question I want to ask is , “Would you do shopping on normal days or when there is a sale?” So why don’t you show same attitude when it comes to buying stocks?
Therefore when there is euphoria and everyone is buying, you should start selling. And when there is panic and everyone is selling, you should start buying.
3. Don’t Put All Eggs In One Basket
What if you put all eggs in one basket and the basket falls accidentally? To avoid such accidents you would put eggs in different baskets.
Similarly to avoid risk you must not invest all of your money in one or two stocks only. Instead diversify it in a several different stocks.
Because you can never be 100% sure what is going on inside a company. Your favorite stock can get plummeted if any undesirable news gets disclosed. Therefore to decrease the risk diversify your portfolio.
Your portfolio should contain 10 to 15 different stocks. If you are short term trader, you can have 5 to 10 different positions at a time. Never put more than 20% of your money in single stock.
Moreover , remember not to overdiversify , because it is quite difficult to manage more than 15 scripts.
4. Don’t Try To Catch A Falling Knife
This rule of stock market suggests that never buy a stock which is falling sharply. Because stocks go down for reasons which you may be not aware of.
Moreover don’t put good money after a bad one. It means when you buy a stock and it starts to go down , don’t try to average it by buying more because you don’t know how low it can go. If it keeps going down , you will incur a huge loss.
Of course you can buy a stock in 2-3 parts in a limited range, but you should never buy if it goes more down specially more than the index.
5. Don’t Pay Attention To Tips
Most of the tips you find on news channels or newspapers are misleading. The advisors have vested interest in them.
Moreover before you get any tip or news , the price of the stock had already changed, because the insiders know it before you get to know.
Therefore professional traders sell on good news and buy on bad news.
So turn off CNBC, use your own mind and do proper research.
6. Don’t Bet On A Lame Horse
If you are going to bet in a horse race, which horse would you select? A strong horse which is ahead of others or a lame horse which is lagging behind?
Similarly in the stock market select the stocks which are ahead of others, which are making higher highs and higher lows.
Never buy stocks which are making lower highs and lower lows. They are going down for specific reasons.
Moreover to abide by this rule of stock market , You must avoid penny stocks ( lowpriced specially below $5) at all. People think that lowpriced stocks are not likely to go down. But even $1 priced stock can become $ 0.5 giving you 50 % loss and $ 0.5 priced stock can become $ 0.01 too wiping out your 98% money!
7. Find A Suitable Strategy And Stick To It
There is not any holy grail for stock trading. You can not become rich overnight. Therefore learn different strategies and select any one that is suitable to you. Then stick to your strategy.
When a new person enters stock market, he or she becomes overconfident after making a few trades. Remember it takes a considerable time to learn stock market trading.
You can not become a doctor by sitting beside a doctor for a few days. Similarly to master the market you will have to learn many things. You must learn technical analysis, fundamental analysis and trading psychology.
Remember there is no strategy that can give you 100 % result. Any strategy that is right more than 50 % times is good. It is important to do back testing or paper trading before you choose a strategy.
8. Patience Is The Key.
If you ask me which is the most important quality , a trader should have, my answer would be patience. So this is the most important rule of stock market.
In stock market you have to be like a leopard sitting patiently and calmly in the bush, waiting for a right opportunity to appear.
When you are sitting before a computer screen, you are continuously get tempted to trade. Overtrading will not make you rich but your broker will definitely get rich.
The key is do less and do good. Always bear in mind that in the market opportunities will continue to arrive. Stock market is not going to shut down tomorrow.
9. Keep Records Of Your Trading
This rule of the stock market is for the self-evaluation. You can not succeed, if you don’t have plans and records of your progress.
Therefore make a journal or a diary and keep all your trading records. The most important parameters to include are date of buying/selling, script name, quantity, price and reason behind taking the trade.
Time to time analyze your journal and reflect on it. It shows you what mistakes you made and how you can improve.
10. Invest Only The Money You Can Afford To Lose
Stock market is unpredictable. Even if you invest in a good stock , there are chances that it may remain below your entry price for a long time. So if you have put your urgent money or borrowed money in it, you would have to sell it at loss.
Don’t use too much margin or your loss will get multiplied . So follow this rule of stock market and never take a loan for trading.
11. Cut Your Losses, Let Run Your Profits
Most of the traders sell the stocks as soon as they get some profit, but are unwilling to sell when they make loss.
See, trading is a business. And loss is a part of a business. Therefore if you want to be a professional trader, learn to accept the loss. Because if you don’t accept small loss, you will have to be ready for a huge one.
Therefore think of risk before you take any trade and put stop loss as soon as your trade gets executed.
Similarly don’t sell a stock as far as it is going up, instead let the profit run. You can use a trailing stop loss to protect your profit.
In order to follow this rule of stock market your risk reward ratio should be at least 1:2. Therefore if you are ready to take loss of $100 in a trade you should aim for $200 profit. In order to achieve this always buy near support.
You can make money even if you are wrong 75% of time ! Below is an example of four trades made by a trader. Though the trader made loss three times, yet he is in profit in the end.
(1) $250 loss , (2) $ 200 loss,
(3) $ 800 profit , (4) $150 loss
= net $ 200 profit.
Therefore cut your losses and let run your profits.
12. Be A Surfer ,Not A Warrior
When we make a loss ,our mind is unwilling to accept it. We feel it against our self-esteem to accept that we are wrong. So we try to compensate the loss by overtrading.
It is like we are trying to take revenge on market. But in doing so we make more loss by taking wrong decisions.
Remember the market is always right. Therefore never fight with it. Otherwise the market will kill you.
Instead you must be like a surfer and try to ride the waves of the market. Go up with it when it goes up, and down when it goes down.
Follow these Golden rules of stock market and you will be definitely successful.