Important Pointers For Stock Trading

Last Updated September 10th 2021
8 Min Read

The stock market can be a magnet for countless investors and it surely can be a rewarding profession when done right. But the flip side also is that it is never too easy to get your trading decision correct the majority of the time. 

For anyone looking to make the most of the trades and to ensure that they do not end up with losses instead of gains, we examine the best practices of the industry. 

Here are some important pointers for anyone – whether beginners or with experience – about to begin stock trading or just looking to improve their game. 

Evaluate If You Are Ready For Trading

Trading can be both a challenging and a specialised job and that holds true for all genres, be it forex, commodity, stock or any other. Stock trading can be really complex given the overwhelming number of individual equity that is traded in. 

Before stepping into the realm of stock trading, it is crucial to assess your preparedness and readiness across multiple parameters. It can be a fast-paced and nebulous world and you should be cognizant of that and ready for the ride ahead. Also, it calls for an interest in finance and stocks, besides having an ability to analyse and make quick decisions. 

Just as importantly, an aspiring trader should assess his financial position and be ready to bring in some capital that he can spare. As stock trading is inherently a risky business, there must be an appetite for risk and the financial cushion to bear any temporary setback. 

Only if you can do an honest self-appraisal and find yourself ready to enter the hurly-burly world of stock trading should you take it up. 

Learn The Ins And Outs Of The Stock Market

An investor who buys stocks usually has a longer holding period as he is after long term appreciation. He only needs to keep an occasional tab on the stocks he holds. But, as a trader, you would need to be up to date with the overall action in all spheres from the stock market down to the industry and stocks you are trading in. 

A trader necessarily needs to be fully familiar with the working of the stock market and how it gets impacted by macro indicators and economic and industry news. He should be conversant with all the rules and procedures of the stock market and trading. A trader also should know the widely used concepts like pivots, dollar-cost averaging, scalping, and momentum, among others. His grasp of operational strategies like the various types of orders – market order, buy and sell limit order, buy and sell stop order – is essential. 

Of course, a trader also needs to be constantly updated on the events and developments that impact the economy, the stock market, the specific industry and, certainly, the selected stock he is trading in. 

Read Also: 5 Factors Influencing the Stock Market

Pace Your Progress

It is easy to get carried away with tips and market intelligence and pick multiple stocks for trading. In the early days, it is best to go easy and stick to a handful of stocks and trade in them. Go with ones from an industry you are most comfortable with and have a strong understanding of. 

It is important to not go all out while beginning or even when in your initial days. Start your stint modestly and watchfully by analysing stocks and understanding the industry, the company and the share prospects. Identify sectors you can specialise in and get a grip on. Pick one or two stocks from a select couple of sectors and once you feel these can, for starters, give you decent gains without too much risk, stick to these. 

Once you have settled in and are comfortable reading the market signs and analysing charts, besides registering profits, you can then gradually build your trading efforts from thereon. 

Check Out: How You Can Beat The Market

Understand And Manage Risk Well

Trading can be a very rewarding profession but also quite risky, if the markets are choppy and when wrong decisions are made. But with the right approach to risk management, it is possible to reduce the possibilities of making losses. As long as you are disciplined and respect the vagaries of the market, stock trading can be a profitable business

So how can risk be contained and the chances of a risky situation be avoided? First and foremost, every trader should have a trading strategy in place. There is no place for random decisions in stock trading. As long as there is a process in place to pick a stock – right from the rationale for selecting one and timing the trade in terms of the right pricing – the risk quotient will be lower. 

Also, there should be a pre-decided maximum exposure to one trade against the overall capital you hold. Keeping it at 1% to 2% or even a maximum of 3% should be the limit. Similarly, healthy trading practices like stop loss should be diligently exercised. 

Think With Your Head, Not With Your Heart

A trader is a human and not a machine, right? There are emotions involved while making any decision but these can be even more personal when it comes to money and investments. 

Incurring a loss on a decision made can be difficult for anyone. Often, traders are in denial when one of their calls goes wrong. In the hope that a potential loss can be turned around by waiting a little longer, it is common to see more damage being done. These are times when a trader needs to be objective and not cling on to a stock and let it go.

A trader can even get swayed by a sudden interest in a stock that he well knows is not technically sound. You should never make a decision simply because others are making it. When your experience and wisdom raise a red flag, think with your head and not with your heart. 

Stick With Technical Analysis 

Continuing on the above point, the safest and the most correct way to trade is to go by data and patterns, whether technical or fundamental. It can be dangerous to trade without having a clear and proven picture of the company, its financials and its prospects. 

Use technical charts, patterns and trends to study and formulate trades. Avoid random buys and sells on the back of rumours or tips that are unsubstantiated. Following the herd is also a practice that is unscientific. In short, stock trading should be founded on hard data and validated information. 

Stay Away From Unconventional Trading

Another point that dovetails into the earlier one is the importance of staying on the right track when picking stocks for trading. Whether you are an experienced trader or, especially, a beginner, stay away from unconventional choices. 

One such category that is often talked about is penny stocks. Such equity that belongs to companies that are not well known or established may have little history or data to back their credentials. These, typically, trade cheaply and lure unsuspecting traders to take a gamble on them. 

But such stocks are hardly traded regularly and it is this illiquidity that can result in finding subsequent buyers for them. Also, such enterprises could even find it difficult to do well and can see their stock prices fluctuating wildly, making for risky candidates for trading.  

Learn How To Handle Emotional Extremes

Trading in stocks can be one of the most high pressure and risky jobs out there. Anyone who has experienced huge profits or losses can tell you that it can be a rollercoaster of emotions that need to be managed. Whether it is a windfall or a setback, as a trader, you will have to take it with as little emotion as possible. 

The problem with getting swayed by extremes is that it can ruffle your composure and the one thing a trader should do is to be calm and collected. A good run should not make a trader overconfident nor should a bad one make him nervous and doubting himself. 

Don't Miss: The Importance Of Trading Psychology

Keep Notes And Keep Learning 

Some forms of trading like intraday trading can be quite hectic and does not give spare time and can drain you out after a long day. But it is still important to keep notes of the highlights of the activity as part of a journal maintained for self-improvement. 

This is a great way to register what you did right to make some winning calls. But, more importantly, it is absolutely essential a practice to learn when you note down what went wrong. Successful traders have a habit of noting down details of their significant trades. New traders will find this to be more useful than what any academic books can teach them. 

Research And Find The Right Broker

In any business, finding the right partner is half the battle won. In trading too, make sure that you research well and make a shortlist of the best brokers. Compare them on the relevant points like trading infrastructure, user feedback, charges and fees, customer support, besides others. Choose the one you feel most comfortable with after interacting with them and checking their platform and services out. 

It is best to try some demo trading first and understand the functionality well. This can help you get a first hand experience of the trading arena without incurring any losses. If it is a broker who also supports clients with tips and information, check out a sample to see how well their intelligence does in the real world.

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