As we have already established in our previous articles, investment psychology plays a crucial role in determining your trading career’s success. Markets react more to sentiment than to actual research and analysis. Therefore, to win at trading, you have to embrace the right psyche. This will help you navigate the ups and downs of your trades. That being said, let us dive into the final part of the investment psychology series.
17) Whenever possible, trade liquid stocks
When you are starting out as a trader, it is important that you trade ONLY liquid stocks. As a novice trader, you might be tempted to put all your money in a relatively low-volume stock because your trading system gave you the “buy” signal. However, if you went ahead with that, you would soon notice that the sheer volume of your trades alone would cause prices to fluctuate. This means that your limit order would not get executed and your market order would give you almost no profits. On the other hand, trading in liquid stocks ensures that there is sufficient stock volume being traded so that your capital won’t create a dent in its price movement. Apply your trading system to highly liquid stocks to ensure that the buy or sell signal being generated is accurate.
18) Never meet a margin call
Trading with margin means that you borrow money from your broker for increased leverage. This allows you to buy 10,000 shares when you could really afford to buy only 5,000 – if your trading capital is INR 10,00,000, you can actually trade with INR 20,00,000. However, trading with margin has multiple risks, such as eating up your capital much faster, as 1% loss on INR 20,00,000 amounts to 2% loss on INR 10,00,000. If your trade goes south and your loss exceeds the capital in your account, your broker will give you a margin call, asking you to increase your capital to compensate for your debt. If you are not able to meet a margin call, bid adieu to your trading career! Therefore, analyse the risk involved with every trade and avoid trading in margins, irrespective of how accurate you believe your trading system to be.
19) Place your stop loss at logical places
Maintaining a strict stop loss is the best way to protect your capital. Therefore, its placement is of paramount importance. The three ways using which the market communicates with you are time, price and volume. Once you understand how these three parameters work in tandem, you will be better equipped to understand the trend of a stock. This, in turn, will allow you to place your stop loss at a logical place.
Mastering all the trading and psychological concepts we have shared in this Investment Psychology series may take months or even years. However, do consciously put in the time to do so. If you talk to successful traders from around the world, you will understand that they rely on these pointers to stay calm and successful.
Put in the time and effort to take care of your mental health while trading and you will notice how much more peaceful you are with your trading strengths and weaknesses. Happy trading!