In our previous article, we focussed on the importance of trading objective and not subjectively, to remain profitable throughout your trading career. With the last article in the series covering the ten tenets to trade as a successful entrepreneur, we will be finishing off with the composite understanding of profitable trading. As you must have seen throughout the series, there are several building blocks for a successful trading plan.
To summarise, the three very important parts of trading you must understand are:
There are several misconceptions about full-time trading, one of which is that it is extremely difficult to make a career out of it. While it is true that most traders fail, it could be attributed to lack of discipline in the long term. Also, most traders allow their emotions to get the better of them, which leads to either greed or fear taking over their trading strategies. It could be hard to keep emotions out of the picture but once it is practised, you could employ efficient risk management strategies to stay consistently profitable.
In absolute terms, it helps if your capital for day trading is considerably big. This ensures that even small moves give you a considerable profit. If you have to sustain with only the returns from day trading with only a small capital, then you will have to hope for big movements and a high rate of accuracy in your system. Considering the volatility of the market, it is not advisable to trade with a small capital and depend entirely on it for your expenses. It could, however, be a great way to learn and compound the returns to eventually turn it into a considerable capital you could live off.
Another important factor to keep in mind while saving up capital to trade is to treat the capital as dispensable. This will eliminate any emotional bonding towards it and allow you to be practical while facing losses. So, it is recommended to save up only a part of your income as trading capital.
If you are a beginner, you should focus all your attention on learning everything about the market. There are books, blogs and websites dedicated entirely to share market. Once you have a hold of the basics, the best way to improve your knowledge bank is would be to open a trading account and start trading with a small capital. Make sure to stay on top of news and global economic events which can create significant moves in the market.
After getting down to the basics of the market, you can develop the actual strategy of your trades. This means backing it up with clear rules for entry, exit and stoploss. If these rules are backed up with proper money management rules, even with a small winning rate, you can come out profitable at the end of a month or year. Try to take trades whose risk-reward ratio is promising.
Although most traders use technical analysis to determine the direction of movement of a stock or index, fundamental analysis, especially after a company’s result, can help with gauging the movement of a stock in the long term. Considering the tax benefits given to long-term investors, it always helps to systematically invest as much as you can from your trading returns in well-performing stocks for the long term.
We cannot emphasise enough about the importance of discipline while trading. A person might have an excellent strategy which gives him/her excellent returns. But simply due to the lack of discipline, his/her returns could be diminished. Once that happens, the trader could be crippled by fear which will not allow the trader to proceed further. Developing discipline to let your trades run for you can often reduce the mental burden you have placed on yourself too. Losses are an inevitable part of trading. The faster you accept that and insulate the losses without any emotional baggage, the more you can focus on optimising your strategy for more profits.
If these three inputs are properly understood and meticulously taken care of, trading is like any other business with profitability and associated risk. In any business, venture risk is inseparable from growth and profit. But it can be measured, insulated and taken care of. It is very essential to polarise and integrate all the three parameters above for optimised results. Lack of harmony or isolation of any of the functions will substantially weaken the whole process. Happy trading!