Before new traders start trading they have “high hopes”. Here are some of the high hopes:
1. I will invest 5000 and make 10000 every month. They forget that its 100% return a month.
2. If Nifty will open gap up I will buy calls, if it opens gap down I will buy puts and make money. Its a myth that if there is a gap up the stock will keep going up or if gap down the stock will keep going down. Reversal is always possible.
3. Thought process of a new but rich-son trader: I will invest 1 lakh and make 1 crore in one year and prove my dad that he is a fool working hard in his business making just 30% return a year.
4. In five years time I will be a multimillionaire.
5. New option trader: I will buy an option for 10 and sell at 20 – doubling my money every time I trade because I have seen that happening many times.
Reality: ALL of the above are just a myth, not a reality.
With time the stock markets teach them the reality.
Here are checklist for new traders before you start trading:
1. Make a list of all your trades – its profit loss and the mistakes you did
When I say each trade it means that. Buy a note book (yes a note book – not just a soft copy – but make a hard copy). Write date of trade, time taken to trade, closing time of the trade, total money at risk, why you took the trade, profit or loss and reasons for profit or loss. Everything is important.
Review this note book at the end of every trade.
2. Money Management
You must know how much you are willing to risk in each trade. When starting new do not risk more that Rs.1000 per trade even if you are son of a very rich man or you have a very high salary. 1000 rupees is 1000 rupees – it has same value whether in hands of a beggar or Mukesh Ambani (one of the richest man in world and the richest man in India). Later when you have some experience you can increase the stop loss limit.
Therefore you must keep a stop-loss in the system as soon as your trade is triggered. Read this for more information on stop loss:
Best Ways To Keep Stop Loss For Intra Day Trading
3. Moving Averages
If you want to be day (intraday) trader focus on moving averages. If you want to trade in very small time frame then 5 minutes moving average is the best indicator. Read this: How to trade moving average
4. Do not trade as soon as markets open
New traders cannot stop themselves to start trading as soon as markets open. This is a very wrong time to trade. During the first half hour and last half hour it is the new traders who are quite active in markets. First half hour belongs to the novice intraday traders, the last half hour belongs to the stop-loss takers and BTST (Buy Today Sell Tomorrow) traders – hoping to trade the gap up and down.
Fact: Markets take time to settle down when professional traders enter. Professional traders enter only after 9.45 am and leave (close their trades) before 3 pm.
5. Plan your trade before you enter
You cannot trade without a plan, you will most likely fail. Therefore you must know exactly what you are doing in your trade. Just trading to trade (speculative trades) will not make you money.
6. Educate Yourself
Keep reading and researching if you want to be a serious trader and make it a full time income. Anything that you find yourself good at, research more on that subject. For example due to good liquidity, proper fills and trading volumes I mostly trade Nifty options and Bank Nifty options in a very conservative way.
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Dilip Shaw, Founder
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