The Stock Market has been a mystery for decades and for generations of people one after another. Every generation has struggled with how the market works and how money can be made and have asked the same set of questions over and over again. The market in its entirety is a simple system to understand.
The prices of the stocks in the market fluctuate based on demand and supply. If there were a lot of people buying, then the price would increase, if people were selling the price would decrease.
Stock trading has come a long way and there are algorithms that help people with their trading. So in the current scenario what five rules should you follow to make money in stock trading?
Rule 1: Understand your objectives
This is where most people don’t give it a second thought. They don’t plan. You should have objectives and plans for your trading and how much money you expect to make. This would decide what your stop loss would be, this would decide what instruments you would be buying. Planning always helps and it definitely gives you a benchmark in this scenario.
Rule 2: What kind of trading?
There are many types of trading that you can do. Trading in futures, options, stocks and so on. Different type of trading involves different knowledge, skill sets and understanding. Futures and Options are risky but in many cases they can be predicted to the T and that can bring you a lot of money. So figure out your style of trading and the instruments you want to trade with.
Rule 3: There is a science behind trading
War is gamble. You don’t know who will win. But you still have to prepare and strategise for war right? In a similar light, you have to prepare for trading and there are very clear logic behind some trading decisions. Take a look at the following example. The following Image is the logic behind a trading decision.
In the following image “Sapphire” is Singapore listed company dealing with mining and here is the write up by Ernest Lim.
You can read the full write up here.
Do you see how much data and insights has to be analysed to come to a trading decision? This is why trading has a science. Always look for opportunities. Create hypotheses and test those hypotheses by doing research. If you could back that hypotheses with data and come to a conclusion, you are almost predicting the future of a stock’s performance.
Rule 4: Trend is my best friend
This is the maxim followed by the best traders all over the world. The stock market has cycles of ups and downs. These cycles have patterns sometimes and they are also called trends. If there’s a pattern to something then it can be predicted with a reasonable amount of certainty. Many top Investors in the world use trend analysis to analyse when the markets will go up or down or when a particular stock will go up or down. Learn about trend analysis and you will be become a better trader in the market.
Rule 5: Know your risk and when to stop
As a trader you do not want to be scarred for life. A lot of traders start trading out of greed and get into the game without sizing up their risk appetite. If you cannot afford a lot of risk, you shouldn’t trade without thought. Understand your risk appetite, how much you can lose and trade accordingly. Set up a stop loss, appropriately. If you set up a stop loss, you don’t lose a lot of money when your trades come down. Always cut your losses and move on to bigger fights. In a few trades if you lose it all, you will never come back.