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Monday, January 3, 2011

Trading Basics


Here is the transcript of portion of the subject teached in class conducted by me few days back.We have discussed about various wise investment options/ideas/decision making etc.

In this post some of the basic things one must follow while trading (considering one has subscribed for any Tips provider.Which is dangerous thing to do in most of the cases !!) will be covered. I hope these basic things would help you increase your profits and minimise your losses.

1. Never Jump into a trade or do compulsive trading.

It is a common habit of many people to trade just for the sake of trading. Traders, for the sake of trading something, become desperate to trade which results in losses. Always try and trade at the levels given. If after the trade is given, and before you buy, the prices have shot up, please apply your brains before entering that trade. Or, if a trade is given and it is over, and again you find the script at the recommended price, don’t try and enter the same until advised.

For eg: Tip provider give a trade to buy a Call "comany A "trading at Rs.100 with s/l 90 for a target of 110-120. When you receive the call, the call is trading at Rs 105, and you enter it just for trading. Please apply your mind and see that the call has already reached halfway from the entry levels given, and if you enter it, you are playing for a target of just 5Rs. against a stop loss of Rs.15. Also, there is a chance that amount you earn will be gone towards brokerage. At the most, you can enter around 101-102 levels.
Again, suppose the call given hits the 1st target and again comes back at 100. This does not mean that you will again long it with the same stop loss and target, until and unless advised.

2. Play with proper stop loss and targets.

Whenever a call is given please stick to the stop loss until Tip provider instruct you to change/ignore it. Please do not alter the stop loss as you wish. Please do not rely on hope that the call will see targets after hitting the stop loss, so stick to the stop loss. The same goes with targets. Don’t be greedy for bigger profits. Keep on booking profits. Remember, a good trader is one who can not only book profits but also book losses. Also, a good trader will always keep on booking profits.

Suppose Tip provider has given 3 targets for a call and you are holding 4 lots. Try to book 2 lots at 1st target and increase your stop loss to cost , book 1lot at 2nd target with stop loss at target 1 and the last lot at 3rd target with stop loss at target 2.However, if you are a safe player, I suggest you to book all lots at the 1st target itself. If you are holding a single lot then try and book at first target or trail above cost.

3. Play with trailing stop loss.

Please do trail your positions. Trailing means to keep on increasing the stop loss towards cost and ultimately trying to bring the stop loss above cost. This would reduce your losses and keep you in profits most of the time.

For eg: You buy " company A " call at 100 for target 120 - 150 with stop loss 90. After a few minutes, you see that the call is trading at 110, here you must increase your stop loss from 90 to may be 98-100 (depends on your risk appetite). Now after a few minutes the call is trading at 120, try to keep the stop loss at 108-110 now. Even if the trailing stop loss of the new stop loss is hit, you will still be in profits as your stop loss is above cost now. If trailing stop loss is hit then exit instead of relying on hope or altering it.

Trailing stop loss minimizes your chances of losses and increases profit.

4. Please trade on all calls given by tips provider

Please trade on all calls given by Tips Provider and trade in equal number of lots. This would reduce your chances of losing and would help u in earning. It is very difficult to have an accuracy of 100% in the calls. So, at times, some of the calls may hit stop losses. So it might happen that 10% of the calls hit stop loss and to your utter dissatisfaction, you would have traded in those 10% calls only. And this happens with people who choose between calls. If you have relied on Tip provider and joined the service, then have faith and trade in all calls rather then using your brains and selecting calls. Trading in all calls gives you the advantage of earning the profits in accurate calls and make up for the calls which hit stop loss.

5. Please trade equally.

Please trade in all calls in equal quantity. If you have decided that you will trade only 1 lot, and then on every call given tip provider, trade in 1 lot only. Please don’t be selective. It might so happen that you traded in more than 1 lot and you suffered a loss and hence you decided to trade in just 1 lot. Please don’t do this. If it is mentioned by Tip provider in his/her call, that trade in this many number of lots then you can have a different number of lots traded, else please trade equally on each call.

In general even if no update is given on any call given, tip providers presume that a trader will book half of his holdings at the first target. If he holds only 1 lot, then he must book that at 1st target or trail it above cost.

Happy Investing :-)

God Bless all of Us !