Those days are gone when trading was considered as gambling. Now trading is emerging as a new vocation for many millennials, professionals and householders who are considering it as an additional source of revenue. There is a lot of hype of trading tools and techniques, but one needs to bear in mind that, "Trading is one of the hardest ways to make easy money."
There are some key factors to be considered while diving into the world of trading.
1. Have enough Want & Motivation: "Everyone wants to go to heaven but no one wants to die." Everyone has the will to win but far fewer have the will to prepare to win. Majority start trading with a casual mindset and that is a major cause of failure. So before we start to trade, it is essential to have enough want and motivation for it. Trading success comes from love and passion for the market and not by being a casual trader.
2. Start with income source in place: Having fixed income while starting to trade is very important. Fixed income can give surety to secure family responsibilities and manage financial obligations. Trading income can be very volatile in the beginning, so one cannot completely depend on it.
3. Start Small: Play Defensive not Offensive. Before we think of Earning, we need to focus on Learning. Losing and being wrong are inevitable realities of trading, so in the initial stage it is very important to learn from our mistakes and gain the experience at minimal cost (loss).
4. Play for Longer Time-Frame: Most first time traders simply put too much emphasis on analyzing and trading on shorter time-frames. However, a good amount of expertise is required to trade on shorter time-frames as it requires strong technical skills and adaptability. So it is good to start with a longer time-frame which is composed in nature. One can understand price structure and action with ease.
5. Stick to Positional Trading: Again, very short term and intraday trading require strong technical, analytical skill and good understanding of emotions which comes with experience. To gain that experience one needs to start with positional trading as it requires less of trading and more of observation.
6. Learn from Mistakes: If we try to learn from every single trade we do we are going to get better as time goes by. Learning from mistakes is the way to become a successful trader. Small, but continuous improvement in process leads to large cumulative impact on performance.
7. Focus on Survival: If we never put on stake our lifestyle for trading gains, nothing bad will ever happen to us. Secondly, if we know what the worst possible outcome is, it gives us tremendous freedom. It is very important to segregate our savings into Emergency Fund, funds to fulfil ongoing commitment and Risk Capital. One should bring only risk capital to the market. So, if risk capital gets affected, it should not put pressure on your lifestyle.
8. No leverage: Leverage is a double-edged sword. It can have multiplier or destructive effect on capital. Leverage is a product for seasoned players in the market. So in the initial stage, it should be avoided.
9. Stay away from Tips: Have an approach of DIY (Do It Yourself). Acting on tips or others' views will not enhance our learning. Working on tips is a short cut to expected profits, and short cuts don't ever create a long-lasting success.
10. Learn Risk Management: The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into trading. Learning to accept the risk is a trading skill – the most important skill we should learn.
11. Don't Expect Magical Returns: Market is not a magical wand that generates consistent and exponential returns. In fact, over expectations of returns lead to over trading which translates into erosion of capital. So have a realistic approach and expectation.
To operate effectively in the trading environment, we need rule-based boundaries to guide our behaviour and the above pointers should be a good starting point towards the same. With experience you can keep expanding them.
(By Kapil Shah, Trainer at FinLearn Academy)