#TuesdayTip - Heartless trading
If you looked up why do most traders not make money, you will find the most common reason is that they let emotions into trading.
These emotions generally include feeling lucky, feeling hopeful, trusting your gut, greed etc.
As a trader, the biggest advantage you can have is not being intelligent but instead, being disciplined.
A disciplined trader has a minimum set of 3 rules to his system.
Entry Rule - When to take the trades
Profit Rule - When to take your profit
Loss rule - When to accept you were wrong
As you may have noticed, I have titled the post as "heartless trading" because if you trade with your heart, you tend to manipulate these rules. You get carried away and feel like maybe you might get luckier.
If you can trade like a machine, you will make more money. Period.
The most common and potentially damaging mistake traders make (especially new traders) is violate Rule 3. They never take their losses till it's too late.
The thing with losses in stocks is that you always will find some justification to not take the loss and wait a little longer for everything to get better. This just causes you to lose more and more money the longer you wait.
The main thing one must do is limit your losses and let your profits run.
While this may seem obvious, it's still the mistake that everyone (including me) makes. It's just very difficult to accept a mistake. But to be a successful trader, you must.
I've covered the concept of a stop loss earlier in an earlier post (See here). Yet, I will briefly summarise.
A stop loss is a type of order which will get triggered if the price reaches a certain level.
Let's take an example:
You expect a stock to rise so you buy.
Buy price Rs. 200
Target : 200+ 5%= Rs. 210
Stop loss:200 - 2%= Rs. 196
Now you already bought the stock, this is when you place a stop loss order. It's an order to sell at 196. That is make a loss of 2%.
It's a special type of order that gets executed only when a certain price is triggered.
So if the stock price drops to 198, still it won't sell.
So if the stock price drops to 197, still it won't sell.
But the moment the price reaches 196 it will sell.
This way, your emotions are removed from the equation. You have set a rule. Your computer will stick to it. You don't let your emotions dominate.
The reason I place so much importance on Stop loss orders is because I lost a ton of money not following them.
I wish someone would have told me about this long back. I am telling you this so you can avoid my mistakes.
Now I have some practise for you to do:
I hope you have installed the Trading212 app I discussed in my previous post (Read here). If not, download it here.
Read my articles based on the strategy based on the MACD again. (Click here)
Re-read my post on Position Sizing. (Click here)
Use it in the app. Buy a few stocks which have a MACD cross.
And most importantly, use a stop loss.
That's all for today's post.
A friend of mine, a fellow blogger (You can visit his blog here. It's not about stocks), pointed out that most of my readers are probably unaware of most things about stocks.
And another friend asked me something really basic about Indices and he made a point that basic things are not explained to people when they enter stocks.
So in the next few posts, I will be discussing stock market basics. So again, it would be a good time to share the blog with your friends and introduce them to trading as well.
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Until next time!
Happy Trading!