It is often said that, “The tool or platform isn't the problem; how it is used is what truly matters.”
The stock market is a platform for creating wealth through both investing and trading . However, in trading, many casual investors fail to achieve success due to a lack of strategy and over-reliance on feelings or borrowed knowledge (tips). Many retail investors indulge in random trading, leading to poor experiences and losses.
So where exactly is the casual retail investor going wrong?
Five points to trade profitably:
Define Entry and Exit Points
One of the first steps in building a successful trading strategy is defining clear entry and exit points. These decisions should not be based on gut feelings. Instead, rely on technical analysis to guide your choices. Write down your strategy on paper and make sure it is well-defined. Planning your entry and exit points in advance helps you stay disciplined.
Money Management
Without a clear money management strategy, it is easy to get carried away and overexpose yourself to unnecessary risk. Before entering any trade, have a well-thought-out plan regarding how much capital you are willing to allocate to each trade. Divide your money wisely among different stocks or instruments, and avoid random decisions.
Use Stop Loss and Trailing Stop Loss
Manage risk better by using a stop loss. A stop loss is a predetermined price point where you set your maximum loss and automatically sell your position if the price falls to that level.
This prevents emotional decisions in volatile markets. Additionally, consider using a trailing stop loss. This tool allows your stop loss to adjust as the price moves in your favor, locking in profits while still protecting you if the market reverses. Both of these are crucial in limiting losses and securing profits.
If Trading in Futures and Options, Do Hedge
Hedging is an essential tool when trading derivatives such as futures and options. Use a combination of instruments to diversify risk and protect money. For instance, you could buy futures and hedge with put options. This way, futures serve as your primary instrument, while put options act as insurance. Another approach is to use option combinations where you buy and sell options in tandem.
Maintain Idle Cash as a Cushion
Keep some of your trading capital unutilized as a cushion. Avoid putting all your money into active trades. Having idle cash can serve multiple purposes—it can be used to average up positions that are performing well or to average down the cost of stocks that are temporarily undervalued but still meet your entry criteria. This buffer will also give you the flexibility to adjust your positions if needed.
Trading profitably is not about luck, but about implementing a well-structured plan and managing risks wisely.
(The author is a Chartered Accountant and CFA (USA). Financial Advisor. Views personal. He could be reached on 9833133605. )
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