I believe that every trader has to pass through these three stages of development:
Every trader loses initially
I strongly believe that every investor who comes for trading initially gives losses as he/she is unable to have control over his greed and fear. At times with all the information and luck in his favour, he makes profit, and then because of his new over confidence, trades more which results in his profit gone and also sometimes a portion of his capital gone, This cycle of fear of the losses and greed to earn more makes him initially give losses
The second stage begins where the trader begins to make no profit no loss.
Out of the total investors who enter the first stage, 80% of them finish off at the first stage only and after an year or two find that the stock or commodity market is not their cup of tea. So in the 2nd stage only the 20% investors try to break even in their trading and quite a lot of them are able to have control over their fear and greed with a result that they stop giving losses. Now these traders are ready for the 3rd stage
The trader starts to make profits
This stage where a trader makes consistent profit i.e. he does not give loss cheque to the broker. In fact this is the stage which everyone wishes to have. But I strongly believe that anybody who wishes to come to the 3 rd Stage has to pass through the above 2 stages.
Now we come to 2nd principle of trading and that is Always use stop loss orders.( Here you should know your loss you can give in a situation where the trade starts going against you.)
In my seminars i stess this point quite a lot as the stoploss is the most important thing. One should know how much loss one can give on each trade he takes. The stoploss should be pre determined. What I said earlier of 10% loss was a general rule for an investor who wished to take delivery or trade. This 10% stoploss rule can't work with intraday traders. (What I wanted to stress earlier in my topic was that one should always have money to trade and with that 10% rule one will be always there in trading. For intraday traders they will have different fine stoplosses and their trading strategies will be totally different). What I am telling at the moment is for a seminar where I first have to make them stop giving losses. Normally what happens is that people take deliveries and keep holding till they do not go up, in such cases this 10% rule works.
I suggest a stoploss for every trade. Generally what happens is that you buy two stocks, stock A and stock B. Both you buy at 100 units each. Stock A becomes 105 and stock B becomes 95. What a gereral investor does is sells the stock A at 105 and waits with stock B which is 95 now. After 6 months what this investor finds is that Stock A has gone to 150 and stock B which he is holding at 95 has come down to 50. Here I stress is that one should never hold on to a falling stock and if his profit is going up, he should go on holding. Cut the stock which is going against your trend. Say now you bought the stock A and are holding, the question arises as to when you are going to sell. I suggest that they go on holding it and now at the end of the month i.e. end of last week Friday see its closing price. Let us say the closing price is 130. Now he should make a stoploss like this that if stock closes below 130 for 3 days than he should quit else go on holding and then again see its price at end of month and this way his stoploss keeps going up. ( In case of shorting it is vice versa )
(Just to take care of some criticism by expert traders, I suggest strategies like playing with the averages example if the stock is 10% higher from its 25 day moving average, he should quit the stock. - This I am mentioning here is to tell the critics that we are slowly trying to give the explanation and ultimately my aim is to give so much to lay investors across the country that they stop giving losses and if losses are stopped then they can start earning. Also I aim at teaching them how to trade and make calculations even with simple averages which can take care of everything, they do not even require a computer for calculations. The simpler the system the better it is)
From the slow trading, we go to intraday trading in the last. A trader who can't succeed in long term trading should not go to intraday trading at once as taking decisions intraday are far more challenging than taking decisions on long term basis. (We plan to cover it later)
