The main attraction of trading is that people feel they can make quick money. But there are no free lunches. Trading requires a lot of discipline.
I have been in the market for 8-10 years and I have seen that people do make money by trading. While any recipient of the so-called ‘hot tip’ can trade, making money consistently is possible only when you have proven strategy and hold on Price action and proper stock selection process. Risk management also plays a vital role in maintain the consistency by maintaining right risk:reward ratio.
Also, this is the time to act rather than taking resolution if you are really serious about being a pro trader. In this blog will share you the step-by-step process on how I designed my trading system.
1) Create a Trading Plan
Before a single real rupee is put at risk, a trader needs to have some idea of how they will make a profit. A trading plan is a personally-written document that states what we will trade and when, how we will enter a trade and why, when and how we will get out of winning and losing trades, and how we will determine our position size. These are the basics. Additional rules can be added over time as needed.
If you don’t have a trading plan, you never be confident in your trading.
2) Prove Your Methods Before You Trade Real Money
With a trading plan in place, the next task is to backtest that plan on at least 5 years data to see how it performs. If the plan doesn’t work in a backtesting, it won’t work in the real world. Revise the trading plan, make necessary changes and backtest again. This process continues until a profit has been made consistently. At that point, it is likely the trading plan is a good one. The following tips will help you get your trading plan to that point.
3) Create a Day Trading Routine to Avoid Mistakes
Create a routine for the trading day. A routine includes getting up at the same time each day, creating watchlist and do pre market analysis, starting to trade at the same time each day and checking for scheduled economic data releases that may affect the market. Quit trading at the same time each day, and then have a routine for reviewing all trades taken. In terms of each trade, have a checklist you run through to make sure that each trade aligns with your trading plan.
4) Trade light or avoid at high impact news
Whenever we have RBI meeting, GDP data release, company earnings announcements and scheduled economic data releases or election or any other major news event release during market hours, it infuses volatility in market. High impact news releases are unpredictable in both how far they may push the price, and in what direction. Avoid holding day trading positions during such events. Instead, wait till after the news is released. Then, use day trading strategies to capitalize on the volatility.
5) Review Trades Weekly and Monthly
A review is critical to long-term success. Without review sessions, a trader can’t see the overall picture of what they are doing well and what they are doing poorly. Each day, take a screenshot of your chart with all your trades marked on it. At the end of the week, review the charts for the prior week and note deviations from the trading plan. Note any areas of the trading plan that could be improved.
6) How to overcome weakness
Each trader has weaknesses and strengths. Over time, traders will notice their weaknesses, such as not taking a loss when they should (and letting it get bigger) or taking trades that don’t align with the trading plan (and thus, these trades are based on an unproven strategy). Such weaknesses can cause big losses in a hurry. Have a personal plan for what you will do when you notice yourself making one of these mistakes.
The plan may include closing the trade immediately, followed by a mandatory 10-minute trading break. Or take guidance from pro traders who have already overcome this barriers.
7) Never trade without Stop Loss Order
It is impossible to predict what the market will do from moment to moment with great accuracy, therefore losing trades do occur. The stop-loss protects the trader for bigger losses during those times. Use a stop loss.
8) Risk Less Than 1% of Capital Per Trade
Based on where the stop loss is placed, it should limit the damage caused by a losing trade to less than one percent of the trader’s account balance. One percent of the account, in rupees, is the account risk.
The difference between the trade entry price and the stop-loss price is the trade risk. Trade risk, multiplied by the position size, should be equal to or less than the acceptable account risk (one percent of the account).
9) Potential Reward Should Outweigh Risk on Every Trade
Overall profit is determined by what percentage of our trades we win, and our average winning amount versus the average loss. Day traders should strive to have average winning trades that are bigger than their average losing trade. Strategy should be designed in such a way to so that we get low risk entry and potential profit is higher. This way small losses and big profits will give you long term consistency.
10) Implement a Daily Stop Loss
Very important if you want to become full time traders. Just as a day trader should control risk on each trade with a stop loss, a trader should also cap how much they are willing to lose in a single day. Bad trading days happen. We can’t let those days ruin our entire month or account. Limit single-day losses to an amount you can reasonably make back on a profitable day. New traders, who don’t know how much they can make on a profitable day, should limit single-day losses to 3% (or less) of their account balance.
11) Price Action Is More Important Than Indicators.
How an stock’s price is moving is more important than what an indicator is saying. Most technical indicators look at historical prices, and therefore can’t tell you what is happening right now (while the actual price can). That isn’t to say technical indicators can’t be used, but they should be used sparingly.
Hope this blog has provided value. Do check our last blogs for more insights.
Those who are interested in learning exact process we follow for trading can check our Mentorship program here.