The stock market offers investors a range of opportunities, often presenting competitive returns compared to traditional investment avenues. This appeal naturally draws a wide variety of participants, including new traders who are eager to grow their wealth.
However, it’s essential to approach the market with a clear strategy that aligns with your personal goals and skill set. In this article, we will cover some trading rules that you need to know.
Best Trading Rules for Beginners
Here are some of the best trading rules for beginners that can help you if you are just starting in the market.
1. Always Use a Trading Plan or Strategy
A trading plan provides:
- A structured approach to your trading activities
- Helping you determine what to trade
- The timing of trades
- The amount to invest
A carefully designed trading plan is formulated based on the trader’s financial targets, risk preferences, and chosen investment strategy.
Lacking a trading plan, you might fall prey to market speculation, panic in times of market turbulence, and make impulsive decisions like buying high or selling low, which could result in severe financial losses.
2. Treat Trading like a Business
Track your trades carefully. Note the stocks, your reasons for buying or selling, and the final results. This approach reflects the way businesses maintain and analyze their financial records to inform their decision-making.
Doing so will make you disciplined by avoiding fundamentally weak stocks. You can identify and correct past trading errors by reviewing your trade records to avoid repeating them.
3. Use Technology to Your Advantage
Digitalization has changed the way people trade. You can now access countless tools and platforms to improve your trading experience. For example, you can find many trading platforms that offer real-time market data, advanced charting tools, and automated trading features.
Similarly, while manual trading is often suggested for beginners, emotional decision-making can often lead to losses.
4. Protect Your Trading Capital
Position sizing involves deciding how much of your capital to allocate to a trade. To use this effectively, set your trade risk as a percentage of your total capital, keeping it within your comfort zone.
Modify the position size according to the risk of the trade and current market conditions to safeguard your investments from large losses while aiming for optimal returns.
5. Stay Updated with Market Trends
Trading goes past merely buying low and selling high. It is a complex area that demands a solid understanding of market movements, economic indicators, and financial instruments. Being a trader means ongoing market-related education like staying updated with financial news, and grasping how global events affect market dynamics.
You must also set aside time to attend stock trading webinars, join trading classes, and read books on market strategies. To know what people who are #MadeForTrade are discussing on market, money, and more, check out Dhan’s thriving community.
6. Take Chances Only Within Your Means
The markets are unpredictable, and many factors influence them, most of which are beyond your control. Therefore, it is recommended to only risk the amount of money one can afford to lose without affecting their lifestyle or financial stability.
Suppose you have Rs 10,000 in your trading account and decide not to risk more than 2% of your total capital on any single trade. That means if one of your trades fails, your loss is restricted to Rs 200, and you are still left with a decent amount of capital to profit from the market.
Investing in mutual funds is a good entry point for beginners due to their diversification, professional management, and accessibility. They offer a variety of options and are suited for long-term growth, making them a straightforward choice for new investors.
7. Develop A Methodology Based on Facts
Trading in financial markets is a complex endeavor that demands a carefully crafted strategy. This strategy, or methodology, should be based on factual information rather than emotions or hunches.
For example, you can also perform trend analysis. This process reviews historical price data to identify the market’s trend direction and strength. It allows you to gauge whether the market is trending sideways, upwards, or downwards.
8. Always Use a Stop-loss
A stop loss is a tool that provides an automatic exit point if the market moves against your position. Suppose you have bought Reliance Industries shares at Rs 2000 each. The company is about to disclose its quarterly reports, and you are uncertain about the profitability. To mitigate your risk, you establish a stop loss at Rs 1900.
Following the results declaration, the stock value fell to Rs 1500 within minutes. However, because you had placed a stop loss, your loss is limited to Rs 100 per share.
To avoid this, make use of advanced technology and tools. For instance, the Trailing Stop Loss feature on Dhan helps you mitigate your losses.
Learn what is Trailing Stop Loss in detail here.
Conclusion
Mastering trading demands discipline and strategy. By following these rules—using a trading plan, treating trading like a business, leveraging technology, protecting your capital, and continually learning—you can improve your chances of success.
Remember to manage risks carefully, use stop-loss orders, and know when to pause trading activities.
