Beginners of trading are more likely to get lured by the promises of big returns from stock markets. However, it is important to acknowledge that investing in stocks requires a great deal of research and discipline. Having patience and understanding of the volatility of the stock market play an essential role in making sound investment judgements and building a good stock portfolio for yourself.
The stock market offers good opportunities for growing your money provided you follow a correct and systematic approach. It is essential for traders to know the golden rules of trading in the stock market no matter their level of expertise.
Let us take a look at a few golden rules of trading that could help you get a head start when trading in the stock market.
The 6 Golden Rules of Trading
1. Basic Knowledge Is Key
The initial step before starting anything is to understand the basic knowledge of the subject matter and have all the basic formalities done. In investment, it is essential for you to have a PAN card in order to be able to open a Demat account and a trading account.
Anyone who is looking to invest in the stock market needs to know what a Demat account is and how it is different from a trading account.
What Is a Demat Account?
In order to hold stocks and securities in electronic form, Indian investors are required to open a Demat account, short for a dematerialised account. Shares that were bought online or converted from physical to electronic shares are held in a Demat account. By doing this, online trading is made easier for users, all while providing robust security for your shares.
The Demat account was first introduced in 1996 for trades on the National Stock Exchange of India (NSE) and has been an essential step forward in digitising the stock trading market in India.
The shares and securities in your Demat account are kept secure by depositories, or digital banks, that operate under strict regulatory guidelines monitored by the Securities and Exchange Board of India (SEBI) in order to maintain the integrity of the Indian financial market.
How Is a Demat Account Different From a Trading Account?
A Demat account is an electronic account used to hold and manage securities such as stocks and bonds in electronic form. A trading account, on the other hand, is a specialised account used by investors to execute buy and sell orders for securities in the financial markets.
Take a look at a few differences between the two:
While both accounts are essential for trading and investment, they serve different functions and are often linked together to facilitate seamless trading activities.
2. Have a Trading Plan
Before starting anything, having an outline of what should be done is a great way of keeping track. Similarly, one of the golden rules of trading is having a trading plan that helps provide clarity, discipline and structure to your trading activities.
- Clarity of Objectives: Having a trading plan helps clarify your trading objectives, including your financial goals, risk tolerance, and investment timeframe. It provides a roadmap for your trading activities and ensures that you have a clear direction in your trading journey.
- Discipline and Consistency: A plan helps you stick to a set of predefined rules and guidelines which prevent impulsive and emotional decision-making. It also instils discipline and consistency in your approach to trading. By following your plan, you can predict trading outcomes better and improve your trading results over time.
- Performance Evaluation: A plan helps you systematically evaluate your performance against the benchmarks and objectives you have set for yourself. This allows you to identify your strengths and weaknesses, and areas of improvement in your trading strategy. Thus, you learn from your past and are able to refine your approach in order to achieve better results in the future.
3. Stay Updated
Aside from basic knowledge, anyone looking to invest is required to become a student again. Trading involves a global market that fluctuates based on various factors. It is therefore essential for a trader to be on the lookout for new information and to constantly research the markets and any financial news about the stock market.
Things that are often overlooked also have an impact on the market. Political events, natural phenomena, social trends— they all have some kind of effect on the financial markets. Thus, a trader should not limit themselves to knowledge about the market but must be well-informed and updated on the overall situation globally. This helps the trader make informed financial decisions that would bring them better results.
4. Avoid Herd Mentality
The tendency of individuals to follow the actions and behaviours of a larger group, often without critical evaluation or independent thinking is referred to as herd mentality. This can have significant implications for traders in the market.
Relying on the actions of others to influence your decisions rather than making an independent analysis can cause you an increased risk of losses. It can also lead to the spread of misinformation in the market. This further spreads the herd mentality which can cause harm to investors all around due to the rapid price movements based on false information or rumours.
Our actions are bound to be influenced by the people around us however, traders are advised to not get carried away by those around them. It is always better to be smart and base your decisions on your own financial research.
5. Implement Stop-Loss Orders
Another golden rule of trading is to implement stop-loss orders. Because of the volatile nature of the trading market, traders are often advised to always have risk management tools to help reduce their potential losses when trading in the market.
A stop-loss order is one of the risk management tools that traders use. It is an order put in place to buy or sell a security once it reaches a specified price, known as the stop price. The order is designed to automatically execute a trade when the market price reaches a certain level, helping traders limit their losses if the market moves against their position.
In order to put in place a stop-loss order, traders must first determine the maximum amount that they are willing to lose on a trade and exit the position should the market move unfavourably. This aids the trader in maintaining discipline and helps avoid making decisions that are emotionally driven.
These orders are valuable tools that form an integral part of trading strategies aimed at preserving the trader’s capital and maximising profitability in the financial markets.
6. Diversify Your Portfolio
The stock market is known to be volatile due to the numerous factors that affect the market and lead to fluctuations in stock prices. Therefore, instead of investing all your money in a single stock or sector, by diversifying your portfolio, your risk is now spread across multiple investments which mitigates the impact of adverse events that could affect any particular stock or sector in your overall portfolio.
A diversified portfolio also tends to be more stable and resilient during economic crises, reducing the likelihood of suffering significant losses from a single event. It also gives room for growth as an investor as it allows you to participate in various sectors and industries.
Diversifying your investment portfolio is a risk management approach that helps you build a portfolio that can withstand market volatility and maximise long-term returns.
Conclusion
Following these golden rules of trading is the key to navigating the complexities of the stock market successfully. By adhering to principles such as risk management, disciplined decision-making, and continuous learning, you can increase your chances of achieving consistent profits and long-term success.
Trading requires dedication, patience, and a commitment to following proven strategies. As you start your trading journey, you can benefit from the educational resources available on TradeSmart to deepen your understanding of market dynamics, hone your trading skills, and stay updated on the latest trends and strategies. Moreover, you can open a free Demat account and get real-time support via call, text, or email during market hours.
Disclaimer: This article is for information purposes only and should not be considered as stock recommendation or advice to buy or sell shares of any company. Investing in the stock market can be risky. It is therefore advisable to research well or consult an investment advisor before investing in shares, derivatives or any other such financial instruments traded on the exchanges.
FAQs
What are the golden rules of trading? Why are they important?
The golden rules of trading are essential principles that guide traders in navigating the complexities of the financial markets. By adhering to these rules, traders can mitigate risks, capitalise on opportunities, and achieve long-term success in their trading endeavours. The golden rules include:
- Gaining basic knowledge such as the difference between a Demat account and a trading account
- Having a detailed and well-researched trading plan
- Staying updated on market news and events that can affect the stock market
- Avoiding herd mentality and focusing on independent analysis to make informed decisions
- Implementing risk management techniques such as stop-loss orders
- Diversifying your investment portfolio to spread risk and provide more stability during market fluctuations
Can I have a trading account without a Demat account?
While it’s technically possible to have a Demat account without a trading account, it’s uncommon and usually not practical for active traders or investors. Many financial institutions typically offer both a Demat account and a trading account as part of their services as both accounts work together to facilitate trading.
Is there a specific capital I need in order to start trading?
The capital required to start trading in India can vary depending on several factors, including your trading strategy, risk tolerance, and investment goals. It’s essential to carefully assess your financial situation, set realistic goals, and develop a well-defined trading plan before committing any capital to the stock market.
Do I have to check my investments daily?
While daily monitoring of investments may not be necessary for all investors, it’s essential to establish a monitoring frequency that aligns with your investment goals, risk tolerance, and investment strategy. Regular reviews and adjustments can help ensure that your portfolio remains aligned with your long-term financial objectives.
The golden rules are really important for the traders which can give you best results.
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[…] Also Read: 5 Golden Rules of Investing in Stock Market: A Beginner’s Guide […]
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[…] Also Read: 5 Golden Rules of Investing in Stock Market: A Beginner’s Guide […]
[…] Also Read: 5 Golden Rules of Investing in Stock Market: A Beginner’s Guide […]