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11 habits of disciplined trader

  1. 1. 1 11 Desirable traits that make a disciplined trader. There are so many traders around the world but only a few of them are successful. All things being same, why is it that all are not successful? What is that special quality or qualification which separates the successful traders from others? Do they possess anything that others do not? Are they all simply born lucky? Do they get some insider information from companies? Are they all born millionaires? Why does this disparity creep into the fortunes of some? One thing I can say with certainty; neither are they born lucky, nor do they get any exclusive insider tips or information from any company. They also, do not have anything special in them. Born millionaires they definitely are not. They are, like us, just normal human beings. Then, what is it that makes them successful? Here is the simple answer. It is the following that make him a successful trader:  Habits,  Rules or  trading techniques, Here, I am going to describe the 11 habits or rules that make them successful: 1. Objective 2. Suitable Trading System 3. Draw a plan and execute it
  2. 2. 2 4. Position Sizing 5. Willingness to accept loss 6. Records of trades 7. Responsibility for your trades 8. Learning attitude 9. Believe in yourself 10. Review the trading system 11. Play it like a game Objective Every trader has his clear defined goal or purpose. He knows the limits of how much risk he is willing to take and how much he expects to earn. Your object should be clear and written down on paper or somewhere else where you can read your object or goal on a daily basis. That should form the basis for all your trading in the market. Until the time your object or goal is not clear, you cannot be a great or successful trader. Therefore, to be a successful trader, or to be a great trader, your objective or goal should be clear. Suitable Trading System Once your object or goal is clear you have to go for a Suitable Trading System. Trading systems are:  Long term,  Short term,  Medium term,  Arbitrage,
  3. 3. 3  Momentum and  Day trader. From the above you have to choose as per your personality. Your personality means:  How much loss you can afford,  Or, if on some day, the market goes down unexpectedly and your portfolio value goes down by 40 to 50%, will you be able to bear this much of loss?  If you buy any stock and it is not giving any movement for some time, will you be able to hold the position for a longer time, say for 3 or 4 months? These are the factors, which you have to consider when you are choosing a trading system. Too many traders are hungry to earn money in a short term. They follow the latest trend of “Day Trading”. Day trading means that you are living for each day, one day at a time. However, this system does not suit all the traders. To be a successful day trader you have to adjust to the short-term roller coaster volatility of the market during the day. You need to have the discipline and ability to handle the stress that day trading requires. Yes, there are a number of traders making handsome amounts of money during day trading. Here, I would like to give an example of a day trader who made a lot of money in day trading and, due to that hard-earned money, he become a main broker of NSE.
  4. 4. 4 He has his own trading system. He used to come to his office at around 12 noon, study the market for an hour; then, around 1.30 pm he used to make his first trade. He only traded in Index stocks and in quantity. He would start squaring his position after 3.15 pm. Though this trading system is suitable for him, we cannot say that the trading system he follows suits all the day traders. Hence, there are different styles of trading systems for different traders. Draw a plan and execute it No trader would survive if he did not go through with executing the plan he made. If you have no gumption to follow your plan, there is no need to make one. A plan makes a provision for an alternative course of action to be adopted in case of unforeseen events. However, it would only work if you were ready to follow your plan. Once you have traded, there is no point in thinking of where the price is going. Plan about what you will do if the price triggers your target, or hits the stop-loss point. If you are taking your decision when the price triggers your target or hits the stop loss, then you are likely to be emotion less and stress free. You also have to plan for unforeseen events like:  Financial results of large companies,  RBI’s Credit Policy announcements,  Elections,  Riots, strikes or terrorist attacks,  Declaration of inflation figures,  Industrial Index of Production figures or  Events, or movements, in international markets.
  5. 5. 5 When any of this events occur market’s volatility is very high and stock price goes ups or down drastically. Hence, every trader has to prepare himself for events which may have a negative or positive impact on the markets. Position Sizing Position-sizing is the most important tool for a successful trader. Position-sizing is a serious assessment of how much you are risking on each stock you are investing. That way you can set your strategy and achieve your goal. It also means that you assess, beforehand, as to how you will be able to compensate or recover your losses according to your risk- taking ability. It depends on the historical performance of your trading system for the current market scenario. Position Sizing means: If you have a fund of INR 25,00,000/- and you are ready to take risk of 1% of the fund. i.e. INR 25,000/-, If the stock price is INR 125/- on which you make a stop loss of 10% To calculate as to how many shares you need to buy to break even: First divide 100 with stop loss i.e. 10% it comes 100/10 = 10 Here you are taking risk of 1%of INR 25,00,000/- i.e. INR 25000 So, total stock value is INR 25000*10 = INR 2,50,000 Total shares buy = 2,50,000/125 = 2000 Shares. Thus, you need to buy 2000 shares.
  6. 6. 6 Willingness to accept loss You are willing to accept a loss; that does not make you a loser. If you are ready to accept the loss only, then you can trade in the real market. A trader undergoes a loss because, when the share price triggers the stop-loss point, the trader assumes that the price may reverse from here on; so, he doubles the position over there instead of a stop-loss ordering him to evacuate. Sometimes, he waits for a reversal of the markets and, consequently, suffers a big loss. Traders need to take losses as a feedback from the market. This feedback should be a lesson to him for future trading so that he may be able to take a proper decision on whether to hold the position if the stop-loss point is triggered. He may cut the position after stop loss trigger, or double the position at stop loss price. Therefore, feedback serves to educate you as to where you were right and where you were wrong. It thus enables you to take correct decisions. Records of trade Do you know how many successful traders record their trades? Have you met any successful trader who records his trades? Recording means keeping a written record of all your trading transactions in addition to recording if on that particular day there was any event like
  7. 7. 7 RBI credit policy announcements, elections or announcements of company results etc. This enables him to compare today’s scenario with old data. He can also record if on a particular day he made any mistakes and the results thereof, if any. So, today when he takes position, he can be prepared for the worst scenario and try for some fruitful returns. Hence, if any trader would like to become a successful trader, he has to record the detailed transactions of his trades daily. Responsibility of Your Trades The successful trader must realize that every action or decision he takes is solely his, and that, he is the only one responsible for all his actions and decisions. A successful trader never blames others for his losses or mistakes. There is absolutely no place for providing excuses. Mistakes are bound to happen and you should take a lesson from your mistakes so that you never repeat those mistakes in future. Once you have tested your strategy and you are convinced that this strategy will give you good returns, there is no need to take advice from others or to ask any experts. When you fail in your strategy, you have to ask yourself, “Did I follow my rules or strategy strictly?” If the answer is yes, then you have to recheck your strategy to decide where you went wrong. Moreover, if answer is no, then you need to have some discussion with yourself. You have to ask yourself as to whether you followed your own rules sincerely. If not, why did you not? Also, how can you stop yourself from doing this again.
  8. 8. 8 Learning Attitude From time to time, every trader has to upgrade his knowledge because on every new day there is something new in the market. It may be: 1 A new strategy, 2 Algorithmic trading, 3 Equity future Arbitrage, 4 Exchange to Exchange Equity Arbitrage or 5 Delta hedging. Until the time a trader’s approach is not inclined towards learning, there is a possibility that the trader may not be able to earn as much as he wants to. Therefore, continuous learning is an important factor for a stock market trader, an arbitrator, investor or a delta hedger. Sometimes some rules related to the stock market change; or, a company releases its final accounting data. You must read it and understand where the company stands. That should form the basis of your trading in the market. Believe in Yourself You have to have belief in your strategy while believing in yourself. If you believe in your strategy, you can make an entry as per your system, or exit as per your system; only then will you taste success. If you do not have belief in your own strategy or the discipline to follow it, then there is a chance of losing your hard-earned money
  9. 9. 9 For successful traders their rules and discipline are a priority; the monetary rewards are secondary. Your confidence is boosted and you can have a belief in yourself only after repeated testing of your strategy, rules and frequent self- analysis. There is a distinct possibility of undergoing a loss too in the market but that is all a part of the game. You have to stick to your rules, strategy, discipline, entry points and exit points. This way, you will never lose more than you desire. If you stick to your rules, strategy and discipline then this market may give you excellent cash rewards. Review the Trading System Every trader has to review his trading system periodically. This enables him to take stock of his standing at that point. If undergoing losses continuously, he has to reassess and review his trading system. This could only mean two things: 1 Either he is not following his rules religiously or 2 The current market trends are not favorably inclined towards the particular category of stocks that you trade in. Hence, periodically reviewing the trading system is a beneficial strategy to all traders. Apart from the strategy, it may be possible that you are trading in the wrong stocks. Play it like a game Follow your rules and strategy with complete belief; forget about everything else. How it is possible and easy, I will tell you.
  10. 10. 10 Use your imagination. It is not your money you are playing with; it is a game. As, in sports, all points are recorded as winning points or losing points, similarly, every transaction you make is either a winning transaction or a losing one. Keeping a record helps you maintain all your trades as winning trades or losing trades. That will give you a precise balance sheet of your winning trades vs losing trades. Thus, you can know how many times you were correct and how many times you were wrong. In addition, you know the situations in which you were wrong. So, whenever that situation or circumstance comes into the market, you take some precautions and save yourself from big losses. Similarly, when favorable situations arrive, you trade more and you gain more.

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