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Share market is not designed for frivolous people who have no idea of what they are getting into. It needs some strict disciplines and the power to make decisions that can have significant impacts on your capital. The importance of trading disciplines could be a little hard to explain.
The discipline forms the cornerstone of the trading and investment strategy for both the short-term and long-term traders. An ability to stick to the regulations and a broader trading plan can give beautiful results in the future.
The stock market discipline – Rules you should follow
Let us look at the trading rules in the stock market and see what you should be doing as a trader and a long-term investor in stocks.
You need to start off with a trading plan and stick to it
The first step is that you should have a trading plan that would outline and document the return expectations. This will let you decide on how to approach the market at different levels of valuations and the maximum amount you would be risking per trade.
You can also choose on the maximum loss of capital that you would endure. The idea would be to adhere to the trading plan so that this discipline can broadly outline your risks and returns of the share market investment portfolio and your trading.
You need to let the investment be a part of the broader financial plan
It would be more so if you are investing for the long term. You need to ensure that the equity portfolio is in tune with the broader equity plan and the equity allocations should be prescribed in them. You need to keep in mind that the investment strategy should be created in such a way that the overall equity component would keep getting adjusted with the risk-taking appetite you have.
No investments or trading without proper homework
It can be said to be one of the essential rules both for trading and investing. You need to understand all the nitty-gritty details about the macroeconomy and the sector in which the company operates and even the specifics about it. You would need to do proper homework in trading as well.
The technical charts and news flows should all be within your grasp. You should also be aware of the supports and resistances. Last but not least, you would need to figure out if the market is strong or weak. If you do not have the discipline of adequate homework, you would not be able to go too far in trading or investing.
Honor the stop losses
This part of the discipline focuses more on trading than investing. The entire concept of the stop loss is where you decide that the trade should be closed. You would then get out of it and then start taking a fresh view.
The loss would be the cost you would need to bear to be alive in the trading business for the long run. However, if you cannot maintain the stop loss in trading, it is unlikely that you venture too far as a trader.
Focus on the pennies and the pounds would be fine
Regarding investing and trading, the small details matter a lot. You should learn to avoid overtrading to recover losses. You must keep an eye open for the trading costs.
This might escalate to a whole new level over a specified period. This is a part of the discipline as well, and if you can keep tracks of the small issues, the bigger ones would take care of themselves.
You need to step back when in doubt
One of the hardest rules to implement could be this. The investments and tradings must be backed by conviction. You might be indulging in mindless speculation if you do not take care of that. Whenever you find that the market conditions are too volatile or hard to fathom, you should take a step back.
Take risks according to your appetite
Prudence is an integral part of the fundamental discipline. The risk should be proportionate to the loss that you are ready to take upon yourself. Another thing that you need to keep in mind is that the risk appetite is in tune with the capacity of bearing losses. You would not want to wipe out 50% of your entire capital in just a single trade. That is not smart at all.
Remember to honor the profit targets
Just as you should be acknowledging the stop losses, you need to take care of the profit targets as well. Without this, you would start to lose track of everything. It could be a little different for an investor. You could either keep long positions with derivatives or convert the stop losses into rolling stop losses.
You can continuously churn the money when you honor the profit targets. You should remain in the liquid market and have the resources to latch on to trading opportunities.
Read and think more and waste less time
Your discipline can be understood better just by the way you utilize your spare time. If you would want to instill discipline in yourself, you should not be spending too much time on the chat forums. Do not waste too much time looking at the market opinion on television.
Your focus could be shifted elsewhere. You could always make use of your time better reading about the emerging trends and scanning the websites for the latest blogs.
You should spend a lot of time crystallizing the trading ideas and reviewing the pros and cons of your performance. Mental discipline could be instilled in this way.
Extend the discipline to other parts of life as well
Discipline is like a habit, and it would be hard for you to discipline in trading if you are not disciplined in life. Everything from the way you organize the paperwork to the way you arrange your study tables, your health, and your habits. Everything equates to your discipline in your way of life.
If you could keep these simple points in mind, you would surely go a long way in your trading journey and be able to make good profits out of the share market.