People confuse trading and investing so much, so first let’s clear the difference:

Trading is playing with price and technical data. There are various types of trading according to time-frame from Scalping and Intraday to Swing and Momentum.

Investing is playing with future growth, understanding the company, its product and sector. Investing is a long term game is myth according to me. If you know, by your expertise or being into the sector, that there is lack of supply of a product and bet on that sector listed companies and exit when further growth stops, I would consider it to be Investing and not trading.

Trading and Investing has nothing to do with a time frame. There can be a 3 Month investment and 6 Month swing trade.

1.       Now that you know the difference, First of all, make decision by yourself, what suits you, Trading or Investing. And there is nothing to worry, if your decision changes with time. I started as an investor; now consider myself as a Swing and Momentum trader.

2.       Everything comes with a risk, higher the risk, higher the return expectations 

Fixed Deposit are least risky, comes with an Insurance (upto 5 Lac), but locks the fund and returns are lower.

Liquid Funds gives same returns as FD, offers higher liquidity, but funds not insured and returns not assured.

Debt Funds and Debenture give highest returns in Debt Category, but comes with a risk of default in re-payment.

Mutual Funds returns are always subject to Market Risk (As you must have heard by now J )

Direct stocks can give higher return, but you have to spare some time, first to gain some knowledge and thereafter also.

Among the direct stocks, risk varies from blue chip to junk penny stocks.

3.       Price targets and results forecast are estimates and mostly has vested interest.

Brokerage Reports on stocks are most of the time come after the larger price action is done.

Similarly analyst giving trades on TV might have already shared those trades to their client.

The price targets are better be avoided.

Also never trade specifically on quarterly results forecast and outcome. Price moves swiftly both ways around results. Catching on wrong side may do much harm.

4.       Every time is different; market follows an abstract daily pattern.

Many factors affect markets day-to-day, and also in the long run. According to different factors, market behaves differently. Sometimes it gives extra -called as- knee-jerk reaction.

5.       Market always follow cycles and trends, hard to predict, and even harder to navigate

Saying that, the markets also have cycle and trends, one of the oldest theory is Dow Theory that helps identify the trends. These trends are hard to predict before they start.

6.       Plans, System and Evidence (back test) are far better than opinions and prophecies while trading.

Develop a system based on past trend and have a pre-set entry price and exit price (or time) while trading. In the long run, system based trading beats opinions and guess work.

Example of a simple system based trading is to buy a stock when it is trading 1% above 30-Day Moving Average and book profit when it reach 5% above 30-Day Moving Average. To manage risk one can place stop-loss at 1% below 30-Day Moving Average. This will give 1:2 Risk : Reward.

To increase the win rate in any system, one can add more features, say RSI to get better trade results. Suppose if the results show that if RSI is above 40 when the Price is in our buy range, we get better win rate, then this is a good indicator to add in the system. If it doesn’t make any difference to win rate, remove it.

7.       You can manage Risk: Reward, but not win rate.

Higher reward against the risk is better. But if you place your targets too high that price turns down before achieving target, you will hit the stop-losses more. Here is a table example of Risk Reward, Win Rate and over-all performance.

1:1 Risk: Reward with 50% Win Rate is like playing a game of coin-side prediction.

1:2 or 1:3 is always better. Above that your win rate may reduce.

*Always include all costs (Brokerage etc.) in Risk: Reward calculation. Here we have not taken it.

8.       While trading, do not harm yourself.

Sometimes doing nothing when you cannot understand what is happening is better.

Don’t afraid of admitting you don’t know. Stay with your circle of competence.

Cut your losses early, a 20% losing trade has to recover 25%, just to reach your price.

9.       Do not trade naked deep Out of the Money Weekly Options.

Out of the Money options are lottery jackpot. Buyers can win only once in 100s times. The loss from others can hurt much.

Sellers can win more times, but the loss of few times can take away many wins.

Hedging is the key, but that’s the end game, do not focus on it from the beginning.

10.   Keep position size low while learning

It takes 20 years in school and College, how can you expect to be a master of trading in few month. You are competing with people that might have experience more than your age!

Trade in less volume when you are still learning and building a system.

11.   Take a break

While trading, whenever you make huge profit or huge loss (Decide specific percentage of capital for yourself), take a break from trading. Huge profit will make you doing excessive trading and losses will make you doing revenge trading. Loss is assured in both.

Don’t trade for a while. Re-assess and start better.

12.   While investing through SIPs, the longer the holding period, the higher chance of success.

Time in the market is more valuable than money. The early you start, the higher odds for success. Here is the table of 5000 vs. 15000 monthly SIP of similar investing capital over time frame. See how longer time frame beats shorter time frame.

Compounding is the 8^th Wonder of the World. That’s a 5x beat!

13.   Concentration is Pro Game.

While investing in stocks directly, choose 8-10 stocks that are leaders in their sector.

Concentrating your entire capital on 3-5 stocks is risky. Even 1 under-performing stock can lower your overall returns. Even 1 out-performer can grow your portfolio significantly in this case, but most probably for beginners, it will be sheer stroke of luck.

20+ stocks will make a jungle, so don’t even diversify that much, that will make every stock un-trackable.

Sweet spot is somewhere in between.

14.   In Mutual funds,

Passively managed fund beats Active funds most of the time.

Lower fees always beat higher fees (Direct plan vs Regular Plan)

15.   Do not just sit on your long-term stocks.

Even if buying stocks for Long Term always check their Quarterly Results and read Annual reports to understand their future planning.

Exit if you see stock is getting too much higher valuation (bubbles are real), if the growth stops or there is suspicion of mismanagement and frauds etc.

16.   Personal Finance is the base of Investing Journey. Your habits and saving patterns matter. There will no investing capital, if you do not save money from earning.

Emergency fund and Insurance is core of personal finance. Secure both before starting investing or trading.

17.   Believe everything that is happening, suspend disbelief. The only certainty is uncertainty. Nobody knows everything. Expect the unexpected. If something looks too good to be true, most of the time it is.

18.   Remaining calm while suffering is a superpower. Take the recent case of 2020, Frontline Indices cut 30% in 2 months, some of the stocks cut more than 50%.

People who were invested earlier and remained calm have earned a fortune in less than 2 years.

19.   Learn Asset Allocation early and do not juggle un-necessarily.

Fixed Income Assets (FD, Bonds etc.), Gold, Real Estate, Stocks, and cash are different asset class. Everyone needs to diversify among these assets. How much to keep in individual classes is a subjective matter and there is no specific percentage for everyone.

Find your long term and short term requirements, adjust them with your current situation, and you will get a tentative idea. Once this is done, do not keep changing them by predicting which class would perform better next.

20.   Market is Supreme. Be humble to it or it will make you eventually.

Read more on:

Dow Theory - The Dow Theory with Chart Explanation