Trading in the stock market is very easy these days. All you need to do is to open an account with any broker and deposit some money to your brokerage account and start trading. You can buy-sell the stock of your choice with a few clicks but it’s not easy to become a successful trader, you have to spent the time to understand the stock market and to put all your effort to learn technical and fundamental analysis.
So before you start you need to know 5 things to make your trades profitable.
A Profitable trading setup
Learn to read charts
Know yourself :You should analyse yourself before you start, when I say analyse yourself that means to know how you react in different situations how you deal with your emotions because it plays an important role in the trading world. Why it affects us that much? Simple it involves one thing….Money! How we handle the situation when our money is on the line depends on our emotion toward it.
If everything goes well and we see our money is growing with the strategy we have applied, our confidence goes to the peak and we feel like that we can hold the trading world in our fist. The effect of this is your confidence convert into overconfidence towards your strategy and you violate your trading rule and do overtrade.
When thing do not go well and we lose our money with all the strategy we apply. Our anxiety level increase we feel depressed and start doubting our capabilities and start thinking that trading is not your ‘cup of tea' etc. That's why it very important to know yourself before you start trading that how you handle both winning and losing situation? You have to be confident and follow the trading rules when you are winning and be patient when you are losing.
2. Trading style: There are different types of trading style to choose from as per your personality.This depends on how you approach the stock market? Each trading style requires a different type of mindset and different type of analysis to do. Here are some trading styles with their associated strategies that you can choose from:
Positional Trader: Positional traders are the traders who do lots of technical and fundamental analysis of the market and buy undervalued stock and sell them when they get overvalued over the long run.
Swing Trader:Swing traders are those traders who buy a stock in correction and wait to recover the price and sell them when they get the fair price their trades for a few days to a week or two.
Intraday Trader: Intraday trader buy and sell the stock on the same day so they have to do the deep technical analysis of the stock and keep eye on the movement of the stock for the day and make the profit from its volatility.
3. A Profitable trading setup: Once you have decided which trading style suits your personality. You then need trading systems rules which play an important role in the trading market. Here are few trading rules which every trader should follow for the better result:
Set up your trade: Always trade in those stocks which are trending in the market and doing well over several months.
Entry Point: Keep eye on the movement of the stock and make entry after a small correction or pull back but should be in the uptrend.
Exit Point: The moment stock changes its trend to downtrend exit from the position.
Risk-Reward: Risk reward does vary as per your trading style you have chosen. To calculate the risk-reward you simply divide profit by your risk. Let’s understand with an example: Assume you bought 20 stocks at the price of 100 and you set sell limit price to 104 and you set the stop loss at 98 that means if stock price reaches to 98 you will sell it. In this case, your decided profit is 20*4=80 and the maximum loss is 2*20=40 so your risk-reward ratio will be 80/40 is 2:1. This means you are taking 1rupees loss for the profit of 2 rupees.
4. Money Management: Money management is the key of successful traders. Every successful trader follows the risk and money management rules in each trade they do. So the question is that what do Risk and money management rules do? This stops you to lose all your money because if you don't follow the rules and risk too much money on all the trade in a very short time of Spain your account will be wiped out so always maintain the risk-reward ratio wisely. Don't be too much aggressive as I explained above at least follow 2:1 Risk reward ratio.
5. Learn to read charts: This is very important for each and every trader to learn how to read the charts before they even think to start trading in the stock market. Without the chart, knowledge is like you do not know the address and you are trying to reach the destination. Do you think you will reach your destination? No, you will not instead you will end up lost, confused and in trouble. Charts show you the trend direction support and resistance level that helps you to understand the entry and exit point of any stock.