Trading Jugaad- Dos and Don'ts- Dos (Day 14)

Trading Jugaad- Dos and Don'ts.

I am going to break this in two posts. Let us look at Dos today.

• Make sure you do know the differences between trading and investing. Do you want me to write a whole article to tell you how to distinguish trading from investing, or do you want me to explain in one line?
  Okay, I hear you. Here is a one-liner: Investing is like a marriage; trading is like dating or flirting. Investing is for the long term so make sure you choose the right partner, I mean the right companies. Trading is a short term affair- most of the time you are in and out quickly. In investing, you need to pick a stock you can stay with for long; In trading, you pick what is hot or glamourous and try to have some quick fun.
  The biggest problem when you try to be both is you are definitely committing suicide in the market. If a trade is working out good, you will take profit like a trader and run-away but when you are losing, you can be patient like an investor and would let losses keep piling! So label yourself properly. 
• Use Fundamentals for What To Buy. Use Technicals for When To Buy:
  Remember there are two important questions in trading. What to buy and when to buy. An investor has to answer only one question, and that is What to Buy. Time usually helps him in the long run if he chose the right stock. 
  On the other hand, a trader has to answer two questions: What to Buy and When to Buy. You may trade today a stock that might multiply 1000% over the next two years but if you bought for trading at a wrong time, it is of no use! How can you answer these questions? You have to pay your dues to learn this yourself.
• The Trend is the best friend in trading. Stay with the trend. If the stock is going up, play long on the stock. I mean, buy the stock. If the trend is down, play short in the stock. (The million-dollar question is: how to know the trend? Maybe I will share some jugaad on it in a separate post.)
• Do remember that there are wins and there are losses. Be prepared for losses. Not even the finest traders win all the time. If you enjoy wins, be prepared to embrace losses too.
• Always cut losses. (Easy to say but really hard in practice.) Like in real-life dating or flirting, after you make a move, see if you get a good response or interest from the other side. Else, leave that for time being. Maybe she has someone else (something different) in mind so there is no point in taking chances and keep spending your money and time behind her. Go find someone elsewhere things are likely to work out for you. Plus, unlike in flirting, trading is a merci-less cruel game. If you keep sticking to a stock when it is moving against your expectations, you may keep losing.
• Maintain a Trading Diary:
  Keep a diary of every trade you make. Why you traded and what was the outcome. This can help you learn trading, and learn about how you think and behave in your trading life.