In life, certain rules are important and inviolable. They make up the core of society’s continued existence. The same is true for trading as well. The stock market may seem like a chaotic place, but it is governed by its own set of rules – rules which have been set up by SEBI, and rules which traders have created for themselves.
SEBI rules are straightforward and easy to follow. They prevent traders from falling victim to fraud in the stock market, and from committing fraud themselves. This includes general guidelines and a code of conduct to follow while trading. Trading rules, however, are unwritten and have been created by traders to better their craft.
Let us look at what these trading rules are in greater detail.
It is easy for traders, both beginners and experienced alike, to be swept away in the heat of emotions while trading. This is fine as long as you are following a trading methodology, which is based on facts about the stock market.
A trading methodology can only be created by those who are knowledgeable about the stock market and all of its components, and not just the ones they want to use while trading. This requires patience, and a certain amount of time to study properly.
Risk goes hand-in-hand in the stock market. There is no way to completely avoid risk while trading. Effective risk management strategies go a long way in mitigating some of this risk, but sometimes even they might fail in extreme circumstances. The only way to avoid a huge loss of capital in the stock market is to only invest as much money in trading as you would be comfortable with parting ways with.
This rule not only applies to traders who don’t have a lot of capital to invest in trading, but for also those who do.
Gone are the days when only the richest or the most elite of the society could indulge in trading. In today’s day and age, trading is open to anyone with a modicum of knowledge and enough money to begin engaging in the stock market. However, not everyone has that minimum required amount for trading from the get-go.
A lot of traders come from middle class families, and it takes them a long time to save that starting capital. Therefore, it is of the utmost importance that traders protect their trading capital through any and all means necessary. This entails making informed trades and not taking unnecessary risks in the stock market.
It is easy to get lost in the euphoria of a winning trade, or the despair of a losing one in the stock market. But every trader should remain focused on the big picture. Winning or losing one or two trades does not make a difference, and nor does it affect your overall profits.
Profits in trading are calculated as a collective, and not through individual trades. Always keep that in mind and continue trading. You will definitely make it big in the stock market.
Beginners at trading might be confused by this, but more experienced traders will know the importance of this rule. This is not the same as protecting your trading capital. It is about trading ineffectively in the stock market. No trader is a bad trader, only their strategies are. But constant ineffective trading even after revising your trading plan again-and-again means that there is something fundamentally wrong about your understanding of trading. It means that you need to take a step back and learn everything again from scratch.
These were the 5 stock market rules which every trader should absolutely follow, and which are necessary for any aspiring trader to prosper in the stock market.