How to Trade in the Indian Share Market?
Tradingnormally refers to the short term. What is short term according to a stock
market definition? Normally, any holding period below 1 year is considered to be
short term and it can stretch from 1 day to a few months. If the investor buys a
stock with the purpose of holding for less than a year it is called trading. The
idea of trading in the share market is to get the best benefits of short term momentum
and price movement as a reaction to news flows.
What does Trading in the Stock Market entail?
The process of trading in stock markets begins with opening your trading and demat
account. While the trading account will execute your transactions in the share markets,
the demat account is where your shares are held in custody. Once the trading and
demat account is opened then you can either opt to trade through the offline mode
or the online mode, although online mode is preferred for short term trading due
to cost effectiveness. How you buy the stock for trading matters a lot as it determines
how much profits you can make over time and what returns you will get on trading.
5 Key Steps to Trading in the Stock Markets
Shortlisting the stocks for trading
The first stage is shortlisting a group of stocks to trade in. For trading focus
on stocks that have good volumes, low basis risk and that react to news flows in
a predictable manner. Once you zero down on the stocks that meet all your requirements,
you have your universe for trading. This is an important decision stage because
you have a choice and you need to choose the best universe of stocks for you and
they cannot be too many.
Trading also requires sufficient homework
The second step is to do you full and detailed homework on the shortlisted stocks.
Understand the business of the company, the prospects of the industry as a whole
and also the key news flows and how they react. As a trader focus a lot of charts.
Don’t just rely on technical reports but also talk to other traders and do channel
checks with other traders in the market.
Execution makes a big difference in trading
Traders need to realize that since trading is for the short term, the method of
execution and the efficiency of execution will matter a lot. You need to ensure
that you get best possible price even when you are trading on the long side or the
short side. Also check the total transaction and statutory cost and check how it
impacts your break-even point. All these add up to making a big difference to your
eventual trading performance.
You need to monitor your trades closely and carefully
The best of traders spend a lot of time monitoring their traders against charts
and news flows. They work out how news flows and announcements will impact the price
of the stock. They also monitor how the macro variables like inflation and interest
rates will have an impact on the stock price. Also, you must keep a very strong
discipline when it comes to stop losses and profit targets because it is only this
discipline that will ensure that you are able to delivery consistent performance
In fact, exit is the biggest challenge in trading
The harsh reality of trading is that even the best of executed trades will yield
profits only when you exit the stock. But exit is a slightly tricky decision. You
don’t want to wait too long to exit and then realize that the stock has corrected.
You also don’t want to exit too early and then realize that the stock has gone up
another 5% after y our exit. When you are a trader keep things in perspective that
there is only so much risk that you can afford to take. Manage your risks and capital
closely and the trades will take care of itself.
Understanding the Trading rule book and the Trade diary
As a trader, your process has two additional very important parts and that is the
Trading rule book and the Trading diary. What exactly is that?
Trading Rule Book is your constitution for trading
A trading rule book, like the constitution of any business, defines how to put a
stop loss, how to set profit targets, hot to identify trading stocks and how to
manage risk on capital etc. Your trading rule book is what you should follow when
in doubt and this trading rule book must be updated on a regular basis.
Trade Diary helps you to improve your trading process
Trading Diary is your thoughts and recording of trades. Each trade must be recorded
in the Trade Diary with the justification for taking that trade. This is the diary
which you must use to evaluate where you went wrong and why you went wrong. These
regular reviews help you to fine tune your trading story over a period of time.