Plan your trades : Look at levels in advance where an entry is to be taken based on whatever technical or fundamental tools you use. Before you enter the trade, you must know the price at which the trade has failed. This is most important. First know where you will exit the trade, where your stop loss is. Then, and only then, look at target levels. An average trade should have a reward to risk ratio of at least 2:1 (i.e. target should be at least twice of the stop loss level).
Stop Losses : For positional trades, a stop loss is typically 3-7%, at most 10%. If more than this, we prefer to pass on the trade, because it is meaningless to think that we can accept if the stop loss is 20-25% away from our entry price.
Stop losses are part and parcel of trading. They are unavoidable. A trader cannot win all the time. It is impossible. Reluctance to accept the small stop loss may cause the loss to mount until the pain becomes so much the trade has to be closed at a massive loss. In Bull markets however, disregarding stop losses gets rewarded, and causes this behaviour to become a well entrenched habit.
Remember, a developed economy like Japan went thru a bear market from 1989 to 2013, a period of 24 years in which the main benchmark index, the Nikkei, fell from 40,000 to 8,000, a decline of 80 percent. We are fortunate that has never happened here in India, but doesn’t mean it cannot happen in future.
Once you have decided on a stop loss, follow thru with it. Stop Losses should not be moved. On the other hand, Take profit targets can be moved, and adjusted, either higher or lower depending on price action. Stop Losses are sacred, and should not be moved after a trade is entered. Take profit targets are not set in stone, and can be moved, depending on price action.
Own the trade : Whether you are getting your advice from someone or deciding on your own, you need to own the trade. Your decisions are yours and yours alone, and so are the rewards and risks. Don’t blame an event. Don’t blame the news. Don’t blame technology or your broker or advisor. Don’t blame the exchange, or politicians, or the regulator. You are entering the market with eyes wide open of the risks. When you are swimming with sharks, you have to be ever-cautious, and get out of the way at the first sign of trouble. At all times, capital protection is of utmost importance. Giving up potential gains in order to take a lower amount of risk is often the smart thing to do.
People are initially attracted to financial markets because of the perception that making money is easy. It is a perception, and nothing could be further from the truth. It is like viewing the ocean horizon from a distance, and seeing how calm the sea is. Move closer and you get to see the amount of churn that occurs, and the volatility involved.
Trading is not for everyone. Give your funds to a professional mutual fund house to manage, and gain peace of mind. Trading involves a high degree of risk. If you can manage your risk very very carefully, then good rewards should come your way.