This Diwali, Become a Smart Trader

Have you ever wondered why we pray to the 8 forms of Goddess Lakshmi (Ashtha Lakshmi) during Diwali? It has an interesting significance. Hinduism defines wealth in a much broader and deeper sense.

Wealth is not just about money but is also about the resources that create future income, leveraging assets, leveraging knowledge, applying skills, social and psychological capital, etc. The logic is that money cannot be expected and it cannot be the ultimate goal.

Lakshmi comes from the word Lakshya or goal and the Ashtha Lakshmi talks about the 8 different wealth forms you need to have to achieve success in life.

Like any activity, success in trading also comes from a conscious effort and by sheer chance. There is a process and you need to work towards it. Let us look at the Ashtha Vidya or the 8 skills that you need to imbibe to be a skilled and smart trader.

1. Start With a Clear Trading Plan

If you hope to be a smart trader you need to have a plan. What how to go about creating a trading plan?

Shortlist the stocks that you will/want to trade in while avoiding stocks that are too volatile or too languid. Be clear about the losses you are willing to take in a trade, in a day, and overall, i.e. identify your appetite for risk. If you learn to protect your capital, then trading profits will follow as a logical corollary. Smart trading is a lot more about discipline and fine-tuning the process rather than shooting from the hip.

2. Keep Your Cool and Think Rationally

There is a common saying in trading that when you panic, you subsidize the other traders who are not panicking. Losing your cool is bad because you are forced to take decisions in a fit of emotion rather than through proper deliberation. More often than not, you end up taking the wrong decisions. When you panic while trading, you either overtrade or end up losing out on opportunities.

3. Focus on the Big Moves and Don’t Fall Into the Overtrading Trap

It’s not just about making big moves but about making a series of small, but more effective, moves. As a trader, you are not obliged to trade on a daily basis, unless you are trying to make a living out of intraday trading. That is a bad idea anyway. We all saw a sharp correction in NBFCs and auto companies as well as realty companies in the last one month alone. These are the kind of big moves you should wait for while constantly making your small, calculated steps periodically. However, your returns should be really worth the risk. If you try chasing too many shorter moves, you will end up overtrading.

4. Never Trade Without a Stop Loss and a Profit Target

Stop loss is your insurance in volatile markets and profit targets help you to churn money and improve your return on investment (RoI). As a trader, you are not in the market for a very long-term. You are just looking for opportunities; so, focus on trading with a stop loss and a clear profit target. Once the stop loss is hit, don’t think about averaging, and, on the flipside, don’t look back at a stock after profits have been booked.

5. Continuously Interpret Charts, News Flows, and Announcements

Sounds strange but, as a trader, you need to be able to do your own analysis. You need to be able to read charts and evaluate the implications of news on your own. Smart traders never depend on other sources for interpretation. Take the data from other sources and come to your own conclusion. That skill can be fine-tuned over time but the more closely you track your trades and outcomes, the better your chances of making a success out of it.

6. Listen to the Market, But Don’t Try to Outsmart it

When it comes to trading, market is the king. What would you do if a stock that you thought would go up instead starts going down? Remember, if you try to outsmart the market, you will end up on the losing side. When the market behaves contrary to your view, it is actually trying to send you a message. As a smart trader, you must read the message and modify your trading strategy accordingly. It can be a hedge or a reversal, but listen to the market.

7. Trading is Economics and Treat it as Such

If you are planning to trade in the markets as an afternoon pastime then perish the thought. Trading is serious business so treat it with the same seriousness as you would treat your own business. That kind of commitment is central to being a smart and successful trader in the stock markets.

8. Finally, the Buck Stops With you and you Alone

‘I was doing well but got done in by market volatility’ is not a valid excuse. As a trader, the buck stops with you and you alone. Learn to take responsibility. Markets may be out of your control but you are in control of your own actions. A smart trader learns from his mistakes rather than blaming the markets for the outcomes.

This Diwali, try and apply this Ashtha Vidya to your trading activity and you should be able to catch some shining stocks.