The buying and selling of shares in the stock market is a science and also an art. You need to have several soft skills to brave the tumultuous seas of the stock markets, but you also need to apply scientific principles to the research you do so that you can decide the best time to jump in or pull out. Patience, foresight, and discipline are some of the personal strengths that one develops (or needs to have) while investing in shares. Our scientific temper is tested and also honed by the use of mathematical and logical principles to understand the performance of a particular company and to forecast the movement of share prices. Every investor would have his or her own strategy and plan for playing the markets and getting good gains. However, just as an artist continually practices his skill to improve his art or a scientist keeps on researching new things, there are certain things that an investor can do to improve his trading.
Try Practicing Before the Game Begins
There are several ways in which you can open a demo account and practice your trading strategy (or improve it) before you start investing real money. You can track these demo investments over a period of a few weeks and see how your strategies are faring. It will not cost you a dime, but it will allow you hone your skills before you get into the complexities of actual trading. Practice makes one perfect, after all.
Entry and Exit Rules
It is easy to get carried away when the prices of all the shares you own keep rising, and you may be tempted to buy more of those shares. Similarly, when a stock price dips, it is a typical reaction from investors to sell them off. However, pure mathematics tells us otherwise. When you buy more shares of a stock that is rising, you end up increasing the average value of your holdings, and you would need to sell at a higher average price to get profits. Again, if a share price is falling, you should buy more of those shares to lower your average cost of holdings. We often ignore this calculation and just behave emotionally, which often leads to losses.
Decide on Book Profit Levels for Exits
A smart trader will not only sell stocks when they are rising instead of getting attached emotionally, but he would also set a target for exactly when to exit. This target would be aligned with his overall investment objectives. Say you want your capital to give you 10% returns (inclusive of the losses) every year. Then for every share you have, you should plan to exit when it individually reaches a 10% growth level compared to the level it was purchased at. Just because Stock A had to be sold off at a loss, does not mean you should try to make up that loss by holding on to Stock B, which is performing well at the moment. There is no guarantee that Stock B would not fall in the future, resulting in a total loss for you.
Have a Sounding Board
Most people rely on their trading agents or stock brokers to be their advisors. However, if you are someone who does his/her own trading, it is always a good idea to take a second opinion from someone. It is not necessary that the person whom you use as a sounding board should be an expert. In fact, we recommend a non-expert because that person would bring in a fresh and unbiased perspective. There are several groups on WhatsApp and Facebook which have investors as members, and they too could help you with your decisions. However, there is the risk of you getting overwhelmed by the varying opinions and advice instead of following your own investment plan.
Try to Be Consistent
As a trader spends more and more time investing, they would have a collection of their own successes and failures, and they may also hear similar stories from other investors. It can often tempt the investor to shift gears. For example, if a trader relies on organic growth of the share over a sustained holding period to book their profits, they should not make attempts to make a short-term profit by doing intraday trading. An expert at capitalcom trading explained this to us – "you will see several hats in the ring, of different colors and designs. You cannot possibly be wearing them all, so you need to decide which looks best on you, and stick to it".
Skilled investors always take the time to step back a bit and see what they did wrong, and for you to be able to do the same, you must keep meticulous records of all your trades. It could be a simple excel sheet of your transactions including entry and exit points and volume of shares traded. Some people just take screenshots of their computer screen at the time of ordering any deal. Recording investment becomes even more critical if you are a day trader because you will hardly have time during the day to assess the decisions you took. Keeping a record would help you analyze your choices on non-trading days or after trading hours get over. You could also seek the help of online portfolio tracking tools to keep track of how healthy your investments are so that corrective action can be taken on time.
These are some good habits to inculcate to improve your trading quality. Apart from these things, you also need to work on your mind so that you do not get hassled by highs and lows. Every successful trader has come through a series of big and small setbacks, so you should not allow similar difficulties to put you off. Every bad trade brings you many new things to learn, and you must use those cognitively to improve your trading continuously.