Do not trade with money which means something to you
Emotions lead to bad decisions. It is easy to be unemotional if the money you are trading with means nothing to you. But if it's a loan repayment, or a credit card bill, or a home loan EMI or kid’s education fund, it becomes tricky. You get nervous, stressed, and emotional. You start making the wrong decisions.
It happens because if you have something important to do with that money, you cannot book a loss and lose that money. This kicks in loss aversion. Yes, you guessed it right — this will make it difficult for you to hit the stop loss and get out of the trade. Ironic as it may sound, you will not be able to prevent losses on the money you can’t afford to lose — because you are unable to stop losses on it. You can read that last sentence again.
Bottom line — Trade with money you can afford to lose without feeling anything about it. Trade with money which means NOTHING to you.
Do not trade when you are in an emotionally unstable place
Trading is purely a game of psychology and discipline. Numbers data etc are secondary. When you are emotionally unstable, your mind will play tricks on you. And that is dangerous. Set your personal life in order before you gamble.
Always understand what you are doing.
A lot of people trade blindly without understanding their PnL, Risks, different scenarios of P&L etc. This basically is a blind trade by the gut. This is even more important in options, where you have to be able to answer the question, if my view goes right, what is my Profit, and if I am wrong, what is my loss. Trading is like card counting. Make sure you know the numbers
Keep stop losses
The secret to successful trading is small losses and big profits. Always keep a stop-loss. Your emotions will always meddle with you, and you will hold on to big losses if you do not get out soon enough. Remember, your stop-loss is not a number in your mind. It is an order in your trading terminal. So keep a stop loss as soon as you place the order.
Bet size correctly
If you are trading with too much money, which you cannot afford to lose then fear would get the better of you. If things go well, then greed would kick in. Similarly, if you trade with too less, you will not care about the losses and you will not put in the effort
Do not trade too much. Take breaks
Every successful trader out there trades occasionally. If you are trading 20 trades every day for all 20 trading days in a month, it can’t go well. Take breaks
You need to be able to pass marginally good trading situations and be able to wait for good trades. You need to understand that this one trade is among the many you will take in life, and learn to let go of the mediocre/ average ones. Wait for the spectacular, and hit the home run.
Do not trade too many things
If you trade too many stocks at the same time, it hurts your focus. Keep it limited to less than 3, IMO.
Never gamble on events
This is a strict no-no. There is no need to explain this
Never bet against the trend/ trying to catch bottoms and tops
A reversal in a trend happens only once. If you bet on reversals you will be right only once. If you bet on continuations, you will be right most of the time. Never catch falling knives. Corollary — never short shooting rockets.
Do not average
Averaging is an easy way to make twice the losses. Stay away from it as much as you can. If a trade is going wrong, get out of it, and wait for the next good trade, instead of averaging.
Do not trade to recover lost money
The only reasons why you should be trading are: you think you can make money, and that there is a good trade out there, and it is the right thing to do.
If your reason to trade is that you lost some money and want to make it back that is not going to be good for you.
To help fellow traders avoid mistakes, we run this thing called the Sensibull Manifesto, which is free of cost. Please do check this out