Do’s and Dont’s For Traders

1.       Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.

2.       Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.

3.       Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.

4.       Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

5.       Don’t buy up into a major moving average or sell down into one. See #3.

6.       Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.

7.       Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old traders’ wisdom is a lie. Trade in the direction of gap support whenever you can.

8.       Trends test the point of last support/resistance. Enter here even if it hurts.

9.       Trade with the TICK not against it. Don’t be a hero. Go with the money flow.

10.    If you have to look, it isn’t there. Forget your college degree and trust your instincts.

11.    Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.

12.    The trend is your friend in the last hour. As volume cranks up at 3:00pm don’t expect anyone to change the channel.

13.    Avoid the open. They see YOU coming sucker

14.    1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.

15.    Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.

16.    Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.

17.    Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.

18.    Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.

19.    Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.

20.    Beat the crowd in and out the door. You have to take their money before they take yours, period.

Important points for option traders

As option trader remember certain golden rules for option trading

 1. Dont hold and sit tight with your option. Trade every day. Say, you have bought a put  option at 100, lets say it has come to 90, you dont have to wait for it  to go above 100 to book profit,  you sell your option  on markets intraday fall and then  you buy back  the option  on market rise and pocket the difference of at least 10 to 15. As far as possible avoid carrying over of options unless you are sure of the markets next day. If you bought a call or a put at start of the month at 150, you will find its value at 75 or less by middle of the month so if you have not traded daily , half of the value is lost by mid month.

   

2.whether market goes up or down or flat, option value will reduce by atleast 5 points every day, so trading daily  at least gives you back  the daily 5 point automatic loss due to time decay. So writing options (selling fresh a call instead of buying a put after  market rise or selling fresh a put  instead of buying a call after market falls )  have a much better chance of gain  than buying options.

     

 3. If your option value goes down by 25% , boldly quit the option. This will protect you from seeing zero value for your option. The habit of holding on to the option thinking that it may gain after some days may give you only 1 success out of 10 attempts so be bold to quit early. (this is the most important point in option trading, people generally book big loss in options when this golden point is neglected.)

     

 4. Do not exhaust all your money in buying options. Only trade in 60% of money and always have 40% reserve for opportunistic trades.

     

 5. Though averaging of options looks very attractive, it is like slow poison. Avoid averaging as far as possible.  Adjust your mind to do reverse trade,  meaning  in case of holding  5000 put, sell a lower option say 4800 put in case of fall in markets & rise in put value, or in case holding  5000 call, then on market rise when call value rises sell higher call of 5200 or if holding a put, boldly buy a call against  the  objection of your   mind.

 6. The above option rules are time tested  and mostly found to be correct. Although most of the time  your analyst  will guide you when to buy or sell but  you on your own also be  rigid on the above  5  golden rules for options. You may fail once  but 9 out of 10 times you  will not regret.

7. The most important thing to be kept in mind is that you must have your own mental must quit levels say about 5 or 10 points to avoid bigger loss in case the communication from advisers side fail due to unforeseen circumstances.

8. In case you are holding an option   without stop loss  or hedging & it goes badly against you, then  do not panic, around the end of the 3rd week of the month quit the option and buy the same option of next month and after the market having gone in one direction, it will retrace  some amount to help you to gain in the next months option as the current month option would become zero if held against the current trend.

9. The most important point to remember in option trading is, in case you have bought a call and it has gone against you, then while averaging by buying another call at a lower price, never hesitate to buy a put also . Meaning every time you average your original option, at each time buy an opposite option also. So every time you average the original call, at each time buy a put also along with the call . This put  invariably will be your protector as the averaged call will invariably become zero. Remember this golden rule.