Ten rules to be successful in trading

Here is something which I found online (www.rediff.com). It goes like this

The fact is that few investors can hope to build real wealth without investing in equity. Necessary as investment knowledge is, by itself, however, it is not sufficient to ensure investment success.

In fact, many an expert holds that emotional maturity is the ultimate key to sustained profitable stock market  investing. Overcoming bouts of panic and greed in down and up market phases is not an easy matter to master. Here are ten rules to help you do precisely that...

There is no such thing as a good stock

There are only good companies. When someone tells you 'this is a good stock' you need to look beyond the stock chart. Why is the company a good company? How will it grow its business? If you can't answer these questions, you don't know what you own.

Have a premise

When you buy a stock you must have a premise. A premise is a reason why that particular stock will go up. For best results, the premise will be one that explains why the company's line of business will increase, and why the marketplace will value that business at current or higher multiples. Without a premise, you don't own an investment, you just own a stock.

Think trends. Buy stocks

If you really want to invest in big growth stocks, you need to invest in secular trends. Secular trends are events unrelated to either the economy or individual company events. The advent of the PC, the birth of the Internet, and the desire for wireless phones, are all secular trends. The biggest investment winners are those companies which are ideally placed to reap the benefits of large secular changes.

Microsoft and Intel rode the transition to PCs as computing power became cheaper and cheaper. Nokia, Motorola, Qualcomm, and Ericsson all found them-selves unable to keep up with demand in the mid 1990s, when wireless phones finally reached the critical price points. If you want really big winners, find the trend, then find the stocks.

Know your risk tolerance

The biggest mistake most investors make is to buy positions with more risk than they can really tolerate. This is where most people got hurt in the Internet bubble burst. They had no idea they owned risky stocks. If you can always tolerate, both financially and emotionally, the complete loss of your entire position, you obviously will be okay. But most people aren't in that position. Figure out how much downside you can live with without having to sell. Figure this out before you buy the stock.

Don't average down to feel better

'Averaging down' is often a way to lose more. If you believe in the company, and the price goes down, you may want to invest more. But if you, like many others, purchase more simply to lower your 'break even' stock price, you are making a mistake. If you find yourself calculating new 'average price per share' points, you might be averaging down for the wrong reason.

Don't miss the train to shave a dime

If you are investing in a major trend through a stock, and have a multi-year investment horizon, what difference does a few cents per share make on your purchase? Many investors try to place buys with limit orders just below the ask, and wind up missing the purchase.

If you really want a stock, particularly a big position, place a limit order at the ask, or even slightly higher. You will at least get the order. This is especially important if you are trying to buy far more shares than the current ask size. If you are right about the trend, you will never miss the extra ten cents per share.

Don't buy hot and watch cold

Many investors buy a 'hot stock' and immediately look for big gains. When they don't happen, the stock falls away from the daily attention list. Pretty soon it starts to edge downward, and, emotionally, the investor stops watching it.

Pain avoidance is common to us all. But you can't let pain avoidance prevent you from watching your stock. If you do, you often take a look two months later and find the stock is far from hot, and you are now presented with a really painful decision.

A hold is as good as a buy

There is no such thing as a 'hold' decision. If you wouldn't buy the stock again today, assuming you had additional money, you should either sell, or admit that you are confused. Resolve the confusion. The hold condition often happens when you have owned a stock for years, are way ahead of your basis, and are basically happy.

But what is driving the stock today? What will make the price rise in the future? Why would you buy the stock today, assuming you didn't own it? If you don't know, you don't have a premise for this stock. See rule 2.

Don't be an inadvertent long-term holder

When your premise doesn't work out, or you no longer believe in the stock, you must sell, even if it means a loss. Holding on just to 'get my money back' is the single biggest reason for losing more money. Who owned all those stocks that lost 98 per cent of their value in 2000? A good percentage was owned by people who turned into long-term holders inadvertently, when they made the decision to just stick it out.

You will lose money

You won't be right every time. If you are going to be an investor, you need to become accustomed to losing money on some positions. This rule is the natural consequence of living up to rules 5, 7, and 9. Taking losses is often the only way you can save your capital from further losses.

Weakness - Opportunity to be a better human being.

Everyone is born with their own set of strengths and weakness but if we think about it "why is that only few become leaders and prodigies". I feel that's because they not only make full use of their strengths but also choose to take that extra step to try to work on their weaknesses to get it counted as one of their strengths.

I personally admire people who do this. I would like to share few stories which r very close to my heart and from which i took inspiration.

I was doing my third year undergrad i attended a famous institute 'Promac' for GRE coaching. Although i don't remember the chairman's name but he was the one who was teaching us the verbal part and after i attending couple of classes i got to know that he was a moving dictionary. And what a great orator, he was able to take a class for about hour and half and there wasn't a single student from the class of hundred who use to move his/her head in anticipation that they might miss something important. He had the talent to pass on toughest of words into your head cracking a joke and would blend couple of words into the context of the joke. His timing was amazing and i always give his example of how a mentoring a class should be. In one of the classes someone asked him how he managed to get the knowledge and his answer amazed everyone in the class "I am good at verbal english words because i didn't know proper english 10 years back"...silence all over....and he continued "Having done my schooling in a non-english medium school, English was my weakness, i was not able to converse in English and was made fun of by my friends all the time. I just chose to convert my weakness into my strength and then made it my profession. The weakness then is making me a rich man now". Having said so he continued with the class. Although i forgot his name, i was never able to forget his attitude towards his life and his weakness.

Few years passed and came to US, completed my masters and got a job in a financial company and i happened to meet a colleague of mine who is very organized, keeps his desk very neat and always organizes his work very well. I observed him for more than couple of years and he was always showing excellent and credible results, always getting accolades for doing excellent work in time which was due to the fact that he was very organized. The fact that he is very well organized always amused me, as this is an art that is not easy to find (how many of us don't search for car keys when we leave the house). One chilly day, We were walking to starbucks as part of the usual routine when we buy a coffee for ourselves in the afternoon and i asked him his secret for being so organized, after all its not an art everyone has. He smiled at me and he said "I am forgetful and organizing my works helps me overcome that". I was spell bound for a minute, His weakness for being forget has made him a guy who plans everything very well.

This always made me appreciate people when they admit that they are working on some weakness of theirs. This also drives me to work on my weakness and makes me dream of a world where weakness is not always considered a defect but an opportunity to improve ourselves to be a better human being.

Looking for hope in doom

Definition of week end has changed for many people as it did for me, its not fun anymore, Economy is going bad on us, layoffs, rate/salary cuts, inflation...in short as many see it its doom all over and its taking its toll on us ... on me. I was looking for answers to get rid of this strenuous situation and the only solution i found was from the people who are around me.

Often people around me quote great and well known people like Ambhani, Bill Gates and Warren Buffet to show an example for positive thinking. But they miss the basic point, we are trying to point at people whom we don't have access to and the only mode to know about them is mass media. I always thought that visuals are effective than audibles, in this prospect mass media was acting like a audible to me. As i was looking for visuals who can inspire me there were numerous people but two people stood out from all of them.

My Friend Sankar and my wife Vidya. Sankar is a person who has seen all odds of life including being unemployed in which he employed himself. Although being a software developer he took up truck driving when he was unemployed and marely earned 3000 Indian Rupees/month or less than 75 US Dollars/month, but now he earning couple of thousand dollars. When we talk to him about economy, its as if he is not related to this side of the world, he says with a relaxed mind "I will take care of my truck business or will go back to driving truck in India". His open mind amazes me.
About Vidya, she is a cool going person who takes one day at a time. She gives more preference to pleasures of today than the 'imaginary and fictional' worries of tomorrow, she clearly stands out for her positive attitude. When i ask her about what should we do we loose our job, she goes "you will not loose your job nor would go out of status, now what do u want me to prepare for dinner?". When ever i talk to her about some problems, its always a relief.

Simple with positive thinking and acceptance of the fact that we will keep ourself busy even if we are out of job will ease the pressure on our mind and will hopefully help us think better. There are many things in our life which we never got time for when the economy was good and everything around was rolling smoothly, now is the time to fulfill them, either it be that certification you wanted to take or that course in business studies which you wanted in your resume or it can be more personal like the long trip to India to visit your parents/friends or the pleasure trip to Europe for which you never could make time. At the end of the day the fact of life is that "losing your job is not loosing your life".