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"This market is a traders delight" said a fund manager to me recently-this set me thinking, that how is trading any different from investing and if just about anybody can invest-then can anyone be a successful trader, or does it require some unique arsenal?

Traders are perceived to be a certain breed of people who somehow always make money in the market-whether it is going up or it is going down! But this is not true-traders also have to face knocks-like investors their two biggest weaknesses are greed and fear of losses and their success ratio depends on how they control and balance these two out. The first step towards becoming a successful trader is to distinguish between investing and trading.

Often when people talk about investing, they think of putting money into a company stock and holding it for a long time until they realize a significant gain. From this view, put simply, investing is to "buy and hold." In reality, people also use the term "invest" to describe mid-term and long-term stock acquisition. Mid and long-term investors will study stock fundamentals such as a company's quarterly earnings report, a company's relative strength in its industry sector, new product lines, technological innovation, or new management teams or strategies. They also look at stock charts and use basic technical analysis combined with overall stock market timing to determine an entry point. Then, having done all this, they may sit back without worrying too much about short-term market fluctuation, secure in their assessment of company performance prospects and in the reliability of their own research conclusions.

Short-term traders attempt to buy low and sell high, not focusing as much on company fundamentals as long-term investors tend to do. Besides buying and selling, short-term traders can also "short a stock" (sell high, buy low) if they think the stock is going to go down in the near future. Thus, short-term traders may seem to care very little about conventional indicators. What they do care about is market volatility, the rising and falling of stock values, for the more ups and downs a stock has, they more money they believe they can make, getting in and out fast to take a quick (and potentially significant) profit. Traders by nature trade to "cash flow" the market. They never get married to one particular stock but rather stay married to the idea of making money by taking profits when they present themselves and manage losses. Managing is a key element to your success. As hard as it is to take a loss it's crucial that you do it.

Infact a wise thing to do would be to have a separate trading account and don't mix it up with your stock portfolio. Keep your long term stock, mutual funds, bonds and whatever else separate from your trading account. This way

You will avoid the most common downfall of all - turning a LOSING trade into a long term hold. It's a deadly mistake. Have your account at the right brokerage firm. The firm you choose should allow you to do everything you want, like options, use of margin, provide you with good research, great trade executions, etc. And have very cheap execution costs. Low commissions are very very important because if you trade actively high commissions can eat up your profits.

Next determine how much of your capital will you be investing in trading. It pays to be conservative in the beginning as you will make mistakes. Learn from your mistakes and as you go along build your positions. It would be safe to start with not more than 10% of your investible capital. Also follow the rule that no more exposure than 2.5 percent of your total trading capital on any one position. Lay the benchmark that the maximum risk on any one trade at should be 10 percent. Anything more than that will materially affect your ability to survive even a modest string of losses.

Now that you have laid the ground work-it mind games time-World over it is believed that traders have to have a different psychological set up from investors. As said by Jake Bernstein, an internationally recognized authority on computerized trading systems and investor psychology "The ability to perceive market opportunities and, above all, to act upon such opportunities without the hindrance of psychological or behavioral restraints distinguishes winners from losers. Winners not only act differently from losers, but the process that ultimately results in action is also distinctly different for winners than it is for losers. Integral aspects of the process are such factors as perception, attitude, interpretation of reality as well as the ability to consistently formulate and implement plans."

The most important element of any successful trading plan is your own mental attitude. This is something you need total control over. A winner is more defined by his winning mental attitude that his winning methodology. This is why the trader with the winning attitude and a faulty approach can still produce positive results while the trader with the loser's mentality will stumble and lose money despite having an excellent trading methodology.

As a part of the mental preparedness, what you as a trader have to do is to balance minimization of fear, protection of the self-image, and protection of personal space with your risk taking ability. The fear of failure should not paralyze you. A person whose behavior is dominated by the need to minimize fear will tend to search for, and concentrate on, potential threats. The greatest threat to a trader’s well being is, quite obviously, the loss of capital. There is therefore a natural tendency to try to avoid losses and the fact that losses are not always avoidable serves only to emphasize the dangers. This habit will delay the decision to cut the loss making position. Losses may therefore be greater as a result and also the fear of making losses would lead to profit booking at lower levels.

Fearful individuals do not make natural traders. One part of the solution is (eventually!) to learn that the world is not necessarily as dangerous as childhood experiences have evidenced. The other, more immediate, part of the solution is to adopt trading practices which automatically reduce the individual’s exposure to fear. Where possible, such practices should incorporate the use of price objectives.

The next step is to adopt a trading system. This can be a composite of a method or indicator that has shown consistency and profitability both in historical back-testing and in real time for a significant length of time or for a significant number of trades. A significant number of trades is defined as at least several hundred trades. A significant length of time is defined as at least one year . Decide before you trade what your target price will be, what your maximum loss will be, and stick to your own parameters. Never allow yourself to lose more on a trade than you would allow yourself to make. Decide how much time you are going to spend researching trading ideas.
Decide how much money you will allocate on each trade. Also always use protective stops, never average a loss
spend the same amount of money on each trade, never overstay a position, set a time frame for each trade
never trade for excitement; only trade for profit. All great traders have only 2-3 great trading strategies they use to make most of their money. It may sound strange but it's true. Most professionals just do the same thing over and over to make small consistent short term profits.

Independent Research is the most important thing to do before any trade. By doing your own research, you complete a definite set of steps that will guide you toward a successful outcome. First of all, set your goals: Do you want to trade long-term (from one year to many years), mid-term (two months to a year), or short-term (every week, even every day)? Once you've set them, stay with your plan. After you've set your goal, you'll need to concentrate on specific industry sectors. By diversifying in a couple of different sectors you avoid putting all your eggs into a single basket. Within each sector, choose stocks you want to invest in.

In investing, intuition also plays an important role. Good intuition derives from experience and good psychological habits. Losing money can be very upsetting, but you need to be consistent and not quit the game easily. Learn to use a loss as a lesson, just as professional traders do, and determine why you lost. In this way, you maximize your chance of becoming a better investor. You should keep records of your trades, noting decision strategy and variables. Be systematic, just like a photography student who makes notes about each exposure to learn from mistakes. Talk with your friends and listen closely to trading tips, but in the end, you have to make your own judgments. Believe in yourself. If your next pick ends up being wrong, that may mean you haven't yet done sufficient homework on that stock.

Once you've narrowed the field, how do you identify a good price level at which to buy or sell? Not only do you need to recognize and follow market timing overall; you also have to catch the timing of the individual stock. This is where Technical Analysis comes into play. Once you have invested keep your self well informed and make buy or sell decisions based on facts and logic. You need to understand what your risk is (Risk Assessment), what the probability of winning is, how much damage you can incur if events go badly south! Know your risk exposure first, then think about profit potential.

So with these tips create a mind set, create a system and get trading!

Aru Srivastava

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