Eight basic principles to follow while trading equities and derivatives

Most of us feel, and with good reason, that trading stocks and trading derivatives are completely separate activities. The goods' returns and risks may vary, but the idea remains the same. When trading futures and options, you can usually employ the same strategies that you use when trading stocks. Here are eight such guidelines that serve as the bedrock of derivatives and stock market trading.

Be realistic in your expectations

This is true in all fields, but especially trade. On rare occasions, a stock you purchase will nearly quadruple in value within a span of 10 trading days. Don't get too excited over stage shows. These instances are the outliers proving the norm. Before the market will allow you to capture large profits, you must first demonstrate a high level of expertise and discipline. You also shouldn't expect to buy a deep out-of-the-money call option and become a millionaire the next morning. That's not how it operates at all. In most cases, you won't be able to reap substantial gains without also bearing significant expenses. The same holds true for derivatives and stocks.

Equity or derivatives, first focus on managing risk

We have discussed this element countless times, but it continues to be the foundation of the trading industry. After all, minimizing loss is the name of the game in trading. Consider your capital and set stop losses if you trade equities. If you are long calls or puts, you should consider how you may minimize your sunk cost in options. Consider how much risk you are willing to face on top of your option premium if you have sold options. The returns will take care of themselves if you only pay attention to the risk.

It is all in the mind, so never panic

Investing, whether in stocks or derivatives, is a mental game. How well do you handle stress in the face of market uncertainty? Can you keep your cool and see opportunities when the market is down? Do you have the self-control to wait on cash during a market upswing? When everyone in your flock seems to be following the same train of thought, how do you resist being swept along with them? These are all questions of mental game strategy. You should never panic while trading stocks or derivatives. In the market, the overall amount of returns is always the same. When you panic as a trader, you end up helping out the other guy who didn't.

Costs and taxes matter a lot in trading

Think like a miser, not a millionaire, while trading stocks or derivatives. Reduce spending to the minimal necessary. Don't make unnecessary trades that will drive up your brokerage fees. Find the most affordable brokerage fees. Always be aware of the tax implications of your trading activities. You know you've made it as a trader when you can evaluate your results after taxes.

Apply the laws of motion to your trading activity

Market momentum is what we mean when we talk about movement. A body in motion will remain in that state of motion unless an intervening force is applied to it, as stated by Newton's third law of motion. The same is true of market conditions. If you discover an underlying movement in the market, it's better to try to comprehend that movement than to gamble against it. As a trader, your best bet is to trade on the side of the market that has the most momentum. Predicting when a trend will reverse or when momentum will change is not your responsibility. The market will determine that.

Think like an analyst but act like a trader

Inexperienced traders sometimes assume that fundamental analysts are responsible for keeping up with the latest news and happenings. In order to have a complete understanding of the trading environment, a trader must have a firm grip on the news and its ramifications. The goal is to have a trader's mentality while acting like an analyst. However, there is no replacement for preparation, being current with events, and an innate understanding of how to decipher data flows.

Focus more on factors within your control

As a trader, what should your main concerns be? Is it reasonable to be concerned about where the stock price will be in one month? Is it reasonable to fret over the future option price? Should you be concerned that the Fed might raise interest rates? Do you need to be concerned that the United States might start a trade war with China? Since you cannot influence any of these results, the answer to all of your queries is "No." Concentrate on the things you have some say over. Stock price predictions are impossible, but risk can be mitigated by stop losses. While the Fed's interest rate decision is out of your hands, your approach is in your hands. While it is impossible to predict the outcome of a trade war, it is easy to identify industries and equities that stand to suffer as a result. Only worry about things you can influence.

As a trader, the buck stops with you 

Never forget that you are ultimately responsible for your actions on the stock market or while trading derivatives. You can't pin your financial woes on the government's spending or monetary policies. Although you have no say in how the Budget or monetary policy will turn out, you can have a significant impact on your trading positions. You might have either completely exited the market or used a put option as a hedge. Don't put your losses down to the market. The market has always functioned that way. Instead of dwelling on why you lost, think about what you did learn.

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