Anyone who wants to become a profitable stock trader only needs to spend a few minutes online to find phrases like "plan your trades; trade your plan" and "keep your losses to a minimum." To new traders, this interesting information seems more like a distraction than actionable advice. If you are new to trading, you may just want to know how to make money fast.
Each of the rules below is important, but when they work together, the effect is powerful. Keeping them in mind can greatly increase your chances of succeeding in the market.
Rule 1: Always Use a Trading Plan
A trading plan is a set of written rules that define the trader's entry, exit, and money management criteria for each purchase.
With today's technology, it's easy to test trading ideas before risking real money. Known as backtesting, this practice allows you to implement your trading idea using historical data and determine if it is feasible. Once the plan is developed and backtesting shows good results, the plan can be used in real trading.
The key here is to stick to the plan. Taking trades outside the trading plan, even if they are winners, is considered a bad strategy.
Rule 2: Treat Trading Like a Business
To be successful, you must approach trading as a full or part time business, not as a hobby or a job.
If approached as a hobby, there is no real commitment to learning. When it comes to work, it can be frustrating because there is no fixed salary.
Trading is a business and incurs costs, losses, taxes, uncertainty, stress and risk. As a merchant, you are essentially a small business owner and you must research and strategize to maximize the potential of your business.
Rule 3: Use Technology to Your Advantage
Trading is a competitive business. It is safe to assume that the person sitting on the other side of the trade is taking full advantage of all the available technology.
The charting platform provides traders with an infinite variety of ways to view and analyze the market. Retesting an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades on the go. Technologies that we take for granted, such as high-speed internet connections, can greatly improve trading performance.
Using technology to your advantage, and keeping up with new products, can be both fun and rewarding in trading.
Rule 4: Protect Your Trading Capital
Saving enough money to fund a trading account takes a lot of time and effort. It can be even more difficult if you have to do it twice.
It is important to note that protecting your trading capital is not synonymous with never losing. All traders experience trading losses. Protecting capital means not taking unnecessary risks and doing everything you can to maintain your trading business.
Rule 5: Be a Market Learner
Think of it as continuing education. Traders need to stay focused on learning more every day. It is important to remember that understanding the market, and all of its intricacies, is an ongoing, lifelong process.
Hard research allows traders to understand facts, such as what different economic reports mean. Focus and observation allow traders to sharpen their instincts and learn the nuances.
World politics, news events, economic trends—even the weather—all have an impact on markets. The market environment is dynamic. The more traders understand past and present markets, the more prepared they will be for the future.
Rule 6: Risk Only What You Can Afford to Lose
Before you start using real cash, make sure that all the money in that trading account is actually spendable. If not, the merchant must continue to save until it runs out.
Money in trading accounts should not be allocated to children's school fees or paying mortgages. Traders should not allow themselves to think that they are simply borrowing money from this other important obligation.
Losing money is quite traumatic. Even more so if it is capital that should never have been staked in the first place.
Rule 7: Develop a Methodology Based on the Facts
Taking the time to develop a good trading methodology is well worth the effort. It may be tempting to believe in the "easy to print money" trading scams that are prevalent on the internet. But facts, not emotions or expectations, should be the inspiration behind developing a trading plan
Rule 8: Always Use Stop Loss
A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be a dollar amount or percentage, however, it limits the trader's exposure during the trade. Using a stop loss can take some of the pressure off a trade because we know that we will only lose X amount on a given trade.
Not having a stop loss is a bad practice, even if it leads to a winning trade. Exiting with a stop loss, and therefore incurring a trading loss, is still a good trade if it falls within the rules of the trading plan.
The ideal is to exit all trades with a profit, but that is not realistic. Using a protective stop loss helps ensure that losses and risks are limited.
Rule 9: Know When to Stop Trading
There are two reasons to stop trading: an ineffective trading plan, and an ineffective trader.
Ineffective trading plans show significantly larger losses than anticipated in historical testing. That happened. The market may have changed, or its volatility may have reduced. For whatever reason, the trading plan didn't work out as expected.
Stay unemotional and businesslike. It's time to re-evaluate the trading plan and make some changes or start over with a new trading plan.
A failed trading plan is a problem that needs to be solved. This is not necessarily the end of the trading business.
An ineffective trader is one who makes a trading plan but is unable to follow it. External stress, bad habits, and lack of physical activity can cause this problem. A trader who is not in peak condition for trading should consider taking a break. Once the difficulties and challenges have been overcome, the trader can return to business.
Rule 10: Keep Trading in Perspective
Stay focused on the big picture when trading. A losing trade shouldn't surprise us; It is part of the trade. Winning a trade is just one step towards a profitable business. It is the cumulative profit that makes the difference.
Once a trader accepts wins and losses as part of the business, emotions will have little effect on trading performance. That's not to say that we can't get excited about very profitable trades, but we must remember that losing trades are never far away.
Setting realistic goals is an important part of keeping trading in perspective. Your business should get a reasonable return within a reasonable time. If you're hoping to become a multi-millionaire on Tuesday, you're setting yourself up for failure.
Conclusion:
Understanding the importance of each of these trading rules, and how they work together, can help a trader build a viable trading business. Trading is hard work, and traders who have the discipline and patience to follow these rules can increase their chances of success in a highly competitive arena.