for Successful Trading
Top 10 Rules for Successful Trading
Introduction
Anyone who wants to become a profitable stock trader needs only spend a few
minutes online to find such phrases as "plan your trade; trade your plan" and
"keep your losses to a minimum." For new traders, these tidbits seem more like a
distraction than actionable advice.
The rules below work together for results that increase your odds of succeeding
in the markets.
KEY TAKEAWAYS
Treat trading like a business, not a hobby or a job.
Plan your strategies and stay educated.
Set realistic expectations for your business.
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Top 10 Rules for Successful Trading
Rule 1: Always Use a Trading Plan
A trading plan is a set of rules that specifies a trader's entry, exit, and money
management criteria for every purchase.
With today's technology, test a trading idea before risking real money. Known as
backtesting, this practice allows you to apply your trading idea using historical
data and determine if it is viable. Once a plan has been 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 of the trading plan,
even if they turn out to be winners, is considered poor 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 it's approached as a hobby, there is no real commitment to learning. If it's a
job, it can be frustrating because there is no regular paycheck.
Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and
risk. As a trader, you are essentially a small business owner, and you must
research and strategize to maximize your business's potential.
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Top 10 Rules for Successful Trading
Rule 3: Use Technology to Your Advantage
Trading is a competitive business. It's safe to assume that the person on the
other side of a trade is taking full advantage of all the available technology.
Charting platforms give traders infinite ways to view and analyze markets.
Backtesting an idea using historical data prevents costly missteps. Getting
market updates via smartphone allows us to monitor trades anywhere.
Technology that we take for granted, like a high-speed internet connection, can
increase trading performance.
Using technology to your advantage, and keeping current with new products,
can be fun and rewarding in trading.
Rule 4: Protect Your Trading Capital
Saving enough money to fund a trading account takes 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 experiencing a losing trade. All traders have losing trades. Protecting
capital entails not taking unnecessary risks and doing everything you can to
preserve your trading business.
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Top 10 Rules for Successful Trading
Rule 5: Become a Student of the Markets
Think of it as continuing education. Traders need to remain focused on learning
more each day. It is important to remember that understanding the markets
and their intricacies is an ongoing, lifelong process.
Hard research allows traders to understand the facts, like what the 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 impact the
markets. The market environment is dynamic. The more traders understand the
past and current markets, the better prepared they are to face the future.
Rule 6: Risk Only What You Can Afford to Lose
Before using real cash, make sure that money in that trading account is
expendable. If it's not, the trader should keep saving until it is.
Money in a trading account should not be allocated for college tuition or the
mortgage. Traders must never allow themselves to think they are simply
borrowing money from these other important obligations.
Losing money is traumatic enough. It is even more so if it is capital that should
have never been risked in the first place.
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Top 10 Rules for Successful Trading
Rule 7: Develop a Methodology Based on Facts
Taking the time to develop a sound trading methodology is worth the effort. It
may be tempting to believe in the "so easy it's like printing money" trading
scams that are prevalent on the internet. But facts, not emotions or hope, should
develop a trading plan.
Traders who are not in a hurry to learn typically have an easier time sifting
through all of the information available on the internet. If you were to start a new
career, you would need to study at a college or university for at least a year or
two before you qualify to apply for a position in the new field. Learning to trade
demands the same amount of time and fact-driven research and study.
Rule 8: Always Use a 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, but it limits
the trader's exposure during a trade. Using a stop loss can take some of the
stress out of trading since we know we will only lose X amount on any given
trade.
Not having a stop loss is bad practice, even if it leads to a winning trade. Exiting
with a stop loss, and therefore a losing trade is still good trading if it falls within
the trading plan's rules.
The idea is to exit all trades with a profit, but not realistic. Using a protective stop
loss helps ensure that losses and risks are limited and that you have preserved
enough capital to trade another day.
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Top 10 Rules for Successful Trading
Rule 9: Know When to Stop Trading
There are two reasons to stop trading: an ineffective trading plan and an
ineffective trader.
An ineffective trading plan shows greater losses than anticipated in historical
testing. That happens. Markets may have changed, or volatility may have
lessened. For whatever reason, the trading plan simply is not performing as
expected.
Stay unemotional and businesslike. It's time to reevaluate the trading plan and
make a few changes or start a new trading plan.
An unsuccessful trading plan is a problem that needs to be solved. It is not
necessarily the end of the trading business.
An ineffective trader makes a trading plan but is unable to follow it. External
stress, poor habits, and lack of physical activity can all contribute to this
problem. A trader not in peak condition for trading should consider taking a
break. After any difficulties and challenges have been dealt with, the trader can
return to business.
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Top 10 Rules for Successful Trading
Rule 10: Keep Trading in Perspective
Stay focused on the big picture when trading. A losing trade should not surprise
us; It's a part of trading. A winning trade is just one step to a profitable business.
It is the cumulative profits that make a difference.
Once a trader accepts wins and losses as part of the business, emotions have
less effect on trading performance. That is not to say that we cannot be excited
about a particularly fruitful trade, but we must keep in mind that a losing trade is
never far off.
Setting realistic goals is an essential part of keeping trading in perspective. Your
business should earn a reasonable return in a reasonable amount of time. If you
expect to be a multi-millionaire by next Tuesday, you're setting yourself up for
failure.
The Bottom Line
Most of the rules outlined above have one thing in common: attention to risk or
losing money. That's because you're in the business of making money in the
markets. Losses will inevitably occur. The trick is to keep the losses small enough
to keep trading until you find more winning trades.
Experienced traders know when it's time to take a loss and have incorporated
that into their trading strategy. Traders also know when it's time to take profit, so
they may move their stop loss in the direction of the trade to lock in some profit
or take profit at the current market price. Either way, there will always be another
trade setup down the road.
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Top 10 Rules for Successful Trading
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5 Tips For Overcoming Market Volatility
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