Top 10 Rules for Successful Trading

JEAN FOLGER
 

Updated May 13, 2021

Rule 1: Always Use a Trading Plan

A trading plan is a written set of rules that specifies a trader's entry, exit,
and money management criteria for every purchase.

With today's technology, it is easy to test a trading idea before risking real
money. Known as back testing, 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 back testing shows good results, the plan can be used in real
trading.

Sometimes your trading plan won't work. Bail out of it and start over.

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 pay check.

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.

Rule 3: Use Technology to Your Advantage

Trading is a competitive business. It's safe to assume that the person sitting
on the other side of a trade is taking full advantage of all of the available
technology.
Charting platforms give traders an infinite variety of ways to view and analyse
the markets. Back testing 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 greatly 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 a great deal 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 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.

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 all of 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 have

an impact on 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 you start using real cash, make sure that all of the money in that
trading account is truly expendable. If it's not, the trader should keep saving
until it is.
Money in a trading account should not be allocated for the kids' college tuition
or paying 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.

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 be the inspiration behind developing 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. Consider this: if you
were to start a new career, more than likely you would need to study at a
college or university for at least a year or two before you were qualified to
even apply for a position in the new field. Learning how to trade demands at
least 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
either way, 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 that 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 having a losing trade, is still good
trading if it falls within the trading plan's rules.

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.
An ineffective trading plan shows much greater losses than were 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 revaluate the trading plan and
make a few changes or to start over with 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 is one who 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 who is 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.

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 along the
path 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 will
have less of an 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 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 establish a viable trading business. Trading
is hard work, and traders who have the discipline and patience to follow these
rules can increase their odds of success in a very competitive arena.
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