Alex GoodmanMany newcomers to the realm of the stock market think that all they need to do to start making money is to figure out how to hustle in order to do successful trading. However, there are a few fundamental guidelines that every successful stock trader must be aware of.
These rules may seem more like distractions than helpful suggestions, but each one is essential, and when they all work together, they can significantly improve your prospects of market success.
In a Nutshell
- For each purchase, always employ a successful trading plan to describe the entry, exit, and money management criteria.
- To make the most of your business, treat trading like a real business.
- To monitor trades from anywhere, take advantage of the technology at your disposal and stay up to date on new items.
- Avoiding needless risks and maintaining your trading operation are two ways to protect your trading capital.
- To better comprehend the complexity of the past and contemporary marketplaces, continuously study them.
- Never risk capital you shouldn’t risk and only ever risk what you can afford to lose.
- Spend the time to create a successful trading plan in order to construct an approach that is based on facts.
- To reduce a trader’s exposure during a trade and reduce stress, always utilize a stop loss.
- Know when to cease trading, whether it’s because a trading strategy is ineffective or a trader is ineffective.
Rule 1: Always Use a Successful Trading Plan
A successful trading plan is a written set of rules that tells a trader when to buy, when to sell, and how to handle their money.
Emily RobertsWith today’s technology, it is easy to test an investment idea before risking real money. This practice, known as backtesting, 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 actual trading.
The mind is everything; what you think, you become.
Buddha
Sometimes your successful trading plan doesn’t work. Abandon it and start over.The key is to stick to the plan. Trading outside the plan, even if it is a winning trade, is considered a bad strategy.
Rule 2: Treat Trading Like a Business
To be successful, you must approach trading as a full time or part time business, not as a hobby or a job.
If it is approached as a hobby, there is no real commitment to learning. If it is 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 must research and strategize to maximize the potential of your business.
Morgan RileyRule 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 a trade is taking full advantage of all available technology.
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Charting platforms offer traders an infinite variety of ways to view and analyze markets. Checking an idea against historical data avoids costly mistakes. Receiving market updates via smartphone allows us to monitor trades anywhere. Technology we take for granted, such as a high speed Internet connection, can greatly increase trading performance.
Using technology to your advantage and keeping up with new products can be fun and rewarding in the trade.
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 keep in mind that protecting your trading capital is not synonymous with never having a losing trade. All traders have losing trades. Protecting capital means not taking unnecessary risks and doing everything possible to preserve your trading business.
Rule 5: Study the Markets
Think of it as continuous learning. Traders should focus on learning more every day. It’s important to keep in mind that learning about the markets and all of their complexities is a long term process.
Rigorous research allows traders to understand the facts, such as the meaning of various economic reports. Concentration and observation allow traders to hone their instincts and learn the nuances.
Global politics, news, economic trends and even the weather influence the markets. The market environment is dynamic. The better traders know the past and present of the markets, the better prepared they will be to face the future.
Rule 6: Risk Only What You Can Afford to Lose
Before starting to use real money, make sure that all the money in that trading account is really expendable. If it is not, the trader should continue to save until it is.
Money in a trading account should not be used for children’s college tuition or mortgage payments. Traders should never allow themselves to think that they are simply borrowing money from these other important obligations.
Losing money is traumatic in itself. Even more so if it is capital that should never have been risked.
Rule 7: Develop a Fact based Methodology
Spending time to develop a sound successful trading methodology pays off. It can be tempting to believe the “so easy it’s like printing money” scams that abound on the Internet. But it is facts, not emotions or hope, that should inspire the development of a successful trading plan.
Traders who are not in a hurry to learn often find it easier to sift through all the information available on the Internet. Think about this: if you were to start a new career, you would most likely have to study at a college or university for at least a year or two before you were qualified to apply for a position in the new field. Learning to trade requires at least as much time and fact based research and study.
Rule 8: Always Use a Stop Loss
A stop loss is a fixed amount of risk that a trader is willing to take on each trade. The stop loss can be a dollar amount or a percentage, but in either case, it limits the trader’s exposure during a trade. Using a stop loss can alleviate some of the stress associated with trading because we know 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 having a losing trade, is still a good trade if it conforms to the rules of the successful trading plan.
The ideal is to exit all trades in profit, but that is not realistic. Using a protective stop loss helps to limit losses and risks, and to conserve enough capital for another day’s 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 results in losses far greater than those predicted in historical tests. It happens. The markets may have changed, or volatility may have decreased. For whatever reason, the successful trading plan is simply not working as expected. Don’t get carried away and be realistic. It is time to reevaluate the negotiation plan and make some changes or start over with a new negotiation plan.
A failed trading plan is a problem to be solved. It is not necessarily the end of the trading activity.
An ineffective trader is one who draws up a trading plan but is unable to follow it. External stress, bad habits and lack of physical activity can contribute to this problem. A trader who is not in optimal trading condition should consider taking a break. Once the difficulties and challenges have been overcome, the trader can resume trading.
Rule 10: Maintain Perspective
Focus on the big picture when trading. A losing trade should not be a surprise; it is part of trading. A winning trade is just one step on the way to a profitable trade. It is the accumulated profits that make the difference.
Once a trader accepts profit and loss as part of the business, emotions will have less effect on trading performance. This is not to say that we can’t get excited about a particularly fruitful trade, but we should keep in mind that a losing trade is never far away.
Setting realistic objectives is essential to keep your operations in perspective. Your business must generate a reasonable return in a reasonable period of time. If you expect to be a multi millionaire by next Tuesday, you are doomed to failure.
Wrap Up
In short, if you want to be a successful stock trader, you need to follow a few important rules that, when used together, can make your chances of success much higher. Traders should always have a successful trading plan, treat trading like a business, use technology to their advantage, protect their trading capital, study the markets constantly, only risk what they can afford to lose, create a fact based method, always use a stop loss, and know when to stop trading. Remember, trading takes time and effort, but with the right rules, it can be a lucrative endeavor.
FAQs about Successful Trading Plans
A successful trading plan is a series of written guidelines that spells out the entry, exit, and money management criteria a trader will use for each buy. It is crucial since it aids traders in adhering to their plans and preventing rash or emotional decisions.
No, the ideal strategy for trading is to treat it like a full or part time business. If you approach it as a hobby, you might not be as committed to studying, and if you approach it as a career, it might be irritating because you aren’t getting paid on a regular basis. Due to the fact that trading is a business with associated costs, losses, taxes, uncertainty, stress, and risk, it is crucial to plan and conduct research in order to maximize the potential of your trading enterprise.
There are several ways that technology may be applied to trading, including backtesting, using cellphones to get market information, and employing high speed Internet connections to improve trading performance. To boost their performance, traders should utilize the newest goods and stay current on emerging technologies.
No, traders should safeguard their trading capital by avoiding unwarranted risks and taking all reasonable precautions to secure their trading operation. It is crucial to keep in mind that safeguarding trading capital does not equate to never placing a lost transaction, and traders should only take on risk they can afford to lose.
A stop loss is the maximum risk that a trader is ready to take on each transaction. It lowers a trader’s risk during a transaction and lessens some of the stress associated with trading. Utilizing a stop loss can reduce risks and losses while preserving funds for another trading day. Even if it results in a profitable transaction, not using a stop loss is a bad practice.
The starting point is the momentum of the trade. If it is due to a fundamental event, such as an economic data report or a comment from a Federal Reserve official, your trade is based on those fundamental factors, and your successful trading plan should reflect that. If your successful trading plan is based on technical analysis, such as staying above the 50 day moving average, again your strategy should be based on that. The key is to adjust your position size so that you have enough margin to stay within your stop loss and not risk it all on one position.
Article Sources about Successful Trading Plan
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- The Balance | Successful Trading – 10 Rules for Successful Trading
- Corporate Finance Institute – Trading Psychology
- Option Alpha | Successful Trading – 10 Golden Rules for Trading Success Regardless of What You Trade
