If you want to be a successful stock trader, you only need a few minutes online to find phrases like “plan your trade; trade your plan” and “keep your losses as small as possible.” For traders who are just starting out, these tidbits can seem more like a way to waste time than useful advice. If you’ve never traded before, you probably just want to know how to make money quickly.
Each of the rules below is important, but their effects are strong when they all work together. Keeping these things in mind can help you do much better in the markets.
Rule 1: Always have a plan for your trades.
A trading plan is a written set of rules that tells a trader when to buy, when to sell, and how to handle their money.
With the technology we have now, it’s easy to try out a trading idea before putting real money at risk. This method, called “backtesting,” lets you try out your trading idea using historical data to see if it will work. Once a plan has been made and backtesting shows that it works well, it can be used to trade in the real world.
Your trading plan won’t always work. Get out of it and try again.
The important thing is to stay with the plan. Even if the trades you make outside of your trading plan turn out to be winners, it’s not a good idea to do them.
Rule 2: Trade as if you were running a business.
To be successful at trading, you need to treat it like a business, not a hobby or a job.
If you treat it like a hobby, you won’t put in the effort to learn. If it’s a job, it can be hard because you don’t get paid regularly.
Trading is a business that comes with costs, losses, taxes, risk, uncertainty, and stress. As a trader, you are basically running a small business, and you need to do research and plan to get the most out of it.
Rule 3: Make the most of technology
The business of trading is a competitive one. It’s safe to assume that the person on the other side of a trade is using all of the technology at their disposal.
Traders can look at and study the markets in an infinite number of ways with charting platforms. Backtesting an idea with data from the past keeps you from making costly mistakes. By getting market updates on our phones, we can keep an eye on trades from anywhere. Technology that most of us take for granted, like a fast internet connection, can help traders do much better.
Using technology to your advantage and staying up-to-date on new products can make trading fun and profitable.
Rule 4: Take care of your money
It takes a lot of time and work to save up enough money to fund a trading account. If you have to do it twice, it can be even harder.
It’s important to remember that keeping your trading capital safe doesn’t mean you’ll never lose money on a trade. All traders have losing trades. To protect your capital, you should avoid taking risks that aren’t necessary and do everything you can to keep your trading business going.
Rule 5: Learn as much as you can about the markets
Think of it as a way to keep learning. Traders need to keep their minds on learning new things every day. It’s important to remember that learning about the markets and all of their complexities is a process that lasts a lifetime.
Traders can understand the facts, like what the different economic reports mean, by doing a lot of hard research. Traders can sharpen their instincts and learn about the small details if they pay attention and stay focused.
The markets are affected by world politics, news, economic trends, and even the weather. The market is always changing. The more traders know about how markets have worked in the past and how they work now, the better prepared they will be for what comes next.
Rule 6: Don’t bet more than you can afford to lose
Make sure that all of the money in your trading account is really spendable before you start using real money. If it isn’t, the trader should keep saving until it is.
You shouldn’t use money in a trading account to pay for college for your kids or the mortgage. Traders should never think that they are just borrowing money from these other important bills.
It’s bad enough to lose money. Even more so if it’s money that shouldn’t have been put at risk to begin with.
Rule 7: Make a plan that is based on facts
Taking the time to come up with a good trading method is time well spent. There are a lot of “so easy it’s like printing money” trading scams on the internet, and it can be tempting to believe them. But putting together a trading plan should be based on facts, not feelings or hopes.
Traders who are not in a hurry to learn usually find it easier to sort through all the information on the internet. Think about this: if you wanted to change careers, you would probably have to go to college or university for at least a year or two before you could even apply for a job in the new field. To learn how to trade, you need at least the same amount of time, research, and study based on facts.
Rule 8: Use a stop loss every time
A trader’s stop loss is the amount of risk he or she is willing to take on each trade. The stop loss can be a dollar amount or a percentage. Either way, it limits the trader’s risk during a trade. Using a stop loss can make trading less stressful because we know that on any given trade, we can only lose X amount.
Even if you win a trade without a stop loss, it’s still a bad idea. Even if you use a stop loss and end up with a losing trade, it is still good trading as long as you follow the rules of your trading plan.
The best thing would be to get out of every trade with a profit, but that is not possible. By using a protective stop loss, you can make sure that your losses and risks are kept to a minimum.
Rule 9: Know when to stop buying or selling
There are two things that can make you stop trading: a bad trading plan or a bad trader.
When tested in the past, a trading plan that doesn’t work shows much bigger losses than were expected. This does happen. The markets may have changed, or they may have become less volatile. No matter what the reason, the trading plan is not working out as planned.
Stay calm and get down to business. It’s time to look at the trading plan again and either make some changes or start over with a new one.
A trade plan that doesn’t work is a problem that needs to be fixed. It might not be the end of the business of trading.
A trader who makes a plan but can’t stick to it is not a good trader. This problem can be made worse by stress from the outside, bad habits, and not getting enough exercise. If a trader is not at their best, they should think about taking a break. After dealing with any problems or challenges, the trader can get back to business.
Rule 10: Don’t lose sight of the big picture
When trading, keep your eye on the big picture. We shouldn’t be surprised when we lose money on a trade. It’s part of the business. A trade that goes well is just one step on the way to making money with a business. It’s the total amount of money made that makes a difference.
Once a trader realizes that winning and losing are just part of the job, emotions will have less of an impact on how well they do. That doesn’t mean we can’t get excited about a really good trade, but we should always remember that a bad trade is never far away.
Setting goals that are realistic is an important part of keeping things in perspective when trading. Your business should bring in a fair amount of money in a fair amount of time. If you think you’ll be rich by Tuesday, you’re setting yourself up to fail.
Understanding the importance of each of these trading rules and how they work together can help a trader start a successful 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 very competitive market.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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