It just takes a few minutes on the internet to find advice like “plan your trade; trade your plan” and “keep your losses to a minimum” for someone who wants to become a successful stock trader. These tips seem more like a diversion than practical guidance to novice traders.
Your chances of being successful in the markets are increased by the combination of the following rules.
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.
Rule 1: Always Use a Trading Plan
A trading plan is a set of guidelines that outlines the conditions for entry, exit, and money management for each purchase made by a trader.
Test a trading concept using the technology available today before investing real money. This technique, called backtesting, enables you to test your trading idea on historical data to see if it is feasible. A plan can be utilized in actual trading after it has been developed and backtesting yields positive results.
Here, adhering to the plan is crucial. Even if a trade goes well, going against the trading plan is regarded as a bad strategy.
Rule 2: Treat Trading Like a Business
You must treat trading as a full- or part-time business rather than as a pastime or a job if you want to be successful.
When it’s taken as a hobby, learning isn’t really committed to. If it’s a job, the lack of a consistent paycheck can be annoying.
Trading is a business that comes with costs, losses, taxes, stress, and danger. You should conduct research and develop a strategy to optimize your business’s potential as a trader, since you are essentially a small business owner.
Rule 3: Use Technology to Your Advantage
The trading industry is a competitive one. It is reasonable to presume that the other party in a trade is making every use of the technology at their disposal.
Traders can view and analyze markets in countless ways with the help of charting platforms. By using historical data to backtest an idea, costly mistakes can be avoided. With a smartphone, we can receive market updates and keep an eye on trades from any location. We often take for granted the kind of technology that can improve trading performance, such as a fast internet connection.
Investing in technology and staying up to date on new products can make trading enjoyable and profitable.
Rule 4: Protect Your Trading Capital
Gaining enough cash to open a trading account requires patience and work. If you have to do it twice, it could be even more challenging.
It’s crucial to understand that safeguarding your trading funds does not equate to never losing a trade. Every trader experiences losing deals. Avoiding needless risks and making every effort to keep your trading business afloat are key components of capital protection.
Rule 5: Become a Student of the Markets
Consider it to be ongoing education. Traders must stay committed to learning something new every day. It is crucial to keep in mind that comprehending the markets and all of their nuances is a continuous, lifetime process.
Thorough investigation enables traders to comprehend the facts, such as the significance of various economic reports. Traders can hone their intuition and pick up on subtleties by being focused and paying attention.
The markets are impacted by global politics, news, economic trends, and even meteorological conditions. The landscape of the market is changing. Traders are better equipped to handle the future when they have a deeper understanding of both the past and present markets.
Rule 6: Risk Only What You Can Afford to Lose
Make sure the funds in that trading account are expendable before using real money. The trader should continue saving if it isn’t.
You shouldn’t put money toward a mortgage or college tuition in a trading account. Traders should never let themselves believe that these other significant responsibilities are merely sources of credit.
It is traumatizing enough to lose money. This is particularly true if the money involved was never supposed to be at risk in the first place.
Rule 7: Develop a Methodology Based on Facts
It is worthwhile to invest the necessary time in creating a reliable trading strategy. The “so easy it’s like printing money” trading scams that are widely available online may be very alluring. But a trading plan should be developed based on facts, not feelings or hope.
It is usually easier for traders who are not in a rush to learn to sort through the vast amount of information available on the internet. If you were to start a new career, you would have to complete a year or two of coursework at a college or university before you could apply for jobs in the new field. The same amount of time and fact-based research and study are required when learning to trade.
Rule 8: Always Use a Stop Loss
A trader’s predetermined level of risk acceptance for each trade is known as their stop loss. The stop loss restricts the trader’s exposure during a trade and can take the form of a percentage or dollar amount. Because we know we will never lose more than X on a trade, using a stop loss can help reduce some of the anxiety associated with trading.
Even if it results in a profitable trade, it is not a good idea to trade without a stop loss. If it complies with the trading plan’s guidelines, exiting a losing trade with a stop loss is still considered good trading.
The ideal—though impractical—is to close out every trade in profit. Protective stop losses help guarantee that risks and losses are kept to a minimum and that you have enough capital left over to trade the next day.
Rule 9: Know When to Stop Trading
An ineffective trading strategy or an ineffective trader are the two main causes of trading cessation.
A trading plan that is ineffective results in bigger losses than historical testing has predicted. That occurs. Perhaps there has been less volatility or a shift in the markets. The trading plan isn’t working as it should for whatever reason.
Remain detached and professional. It’s time to review the trading plan, make a few adjustments, or create a brand-new one.
A trading plan is created by an inefficient trader, but they are unable to stick to it. This issue may be exacerbated by bad habits, lack of physical activity, and external stress. If a trader is not feeling well, they might want to take a break. The trader can get back to business after resolving any issues and obstacles.
Rule 10: Keep Trading in Perspective
When trading, keep the big picture in mind. We shouldn’t be shocked by a lost trade; it happens in the world of trading. To have a profitable business, one must first complete a winning trade. What matters is the total earnings over time.
Emotions no longer have as much of an impact on a trader’s performance once they accept wins and losses as inevitable parts of the game. To be clear, we should never lose sight of the possibility of a losing trade, even though we should still be thrilled about a particularly successful trade.
Keeping trading in perspective requires setting reasonable goals. Your company ought to generate a respectable profit in a respectable length of time. Should you anticipate becoming a multimillionaire by next Tuesday, you’re putting yourself in a precarious situation.
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