Trading is a skill that can be developed through diligence and adherence to certain principles.
Though there are no rules cast in stone, successful traders imbibe certain attributes which have differentiated them from others. Below are some trading rules which newbies should adopt if they want to be profitable.
6 Important Trading Rules Every Beginner Should Know
1. Always use a trading plan
Having a trading plan is the first step to being a successful trader.
You must state in clear terms why you are entering a trade and what you intend to achieve from a trade. You have to have a contingency plan in case your trade goes wrong and how you can manage risk.
Going into a trade without a plan is like going into a bullpen blindfolded. You would not have any conviction of your own, as you would be swayed by the sentiments of the market. A clear plan helps you stay on track and numb the noise from the market.
2. Treat trading like a business
One major mistake newbies make is to see trading as a past-time hobby, or at worst – gambling. These types of people hardly build the character required to succeed as a trader. If you want to be successful as a trader, then you should consider trading as a full- or part-time business, not a pastime or hobby.
If perceived otherwise, there would not be any serious commitment on your part, and if considered as a job, it may be frustrating since you aren’t compensated regularly.
Have a trading budget, set a revenue target, plus have a detailed strategy. Trading is very much similar to a traditional business. There are costs, losses, taxes, uncertainty, and stress involved. It also requires research and feasibility studies (due diligence) which enable you to spot opportunities.
There are also cycles in the market, just like in business. Major financial institutions have units that are set up purely for trading activities. So why not emulate them in your little way?
3. Focus on honing your skill
The mistake most people make is concentrating on returns rather than improving on their craft.
Yes, you are trading because you want to make money. But what would earn you money is not the frequency of your trades but your knowledge. You may be able to score big in one trade, but what good is it if you can’t replicate it on successive trades or do not know how you were able to make a profitable trade?
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. This is because the stock market is dynamic and ever-changing.
By learning and studying the markets, reading available material, and backtesting your strategies, you improve your craft as a trader. Only then can the money be rolling because you have an in-depth understanding of how the market works.
Make sure you know how to prepare: 5 Solid Reasons Why You Should Backtest Your Trading Strategies
4. Risk only what you can afford to lose
There are many rules when it comes to deploying capital for trading.
Some believe that you should not risk more than 2% of available capital on a single trade. Others share the opinion that you should use no more than a 20% stop loss on each position.
The key thing is that you should use only cash that you can afford to lose. This has a calming effect on your emotions as a trader and helps you make more calculated decisions based on technical analysis rather than emotions.
Risking what you can afford to lose means you would not fret if the trade is going in the opposite of your anticipated direction.
You would be able to take more risks and allow greater margins of error. You would not enter or exit positions frequently, and most of all, you would not be swayed by emotions, which is a recipe for an unprofitable trade.
5. Never revenge trade
After suffering some losses, inexperienced traders tend to engage in revenge trading.
This is trying to recoup their losses from security where they lost money. Revenge trading is an emotional response to a trading loss. The focus on recouping lost funds erodes trading based on technical analysis or methodology.
This is usually a recipe for further losses. Rather than engage in revenge trading, stay unemotional and businesslike. Reevaluate your trading plan and start over.
6. Always use a stop loss
Never go into a trade without an exit plan and a strategy for cutting losses.
A stop-loss covers your rear and limits your losses when the trade goes against your direction. Even if it results in a profitable transaction, not setting a stop loss is a terrible practice.
If it fits inside the trading plan’s criteria, exiting with a stop loss, and so having a lost transaction is still excellent trading. The ideal situation is to profit from every trade, but this is unrealistic. Using a safe stop loss can help you reduce your losses and dangers.
Key Takeaway
Understanding the significance of each of these trading principles, as well as how they interact, may assist a trader in establishing a successful trading firm.
Trading is difficult to work with, and traders who have the discipline and patience to stick to these standards have a better chance of succeeding in a highly competitive market.
