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Top 10 Rules For Successful Trading

Most aspiring traders who are interested in learning how to become profitable traders only need  to spend a few minutes online before seeing phrases like  “plan your trade; trade your plan” and “keep your losses to a minimum.”

For a new trader, this information can seem more like a distraction than any real actionable advice.  A new trader just wants to know how they best setup their charts so they can start making lots of money.

However, to be a successful in trader, one needs to FULLY understand the importance of adhering to a specific set of rules that have guided all types of traders with a varying account sizes. Each of the rules alone is important , however when following ALL of them together real success can be achieved. Adhering to these rules will greatly enhance the traders’ chances of becoming successful!

Rule 1: Trading is a Business
Trading should not be about excitement or taking a trade of boredom. In order to be successful you must approach trading as a full- or part-time business and not as a hobby. Treating trading as a hobby where no real commitment to learning is made trading will most likely prove very expensive!  Trading is a business and there are profits and losses, expenses, taxes, stress and risk. If you are going to be a trader, you are a small business own and have to do your research to maximize your business’s potential.

Rule 2: Always Use a Trading Plan
Your trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria. Without this, the trader will be “trading by the seat of his pants” taking trades on “hunches” and “feelings”. This is the fastest path to ruin!

With the availability of trading software and websites that allow backtesting  it is easy to test a trading strategy  before risking real money. Backtesting  a strategy by applying trading ideas to historical data, a trader can determine if a trading plan is viable and also shows what the expectancy is.

Once the plan has been developed and has been backtested to show profitable results and then plan can be used in real trading. The true difficulty lies in sticking to the plan. It so very tempting to take trades that so not meet the plan and it is this ability that will determine the traders success or failure.

Rule 3: Make full use of technology
Trading is competitive for every dollar lost someone makes a dollar. You can assume the person sitting on the other side of your trade is taking full advantage of technology. Charting platforms will allow a trader a variety of methods to view and analyz the markets. Backtesting your idea on historical data prior to risking your hard earned money can save your trading account.

Rule 4: Protect Your Trading Capital
Saving enough money to fund your trading account can take a long time a lots of hard work. It is vitally important to remember that protecting your trading capital is NOT the same as not having any losing trades. All traders will have losing trades it is part of the business. Protecting capital means not taking any excessive risks that can decimate your trading capital and put you out of business!

Rule 5: Risk Only What You Can Afford to Lose
Before a trader begins using real cash, it is imperative that the money in an account is NOT needed for day to day living and if it is lost it will not crimp your lifestyle  If it is, then the trader should keep saving until it is.

It should go without saying that the money in your trading account is not be allocated for your kid’s college education for the mortgage. One must be prepared to lose all the money allocated to a trading account. If you are not prepared for this then you should not trade!

Losing money can be traumatic, if it is capital that should have never been risked to begin with then it can be devastating!

Rule 6: Become a Student of the Markets
Think of trading as continuing education. Traders should remain focused on learning more every day. It is important to remember that trading is an ongoing, lifelong process.

Politics, economics and even the weather can have an impact on the markets. The markets are dynamic. The more a trader can understand the past and current markets, the better prepared they will be to face the future.

Rule 7: Always, Always, Always Use a Stop Loss
This cannot be stressed enough, using a stop loss gives you predetermined amount of money that a trader is willing to risk on any one trade. Your stop loss can be a dollar amount or percentage but  it must be there no matter what. Using a stop loss helps take some of the emotion out of trading, since we know that we are only risking “x” amount on trade. (This assumes that the trade is not held overnight so the position cannot gap away from you)

Rule 8: Develop a Trading Strategy Based on Facts
Taking the time that is necessary to develop a sound trading plan is worth the time invested. It may be tempting to believe that you can trade in your pajamas while a “black box” software tells you exactly when to take a trade by a green arrow pointing up or a red arrow pointing down then you are destined to lose. If trading were that easy everyone would do it!

Traders take their time to learn will have an easier time sifting through all of the information available on the internet. Remember, if you were to start a new career you would need to study at a college or university for a few years before you were qualified to even apply for a position in the new field. Trading may indeed be the most difficult thing you will ever do!

Ignoring a stop loss even if does work out  and end up being a winning trade is a BAD habit to get into! Exiting when your stop loss is hit and having a losing trade is still good trading as long as it is part of your trading plan. While you want exit all trades with a profit that’s just not going to happen. Using a protective stop loss ensures that any one trade will not devastate a trading account.

Rule 9: Know When to Stop Trading
There are two good reasons to stop trading:

One, your trading plan is not effective.

Two, the trader is not effective.

An ineffective trading plan shows that greater losses than anticipated in backtesting are happening. The markets may have changed, volatility in certain trading instrument may have increased or decreased or the trading plan is now obsolete.

It might be time to reevaluate the trading plan and make some changes or just start over with a new trading plan. An unsuccessful trading plan is a problem that has to be solved or you will go broke!

The ineffective trader is unable to stick to the trading plan. Poor habits or poor physical health can contribute to the problem. A trader who is not in good health should consider a break to deal with any personal problems, be it health or stress or anything else that prohibits the trader from being effective.

Rule 10: Keep Trading in Perspective
It’s important to remain focused on the big picture when trading. Losing trades should not be surprising they are part of trading and will never go away. Just as a winning trade is just one more step on the path to profitable trading. Once a trader learns to accept wins and losses as part of the business, your emotions will bother you less and less over time.

Setting realistic goals is an essential part of keeping trading in perspective.  A 10% return on a $10,000 account is very different than a 10% return on a $1,000,000 trading account. Trying to obtain unrealistic returns on a small account is great way to lose it all.

By Understanding and following these trading can help the trader establish a profitable trading business. Remember, trading is hard work, and traders who have the discipline and patience to follow these rules can greatly increase their odds of success.

-Robert Walsh


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