Most professional traders will concur that discipline, dedication, education and experience are the key ingredients to success in the financial markets. Even though the four are quite easy to understand, they are nevertheless not that easy to implement when it comes to trading.

Financial markets seem to have a set of unwritten rules—you can choose to follow or ignore them at your own peril. This can make or break your overall success. Here are some of the essential rules for trading which need to be in your bones.


Trading is a business, not a gambling game

You should not view trading as a game; you should treat it as what it is—a serious business. Once you start taking it seriously, your mindset will start changing, and you will gain control over your investments. You will also become fully prepared for whatever the market throws at you.

There is a thin line between betting on the markets and investing. You are betting when you have no apparent reason or plan as to what you are doing. When there is a reason and an idea behind your trading, you can call yourself an investor or trader.

Unless you treat trading as the serious business that it is, success won’t come your way.

Create a Trading Plan

Once you’ve gotten rid of the “gambling game” perspective and you’ve committed to treating trading like a serious business, a trading plan is required—every trader needs one. Come up with your own trading rules and stick to them no matter what. You can never achieve much if you lack self-discipline. Discipline is a hard practice to master. Rules are made to be broken, and you will surely break your own rules from time to time. Have a rule in place that helps you to avoid this from happening again. A rule that some traders find helpful is to stop trading for the day after they have suffered a big loss or they feel particularly emotional.

Before opening a trading position, one must always have a detailed plan and a reason for that trade. Look back at historical charting data to find your perfect entry and exit points. Discover where your trade can go wrong or what events can have an impact on your trading position, and act accordingly.

Set up your own trading rules and stick to them, no matter what

You Can Never Predict the Future

When trading, you must be clear about the fact that you can never predict the future. You must think in terms of probability. You must commit yourself to being successful in this business. Create a trading plan that clearly specifies

1) all the items you intend to trade with,

2) your method of trading, and

3) the market you intend to trade in.

Since trading is unpredictable, think in terms of probabilities and be careful with every decision you make.

Educate yourself

Embark on reading and researching as much as you can. Knowledge is a hidden secret to success. Professional traders who boast of having years of trading experience will concur with this, and that is why they never cease to learn.

This is one of the great challenges when trading. People change, and so do the financial markets—and thus trading is a constant learning curve. Like anything in life, the more knowledge and information you gain, the higher your chances of success.

Read and research as often as possible. Never cease to learn new things from the markets, yourself and experienced traders.

Never invest money that you can’t afford to lose

Losing money is a painful experience. The idea of losing money in itself can make any person squirm. Trading is about risking money, and you should never risk money that is destined for rent, food, bills, etc.

Your trading approach and trading psychology will drastically change when using money that, if lost, does not have an effect on your lifestyle. In short, investing money you cannot afford to lose is a sure path to financial suicide.

Never let emotions control you in any way. Banish greed from your emotional and mental makeup. Don’t trade only because you’ve seen a friend make large profits on a certain trade—it may never go the same way for you.

In trading, there is no place for emotions. Therefore, just like greed, fear isn’t something that should accompany you when you’re placing a trade. It must be said again: Do not let emotions influence your trading. Emotional stability is the key for a successful trader.

Trading doesn’t tolerate emotions. Don’t let greed and fear control your decision-making. Money meant for bills and mortgage should never, ever be invested.

Embrace patience

Trading may be boring at times. You need to be patient as you wait for the right opportunities. Don’t give up or quit—these are the times when good things may be about to happen.

Consider professional traders, for instance. Most will sit in front of their computer screens for hours on end, monitoring the markets, and they’ll maybe place one or two trades a week. This requires patience and discipline that some people might not have.

Although trading may be boring at times, employ patience when you monitor the markets.

Learn from, and accept, your losses

As a business person, you should always be aware of the fact that losses are part of trading, however difficult and emotional they may be. When you accept your losses and learn from them, you will find that you are able to cut your losses, and not allow them to get out of hand.

One of the reasons why people make irrational decisions and take irrational actions is simply because they fail to accept and learn from their losses. Most traders find themselves to be unsuccessful in the first year; most may take several years to master the art of trading.

Losses are part of trading; accept them, learn from them, and move on.

Adding to a losing trading position

This is when a trader keeps on holding back, instead of withdrawing from a trade that’s losing. Most new traders tend to add to their positions when they are in a losing trading position. As they continue averaging down, their losses increase.

Adding to a trading position must be done when you are actually inprofit, as the markets have a tendency to keep going in that direction. Most traders stay in a losing position because of two main reasons:

o   The trader doesn’t want to admit that he or she is wrong

o   The trader doesn’t want to lose money

In most cases, a bearish market (downward-moving market) will always tend to go on being bearish, and in a bullish market (upward-moving market), there are high chances that the market will continue on being bullish. The solution is to:

o   Admit you are wrong

o   Place stop loss outside trading ranges

o   Don’t be too confident, particularly when you’ve just made a very profitable trade

Adding to a trading position when you are losing money may not be the wisest idea. Cut your losses short and let your profits run.

Limit your risk

Always make use of a "stop loss". A stop loss is sort of a predetermined risk that a trader should be willing to accept when venturing into the financial markets. Utilizing a stop loss is one of the best methods of giving you control of a set percentage of your total risk. It is also a good way to alleviate mental stress, making you feel comfortable with your trade.

Failure to use a stop loss could be a disaster waiting to happen. Most professional traders will never risk more than 1% to 2% of their total account size on any given trade, with a maximum of 10% on all combined trades.

Money Management is an essential part when trading. Even if you have a profitable strategy, if you do not have funds in your account, the strategy is useless. We have provided an in-depth "Money Management Module", explaining how to integrate money management into your trading strategy.

Limit your losses as much as possible. Use a stop loss, and do not exceed more than 10% of your total account size in all combined trades.

Start small

You only need a small amount of money to get started trading in the financial markets. Later, you can trade with large amounts of money once you start making consistent profits.

Most professional traders start with the minimum trade size possible during their first year. This usually equates to 1 lot in trading size. Once they have become more confident in their trading strategies and their feel for the markets, they increase their trading size accordingly.

Start small until you start generating consistent profits; then increase your trading size.

Keep a record of your trades

Having a daily routine every time you interact with the markets is a key component to becoming a disciplined trader. Maintaining a trading journal is one of the trading activities that are necessary ingredients to professional trading success. The best traders in the world have regular and consistent ways of recording and logging their trades. A trading journal reflects both a trader’s past mistakes and her victories, which are an invaluable resource of lessons to help the trader learn, grow and improve. A journal provides you with perspective, and it keeps you on track to professional trading.

Keep records of every single detail when you are trading. This will help you become disciplined and learn from your mistakes.

Bottom Line

To become successful, there are no specific rules and no holy grail that will help you. Discipline, experience and consistency are what make a successful and outstanding trader.

The above-mentioned basic trading rules are very important; that is, each and every individual rule is significant. But when they are all used together, with due discipline, you would be surprised at how useful they can be.

Summary:

P

Unless you treat trading as the serious business that it is, success won’t come your way.


P

Since trading is unpredictable, think in terms of probability, and be careful with every decision you make.


P

Read and research as much as possible. Never cease to learn new things from the markets, yourself and experienced traders.


P

Trading does not tolerate emotions. Do not let greed and fear control your decision-making.


P

Money meant for bills and mortgage should never, ever be invested.


P

Set up your own trading rules and stick to them, no matter what.


P

Although trading may be boring at times, employ patience when you monitor the markets.


P

Losses are part of trading; accept them, learn from them, and move on.


P

Adding to a trading position when you are losing money may not be the wisest idea. Cut your losses short and let your profits run.


P

Use a stop loss, and do not exceed more than 10% of your total account size in all of your combined trades.


P

Start small until you start generating consistent profits; then increase your trading size.


P

Keep records of every single detail when you are trading. This will help you become disciplined and learn from your mistakes.

 

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