The goal may be to reach financial freedom or to maintain it through successful trading. Nothing is going to replace gathering facts and information, using that insight to make better decisions and thus ensure a greater chance of successful trading.
Don’t make the rookie error of thinking going in to trading is easy and or, a get-rich-quick scheme.
You do not have to know anything about trading before you get into it, but a great start is to make the commitment to learn all you can about trading. It isn’t likely that you’ll become a successful trader and make consistent profits if you do it as a casual sideline.
For many traders, better trading decisions come with time to build sufficient skill and experience, and let’s not forget that traders who are successful also love trading.
However, to get started here are seven top stock trading rules to live by.
1. Trading plan
You must have a trading plan. It’s time to dispense with the myth of easy money or that day trading comes naturally. The only thing that comes naturally is the ability and passion for the hard work trading entails. Sure, there may be innate skill, but often it is honed through diligence and the presence of certain behaviours and traits that are built up over time.
Professional investors read to build up a knowledge base and they know how to counter their biases when it comes to trading. A trading plan is an essential part of this. It’s the blueprint for trading. You may tweak it over time as you refine your trading strategy based on results. It should be tested using historical data before you apply it to a real-time trade.
Developing a strategy allows you to take some of the stress out of decision making because with a plan you will have identified your goals and your strategy to achieve them as well as the level of risk (i.e. how much of your capital are you willing to lose) you are comfortable with. Experts suggest no more than 1% of your account should be at risk on any one trade.
An important element of your trading plan is identifying when and where you are going to enter a trade, what the indicators will look like, what the pricing action needs to be doing to make you enter a trade. Just as importantly, it will tell you when to exit at a pre-defined target.
2. Use a stop loss
Don’t forget to implement a stop loss to minimise your losses. This is an order placed with a broker to sell an asset once it reaches a particular price point if the price moves against you. It’s used for short-term or long-term trading. It eases the pressure of monitoring a security daily. Set your limits in advance and the trade is automatically triggered.
The additional common tool is a take profits order. This automatically exits when your trade reaches your target profit level, again meaning you don’t have to sit and watch the price change constantly to manually exit.
3. It’s not a hobby
Do you have plans to dabble in the market? Some people are happy to devote just a couple of hours here and there as a trader to play in the market, but be wary of any claims of alleged success rates.
The adverts that claim an individual managed to turn a small lump sum into a treasure chest of money or can make some substantial sum through a nine-week course are never substantiated.
For many professional investors this is the day job and, as such, they spend time learning and reading about markets to increase their knowledge. Your job is to learn more about the markets you are trading in, to have practised on demos to develop your strategy and to practise building up your expertise the more you trade.
4. Write it all down
It doesn’t have to be in Dear Diary form but this is part of the art of discipline and is one of the character traits that many successful stock market traders exhibit.
In recording your daily activities you can see where you may have winning trades and losing trades and ultimately, you should be able to refine your trading strategy if necessary. The type of information that should be included in your daily record might include:
- Entry price (along with a screenshot of chart at time of)
- Exit price (along with a screenshot of chart at time of)
- Size of position
- Stop loss and take profit levels
- Profit or loss
- Reasons for entering the trade
- How you felt during the trade
5. Know thyself
Don’t shy away from the introspection required to be a successful trader. Market-beating strategies are one thing; another is understanding yourself, your biases and what helps pull those levers to make stock market trading decisions.
There are many guides available to tell you about necessary characteristics to become a successful trader and plainly a positive mental attitude may lead you to find more opportunities when trading.
Understanding whether you have what it takes to become a successful trader should lead you to be realistic about what trading encompasses and what you have to do to make it successful, how it fits in with your goals and why you want to do it.
Also, understand how you manage in uncertain conditions. Successful traders are able to focus and make decisions among chaos. They are able to determine, assess and evaluate risks with greater accuracy, and then to monetise those risks.
6. Make peace with losses
George Soros once said, “I’m only rich because I know when I’m wrong.” Like other successful traders, Soros is willing to cut a trade that isn’t working and has the discipline to do so. This is also part of knowing yourself.
If you are able to put in place a trading discipline and have determined your exit strategy, then you should minimise your losses. However, even if it turns disastrous, learn to take your losses, turn them in to teaching moments about risk management and move on.
A consistent theme among highly successful traders is that many experience failure but it doesn’t lay them low for any extended period of time. Losses are part and parcel of trading. The key is that your losses total less than your gains.
7. Have patience
Patience runs parallel to discipline when it comes to successful trading. They are equally important attributes for a trader. It’s not likely you’ll become an successful trader overnight.
Expect the first couple of years to be a steep learning curve. It takes that long to experience different market conditions and to make a few mistakes all adding to your trading expertise. Trading sometimes require you to have the patience and discipline to do nothing.
Impatience may mean you take profits before a move is complete. If you have clarity in your trading strategy, you’ll have the confidence to avoid moves that could damage your bottom line. And patience means if you have had losses, use it as an opportunity to return to basics and gain a better understanding of price action.