*Rule No.1: Always Use a Trading PlanA trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria. Using a trading plan allows traders to do this, although it is a time consuming endeavor.
With today's technology, it is easy to test a trading idea before risking real money. Back testing, applying trading ideas to historical data, allows traders to determine if a trading plan is viable, and also shows the expectancy of the plan's logic. Once a plan has been developed and back testing shows good results, the plan can be used in real trading. The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor trading and destroys any expectancy the plan may have had.
A trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria. Using a trading plan allows traders to do this, although it is a time consuming endeavor.
With today's technology, it is easy to test a trading idea before risking real money. Back testing, applying trading ideas to historical data, allows traders to determine if a trading plan is viable, and also shows the expectancy of the plan's logic. Once a plan has been developed and back testing shows good results, the plan can be used in real trading. The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor trading and destroys any expectancy the plan may have had.
*Rule No.2: Protect Your Trading CapitalSaving money to fund a trading account can take a long time and much effort. It can be even more difficult (or impossible) the next time around. It is important to note that protecting your trading capital is not synonymous with not having any losing trades. All traders have losing trades; that is part of business. Protecting capital entails not taking any unnecessary risks and doing everything you can to preserve your trading business
*Rule No.3: Use Technology to Your AdvantageTrading is a competitive business, and one can assume the person sitting on the other side of a trade is taking full advantage of technology. Charting platforms allow traders an infinite variety of methods for viewing and analyzing the markets. Back testing an idea on historical data prior to risking any cash can save a trading account, not to mention stress and frustration. Getting market updates with smartphones allows us to monitor trades virtually anywhere. Even technology that today we take for granted, like high-speed internet connections, can greatly increase trading performance. Using technology to your advantage, and keeping current with available technological advances, can be fun and rewarding in trading.
*Rule No.4: Always Use a Stop LossA stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be either a dollar amount or percentage, but either way it limits the trader's exposure during a trade. Using a stop loss can take some of the emotion out of trading, since we know that we will only lose X amount on any given trade. Ignoring a stop loss, even if it leads to a winning trade, is bad practice. Exiting with a stop loss, and thereby having a losing trade, is still good trading if it falls within the trading plan's rules. While the preference is to exit all trades with a profit, it is not realistic. Using a protective loss helps ensure that our losses and our risk are limited.
*Rule No.5: Become a Student of the MarketsThink of it as continuing education - traders need to remain focused on learning more each day. Since many concepts carry prerequisite knowledge, it is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process. Hard research allows traders to learn the facts, like what the different economic reports mean. Focus and observation allow traders to gain instinct and learn the nuances; this is what helps traders understand how those economic reports affect the market they are trading. World politics, events, economies - even the weather - all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they will be to face the future.
*Rule No.6: Risk Only What You Can Afford to Lose, I mentioned that funding a trading account can be a long process. Before a trader begins using real cash, it is imperative that all of the money in the account be truly expendable. If it is not, the trader should keep saving until it is.
It should go without saying that the money in a trading account should not be allocated for the kid's college tuition or paying the mortgage. Traders must never allow themselves to think they are simply "borrowing" money from these other important obligations. One must be prepared to lose all the money allocated to a trading account.
Losing money is traumatic enough; it is even more so if it is capital that should have never been risked to begin with.
Conclusion Understanding the importance of each or these trading rules, and how they work together, can help traders establish a viable trading business. Trading is hard work, and traders who have the discipline and patience to follow these rules can increase their odds of success in a very competitive arena.
HAPPY AND SAFE TRADING EVERYONE.
