Trading Rules

Essential Rules for Profitable Trading

If you're new to stock trading, you may feel overwhelmed by the volume of advice out there. You might be more focused on making money quickly than on following seemingly abstract rules like "plan your trade" or "minimize losses". However, these tips are not just empty phrases - they are crucial for success.

By following the rules below, you can greatly improve your chances of succeeding in the markets. Each rule is important in its own right, but when applied together, they can have a powerful impact on your trading outcomes.

KEY TAKEAWAYS

• Approach trading as a business venture, rather than a pastime or occupation.

• Acquire comprehensive knowledge about the trading business.

• Establish practical and achievable goals for your trading enterprise.

Frequently Asked Questions

What do I do if my trade is in the money (e.g. profitable)?

During bullish markets, trading can be profitable and straightforward. However, it requires skill to know when to take profits. To remove emotions from closing a profitable position, traders may use trailing stops. This tool allows for automatic adjustments to the stop-loss order to follow the price trend.

How much should I risk on any given trade?

A crucial part of any trading plan is having a stop loss in place. This could be a financial stop, such as setting a limit of $500, or a technical stop based on market indicators like breaking a 50-day moving average or reaching new highs. Regardless of the type of stop loss used, it's essential to always include it as part of your trading plan.

What are the key elements to a trading plan?

The beginning of a trade is crucial and should align with your trading plan. Whether your trade is based on fundamental factors or technical analysis, your strategy should reflect that. It's important to adjust your position size to allow room within the stop loss and avoid risking everything on a single position.

How much money should I commit to a single trade?

Position size is crucial in determining the success of a trading strategy. It's important to ensure that your stop loss can withstand a small loss relative to your trading capital. For instance, if your stop is $1.50 away from the current market, you'll need to determine a position size that won't consume too much of your trading capital.

For example, if you're willing to risk $500 on the trade and your stop is $1.50 away based on a technical price level, your position size should be around 333 shares, requiring $6,600 in tradable capital.

Keep in mind that a smaller position will use up less of your trading capital while still allowing you to execute your strategy.

Summary

The rules mentioned above all emphasize the importance of managing risk and minimizing losses. As a trader, your goal is to generate profits in the markets, but losses are inevitable. The key is to limit losses to a manageable level so that you can continue trading and find more winning opportunities.

Experienced traders recognize when it's appropriate to cut losses, and they incorporate this strategy into their trading plan. They also know when it's time to take profits, whether by moving their stop loss to lock in gains or by selling at the current market price. Rest assured, there will always be new trading opportunities in the future.