These 10 golden rules give you the fundamental guidelines to successful trading.
1. Plan your trade and trade your plan. You must have a trading plan to succeed. But if you are good enough you can manage even without it, provided you have a vision of the future. Making money in the markets has almost nothing to do with how often you win — but everything to do with how you manage your risk.
2. The trend is your friend. Do not buck the trend. When the market is bullish, go long. On the reverse, if the market is bearish, you short. Never go against the trend, if you are not good enough to do so and if you can’t wait the right moment again.
3. Focus on capital preservation. The most important step that you must take when you deal with your trading capital. You main goal is to preserve the capital. You should not trade more than 3-5% of your deposit in a single trade. Some other traders advice never to risk more than 2% of your account equity on any one investment, trade, or recommendation.
4. Know when to cut loss. If a trade goes against you, sell it and let go. Do not hold on to a bad trade hoping that the price will go up. Most likely, you end up losing more money. Before you enter a trade, decide your stop loss price, a price where you must sell when the trade turns sour. It depends on your risk profile as of how much you should set for the stop loss. Anyway, you can manage even without a stop loss point, but you must buy at the right, perfect moment. Anyway it’s always better to use protective stops!
5. Take profit when the trade is good. Before entering a trade, decide how much profit you are willing to take. When a trade turns out to be good, take the profit. You can take profit all at one go, or take profit in stages. Once you have covered the spread, you have nothing to lose. In any case you must be able to le the profit run, that’s the real secret of a real good trader. Always remember that how you exit a trade is as important, if not more important, than how you enter it.
6. Be emotionless. Two biggest emotions in trading: greed and fear. Do not let greed and fear influence your trading plan. That’s very important indeed, you must have, what we call an ice blood.
7. Be a really well informed trader. Trade only when you have done your own research and analysis. Read all the news and try to guess what is happening afterwards. Be very careful and learn also how to Ignore the News when necessary.
8. Keep a trading journal. When you buy a currency or stock, write down the reasons why you buy, and your feelings at that time. You do the same when you sell. Analyze and write down the mistakes you have made, as well as things that you have done right. By referring to your trading journal, you learn from your past mistakes. Improve on your mistakes, keep learning and keep improving. Anyway, feel free also not to have one, if you have a very powerful memory, and if you can learn from your previous mistakes.
9. When in doubt, stay out. When you have doubt and you are not sure where the market or stock is going, stay on the sideline. Sometimes, doing nothing is the best thing to do.
10. Do not overtrade. Ideally you should have 3-5 positions at a time. No more than that. If you have too many positions, you tend to be out of control and make emotional decisions when there is a change in market. Do not trade for the sake of trading.
And finally remember to let profits run
This simple rule is the key to being a successful trader. It is three simple words that are very hard to actually implement. When we get a profitable trade our natural fear of losing the unrealized cash kicks in and we truly want to close it out now and take the money. Most trading consists of long periods of small winners and losers followed by a few huge winners that make the difference between overall profitability and simply breaking even or losing due to trading costs (commissions, spread, and slippage).
It is our ability to let the huge winners become just that – huge – that determines how we will perform overall during the year.
The key to letting winners run is to have trailing stops that are outside the daily noise of the market so that they are not tight enough to get stopped out during ‘normal’ trading. This means being prepared to give up a significant portion of a winning trade’s open profit and is the thing that makes this so hard to implement. In fact, we should be adding to a winner and widening stops rather than working out how tight our stops can be to capture maximum profit. The trade has already shown you that it intends to be a winner, and the chances are it is a low-risk idea to add to the position now rather than ‘strangle it’ with stops that are too tight.
It is very important that your position management rules allow for large winning trades, and that the rules are pre-defined and understood before you place the trade. This will allow you (if you have confidence in your method and discipline) to stick to your rules when you do get the big winner.