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If you're new to trading, you probably just want to know how to hurry up and make money.Each of the rules below is important, but when they work together the effects are strong. Keeping them in mind can greatly increase your odds of succeeding in the markets.
Always Use a Trading Plan-A trading plan is a written set of rules that specifies a trader's entry, exit, and money management criteria for every purchase.With today's technology, it is easy to test a trading idea before risking real money.
Treat Trading Like a Business-To be successful, you must approach trading as a full- or part-time business, not as a hobby or a job.If it's approached as a hobby, there is no real commitment to learning. If it's a job, it can be frustrating because there is no regular paycheck.Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are essentially a small business owner and you must research and strategize to maximize your business's potential.
Protect Your Trading Capital-Saving enough
money to fund a trading account takes a great deal of time and effort. It can
be even more difficult if you have to do it twice.It is important to note that
protecting your trading capital is not synonymous with never experiencing
a losing trade. All traders have losing trades. Protecting capital entails not
taking unnecessary risks and doing everything you can to preserve your trading
business.
Become
a Student of the Markets-Think of it as continuing
education. Traders need to remain focused on learning more each day. It is
important to remember that understanding the markets, and all of their
intricacies, is an ongoing, lifelong process.Hard research allows traders to
understand the facts, like what the different economic reports mean. Focus and
observation allow traders to sharpen their instincts and learn the nuances.
Risk
Only What You Can Afford to Lose-Before
you start using real cash, make sure that all of the money in that trading
account is truly expendable. If it's not, the trader should keep saving until
it is.Money in a trading account should not be allocated for the kids' college
tuition or paying the mortgage. Traders must never allow themselves to think
they are simply borrowing money from these other important obligations.Losing
money is traumatic enough. It is even more so if it is capital that should have
never been risked in the first place.
Develop
a Methodology Based on Facts-Taking
the time to develop a sound trading methodology is worth the effort. It may be
tempting to believe in the "so easy it's like printing money" trading
scams that are prevalent on the internet. But facts, not emotions or hope,
should be the inspiration behind developing a trading plan.Traders who are not
in a hurry to learn typically have an easier time sifting through all of the
information available on the internet. Consider this: if you were to start a
new career, more than likely you would need to study at a college or university
for at least a year or two before you were qualified to even apply for a position
in the new field. Learning how to trade demands at least the same amount of
time and fact-driven research and study.
Always
Use a Stop Loss-A Stop
Loss is a predetermined amount of risk that a trader is willing to
accept with each trade. The stop loss can be 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 stress out of trading since we know that we will only lose
X amount on any given trade.Not having a stop loss is bad practice, even if it
leads to a winning trade. Exiting with a stop loss, and therefore having a
losing trade, is still good trading if it falls within the trading plan's
rules.The ideal is to exit all trades with a profit, but that is not realistic.
Using a protective stop loss helps ensure that losses and risks are limited.
Know
When to Stop Trading-There are two reasons to stop trading: an ineffective trading
plan, and an ineffective trader.An ineffective trading plan shows much greater
losses than were anticipated in historical testing. That happens. Markets may
have changed, or volatility may have lessened. For whatever reason, the trading
plan simply is not performing as expected.Stay unemotional and businesslike.
It's time to reevaluate the trading plan and make a few changes or to start
over with a new trading plan.An unsuccessful trading plan is a problem that
needs to be solved. It is not necessarily the end of the trading business.
An ineffective trader is one who makes a trading plan but is unable to follow
it. External stress, poor habits, and lack of physical activity can all
contribute to this problem. A trader who is not in peak condition for trading
should consider taking a break. After any difficulties and challenges have been
dealt with, the trader can return to business.
Keep
Trading in Perspective-Stay focused on the big
picture when trading. A losing trade should not surprise us; It's a part of
trading. A winning trade is just one step along the path to a profitable
business. It is the cumulative profits that make a difference.Once a trader
accepts wins and losses as part of the business, emotions will have less of an
effect on trading performance. That is not to say that we cannot be excited
about a particularly fruitful trade, but we must keep in mind that a losing
trade is never far off.
Conclusion-Understanding
the importance of each of these trading rules, and how they work together, can
help a trader 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.
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