There are a ton of avenues to growing your own wealth, and for many, the most common one is becoming a stock trader. With more people entertaining the idea, a quick google search will net you all kinds of different advice. Some are phrases like “plan your trade; trade your plan” and “keep your losses to a minimum.”
While these things are nice, they don’t exactly mean anything and aren’t something you can take action on either. This is especially true if you’re the kind of individual who wants to make money and not think too much about it.
Whether you’re being hasty or easing yourself into trading, we wanted to share with you some simple rules for trading. These rules on their own might not seem like much, but they all feed into one another and the effects can be strong when used together. All that we ask is you to keep them in mind when you’re getting into trading.
Always Have A Trading Plan
This is what they mean by “plan your trade; trade your plan”. But we’ll be going into more detail with it. First off, a trading plan itself is a set of rules that outlines a trader’s entry, exit and money management criteria for every purchase that they make.
Thanks to today’s technology, you’re able to put this plan into action without losing any money. This can be done through a tactic called backtesting. The only thing is that this test is based on historical data, rather than current data. Either way, it’s accurate enough for you to determine whether the plan is worth moving ahead with or not.
You may have to make a few adjustments to it, but the idea is – once the plan is viable, you stick to it all the way. Even if there are trades beyond the scope that seem appealing, it’s considered a poor strategy to go with it – even if you do end up winning in the end.
In terms of creating a plan itself it’s a matter of determining what you are buying, how long you’ll hold it for and how much money you’ll be putting into it.
Treat Your Trading Like A Business
One of the largest components to trading is mindset. Whether people are buying or selling, there is always some kind of emotional level to it. For example, when the market crashes, people are very quick to sell their stocks. On the flip side, if things start climbing back up, people are impulsed to buy again – even if it’s from the same business they bailed out of earlier.
If you want to be a cut above the regular people, your mindset needs to change. You need to not see this as a hobby that you do over the weekend. You need to treat this like a business.
Why this is important is because business incurs expenses, losses, taxes, uncertainty, stress, and risk at varying levels. Hobbies aren’t typically things that induce those kinds of emotions, but businesses certainly can do that. By looking at it as a business, you are more mentally prepared for potential failures and it can also instill other habits.
For example, a small business owner will stay relevant in their industry by doing research of their industry. They may not be on top of it, as some of the top brands in the field, but they’re staying relevant. As a trader, you’ll want to be doing that too. You want to be doing some research and make strategies and test things out.
You’ll start doing those if you see your trading as a business.
Use Technology In A Smart Way
The more you get into trading, the more you understand that it’s a competitive business. It’s fair to say that the person on the other end of a trade is using every resource available to them to leverage the trade. This includes technology too.
When you sign up to a trading platform, you’ll notice there is a ton of information given to you. It’s presented in such a way that allows you to analyze the market and to perform backtesting.
Another way to leverage this is to have this information sent to your phone as well, allowing you to monitor trade from anywhere. Even things like having high-speed internet can give you an edge too.
Protect The Trading Capital
Trading is not a cheap thing and requires you to save a lot of money in order to make it worth it. It can be tricky the first time, but it’s detrimental if you have to be doing this twice. So, as a rule, it’s important that you protect your initial trading investment as much as possible.
Note that the importance of protecting this capital isn’t synonymous with experiencing a loss. All traders will experience loss at various points. What we mean by protecting is that you’re not taking unnecessary risks and are doing everything you can to preserve the business you built.
Be A Student Of The Markets
As we’ve suggested in seeing this as a business, it’s important that you spend time investing in it. Not always in more capital, but rather in learning. The world changes rapidly and knowledge can lose its validity over time. You don’t want to be clinging to strategies that worked in the 1950s in today’s society, for example. It’s smarter to stick with what’s more current.
In terms of what you should research – it’s all about understanding the markets, their intricacies. It’s about being able to understand documents and what business decisions actually mean to your own investments. This isn’t something that’s done overnight nor is it something you can get by with once and leave it. It’s an ongoing process lasting for as long as you’re trading.
This knowledge gathering doesn’t just apply to the industry and financial aspects, though!
Knowing economic trends, world politics, news events, and even the weather can all make an impact on markets. Having a general knowledge of these things will help you in making smarter decisions and to mitigate potential losses in the future.
Risk Only What You Can Afford To Lose
How risk tolerant are you? That is how much you value your own money at the moment. A high tolerance means that you’re okay with your investment portfolio having plenty of peaks and valleys, while low tolerance means you’re better off with small dips and higher rises. Even if you have a low tolerance towards risk, it doesn’t mean you’re not fit for trading or anything like that. In fact, we consider it a good thing with regards to your initial capital.
Ultimately, the capital that you are putting into trading at first should be something that you can afford to lose. You shouldn’t be trading all of your life savings away as you’re basically gambling by this point.
If you’re not at the threshold where you feel confident in your position, the key is to keep saving up until you feel confident to dive in.
Why this is so significant is because losing money is always going to hurt. But that pain is worse if the money shouldn’t have been put at risk in the first place.
Base Your Trading On Facts
Methodology is a key part to your trading strategy. After all, the methodology will determine what companies you’re trading with and how much money you’re putting into them. You’ve been using logic and reasoning up to this point and should continue to do so.
This rule is crucial time and again, because people use others’ emotions to get the best of them. There are so many scams out there where people say “it’s as easy as printing money” and hook people in by sheer raw emotion.
On top of that, there is the example we’ve mentioned above where people sell when things are bad and buy when things are getting better. It’s not quite logical, especially when you understand how the market works.
You want to be above all of those emotions and instead base every action you do in trading on facts, rather than speculations.
Another way to look at trading is this way – imagine it’s a new career path for you. If you’re new to the job, what is it that you’d do in the first place? You’d learn about it.
You’d study for a few years to get a grasp of what to do and continue to learn in the context of the position. Trading is no different. Learn and base your work around what you already know.
Have A Stop Loss And Always Use It
A stop loss is a predetermined amount of risk that a trader is open to accept with every trade. This goes back to the risk tolerance that we’ve mentioned before. This stop loss can either be a specific amount of money or a percentage based on the trade amount. Either way, having these limits there will limit the trader’s exposure during a trade.
Having a stop loss will allow you to remove the stress from trading, since you know that you’ll only lose a specific amount in any trade if the trade ever goes bad.
Not having that isn’t smart, as it’s essentially gambling. Even if you feel confident the trade will be a winner, it’s smart to have this stop loss as a backup. Think of it as a band aid to an injury. Even if you don’t end up hurt, having the option available to you is smarter to have, rather then getting hurt and not having any option at all.
Know Your Limits
There are two big reasons to stop trading: an ineffective trading plan, or an ineffective trader.
A poor plan will show massive losses instead of what you were anticipating in backtesting.
This happens, of course. Markets have changed or the volatility has shifted. For whatever reason, your plan simply isn’t working.
The key here is not to panic and to keep things businesslike and unemotional. Simply go back to the drawing board and draft up a new plan. Though this doesn’t necessarily mean it’s the end of the trading business.
The other fact is the trader themselves. They can make a plan, but fail to stick to it.
Things like stress, bad habits, or a lack of physical activity can contribute to a trader not being at their best. These days happen even to the best traders out there.
The key here is to know if something is wrong with you and it’s eating you up, as it might be wise to move on to something else for the day. Taking breaks from trading is alright and it shouldn’t consume your entire day or life for that matter.
Keep It All In Perspective
What we mean by this is to keep the big picture in mind when you are trading. A single loss shouldn’t be a huge surprise to you. It’s all part of trading. At the same time, a winning trade is more than a win. It’s one step closer to a profitable business and your own goals.
And what really matters in that business is that you are winning more than you’re losing. Those culminations of multiple profits is what’ll drive you higher and higher.
Once you’re able to accept both the losses and wins as part of your business, your emotions will have less of an impact on your trading overall. This isn’t to say you should never feel excitement from a win or pain from a loss, but rather not let those emotions determine your next actions.
Beyond that, you also want to be setting realistic goals. Don’t think that you’ll become a multi-millionaire by the end of this week from this business. Instead, recognize that it takes time and that you’ll make your million in several years.
Keep These Rules In Mind
Understanding each of these rules is so important, as each one plays into one or more of these rules already. By following each of these rules you can create a solid foundation for being a good trader. Beyond that, this will increase your odds of success in an area that is highly competitive already.