Anyone who wants to become a profitable stock trader needs only spend a few minutes online to find such phrases as “plan your trade; trade your plan” and “keep your losses to a minimum.” For new traders, these tidbits seem more like a distraction than actionable advice.
Rule 1: Always Use a Trading Plan
A trading plan is a set of rules that specifies a trader’s entry, exit, and money management criteria for every purchase.
With today’s technology, test a trading buguru idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading.
Rule 2: 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.
Rule 3: Use Technology to Your Advantage
Trading is a competitive business. It’s safe to assume that the person on the other side of a trade is taking full advantage of all the available technology.
Charting platforms give traders infinite ways to view and analyze markets. Backtesting an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can increase trading performance.
Rule 4: Protect Your Trading Capital
Saving enough money to fund a trading account takes 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.
Rule 5: 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 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.
