In life there are rules. If I were to guess the reason we have them is to enforce order to keep up a standard way of living. In the stock market there’s also rules. The problem is there not always followed, which is why you as a trader must develop discipline when trading. Below are a set of rules I follow which keeps me disciplined. These rules kept me from getting reckless in markets, and if you follow them it will do the same for you.
Rule 1: Create a trading plan before trading any stock
Once you decided what stock to trade you must then develop a trading plan. A trading plan is like a trader’s diary of do’s and don’ts before they take a trade. Knowing when to enter, and exit a trade is extremely important towards being a successful trader. It is also important to have a strategy in place, just incase a trade doesn’t go your way.
Rule 2: Paper trade to reduce risk
Before taken on any live trades, it’s always best to paper trade. By paper trading you not only reduce your risk, but you get comfortable on placing trades. Because paper trading is a live data feed which emulates live trading you’ll gain variable experience the more you trade. Always remember practice makes perfect. So practice, practice, practice…
Rule 3: Never trade at open bell
While this is tempting for novice traders, you should never trade at a market open. It is always wise to wait 15 minutes after openings bell before trading due to price volatility. When market opens prices are extremely volatile so it’s best to stay out of markets during these times. By during this you avert auto systems, pre-market trading, and unfilled orders from disrupting your trades.
Rule 4: Never risk more than 3% of your total portfolio on any one stock trade.
There are old traders, and there are bold traders, but there are never any old bold traders. Protecting capital should be your main priority if you plan on becoming a successful trader. One of the biggest mistakes novice traders make is they fail to protect capital. Protecting capital should be your #1 priority before thinking of profiting.
Rule 5: Cut your losses at 1% to 3% when wrong without question.
One of the biggest faults humans have is they hate to be wrong. This can be a disastrous if you’re a trader because it can result to you losing lots of money. Successful traders know when to cut losses when they think they’re wrong. So don’t be ignorant in admitting you are wrong because no trader is always right.
Rule 6: Master one style and stick to it
Find your trading style and stick to it. Never think you should jump from one trading style to another, because you can easily lose focus. Remember trading is an art. It’s more important you discover your style.
Rule 7: Let price and volume be your guide.
Never listen to opinions about the stock market or individual stocks you are considering trading. Everything is reflected in the price and volume of the stock so use them as your guide. Study the price chart of a stock before planning an entry or exit position. Watch volumes to measure strength and never guess when making a decision.
Rule 8: Use stop orders to manage risk
One of the best ways to protect capital is to place a stop order on every trade. A stop order is use to minimize loss, especially when a stock goes against you. It is always wise to place a 10 cent stop especially when trading bulk load of shares. Remember the name of the game is risk management so use stop orders to limit your risk.
Rule 9: Understand market orders vs. limit orders
Market orders tell your broker to buy or sell at the best available price. Limit orders let you control the maximum and minimum prices at which you will buy and sell. Limit orders are better because you have more control and can be used more easily with strategies.
Rule 10: Avoid margin risk
The whole point of trading using a margin is to increase the amount of potential returns. However, leveraging more money can put you at risk, so keep your margins under control. If you decide to go the margin route, trade with a 4:1 intraday margin. This way you limit your exposure, and by during so limit your risk.
Rule 11: Take time out.
Successful stock trading isn’t solely about trading. It’s also about emotional strength and physical fitness. Reduce stress by taking time off trading and work and work on other things instead. A stressful trader will not make it in the long-term so take time off to relax. This is extremely important towards your learning career in becoming a succesful trader.
Rule 12: Don’t be average
In order to succeed in the stock market, you must aim to be better than average. Average traders may do well short-term, but in the long-term they tend to get killed. To do well as a trader, you simply need to not do what the others are doing. One of the worst things you as a trader can do, is buy when retailers are buying. A professional trader in most cases, buys when corporations and banks are buying. This is simply because these institutions have the biggest leverage potential. Because of this they have more impact to move a stock due to they’re buying power. So if you really want to be successful as a trader follow these steps and you’re do well. And remember, average traders gets average results, so don’t be average.
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