Trading is an easy business to get into: No degrees or specialized training are required, start-up costs are relatively low and it can be done from the comfort of home. The logistical ease of getting started, however, should in no way imply that becoming a profitable trader is simple.
Most experienced traders would attest that success depends on many factors including hard work, research, planning, discipline and being a lifelong student of the markets. As with many businesses, there are certain principles that, when followed, can greatly increase the chances that a trader will be successful.
Here, we explore 10 timeless rules that are an important part of successful trading, no matter the techniques, markets or time frames you trade.
1: Treat trading like a business
As a hobby, trading quickly gets expensive: Just dabbling can prevent traders from gaining the proficiency and experience they need to become consistently profitable. As a job, trading can be discouraging because there is no such thing as a regular paycheck: Traders can work 10-hour days all week and end up empty handed on Friday. Rather than thinking in terms of a hobby or job, it is important to approach trading as a business.
Like any business, trading incurs expenses, losses, taxes, uncertainty and risk, and these factors must be taken into account. The key to developing a successful trading business is good planning, both for the overall business and for the actual trading. Traders who want to weather the learning curve and stay in the industry for the long haul will put in the time and effort to research and develop strategic plans that encompass short- and long-term goals and the details of trading: What will be traded and how it will be traded.
2: Always use a trading plan
A new trader would not have to look far to come across the well-known saying, “Plan your trade and trade your plan.”
The first part — plan your trade — is accomplished through a trading plan: A written set of rules that defines entry, exit and money management criteria. Good trading plans often are based on experience or market observations and developed through research and exhaustive testing. While it is time-consuming and challenging to develop a profitable plan, a major advantage is the consistency it delivers.
The second part of the adage — trade your plan — is, for many traders, as difficult as developing a trading plan. Trade your plan means following your trading plan exactly, without making excuses, second-guessing or otherwise deviating from the rules that were so painstakingly created. Taking trades that fall outside the plan is considered bad trading, even if they turn out to be profitable.
Often, invalid trades are the result of our emotions: Fear, greed, impatience, overconfidence, etc. Other times, they stem from our mistakes, or pilot error as it is often called. Trading your plan is not as easy as it sounds, and most traders must work hard to develop the necessary skills over time. Consistently following the rules of an effective trading plan is part of what allows a trading business to make money over time.