Top Ten Rules to Trading Success
by PT Cheng
There is no doubt that stock trading
is getting very popular nowadays and it's the preferred
vehicle for most people to make money. Almost every
household talks about it. Most of them enter the market
now and then. To be successful in the trading game,
there are some rules to follow. By violating the rules,
you will definitely on the losing side of the game.
Regardless of all the trading books and newsletters
that have cropped up, all of the market gurus are
sharing and following the same trading rules. You
can't live without them if you want to succeed in
your trading. Here are the rules to successful trading,
in random order, and they apply in all trading situations:
1.PLAN YOUR TRADE AND TRADE YOUR
You must have a trading plan to succeed. A trading
plan should consist of a position, why you enter,
stop loss point, profit taking level, plus a sound
money management strategy. A good plan will remove
all the emotions from your trades.
2.THE TREND IS YOUR FRIEND.
Do not buck the trend. When the market or stock is
bullish, go long. On the reverse, if the market is
bearish, you short. Never go against the trend.
3.FOCUS ON CAPITAL PRESERVATION.
The most important step that you must take when you
deal with your trading capital. You main goal is to
preserve the capital. Do not trade more than 10% of
your portfolio in a single trade. For example, if
your portfolio is $10,000, every trade should limit
to $1000. If you don't do this, you'll be out of the
market very soon.
4.KNOW WHEN TO CUT LOSS.
If a trade goes against you, sell it and let go. Do
not hold on to a bad trade hoping that the price will
go up. Most likely, you end up losing more money.
Before you enter a trade, decide your stop loss price,
a price where you must sell when the trade turns sour.
It depends on your risk profile as of how much you
should set for the stop loss.
5.TAKE PROFIT WHEN THE TRADE IS GOOD.
Before entering a trade, decide how much profit you
are willing to take. When a trade turns out to be
good, take the profit. You can take profit all at
one go, or take profit in stages. When you've recovered
your trading cost, you have nothing to lose. Sit tight
and watch the profit run.
Two biggest emotions in trading: greed and fear. Do
not let greed and fear influence your trade. Trading
is a mechanical process and it's not for the emotional
ones. As Dr. Alexander Elder said in his book Trading
For A Living, if you sit in front of a successful
trader and observe how he trades, you might not be
able to tell whether he is making or losing money.
That's how emotionally stable a successful trader
7.DO NOT TRADE BASED ON A TIP FROM
A FRIEND OR BROKER.
Trade only when you have done your own research and
analysis. Be an informed trader.
8.KEEP A TRADING JOURNAL.
When you buy a stock, write down the reasons why you
buy, and your feelings at that time. You do the same
when you sell. Analyze and write down the mistakes
you've made, as well as things that you've done right.
By referring to your trading journal, you learn from
your past mistakes. Improve on your mistakes, keep
learning and keep improving.
9.WHEN IN DOUBT, STAY OUT.
When you have doubt and not sure where the market
or stock is going, stay on the sideline. Sometimes,
doing nothing is the best thing to do.
10.DO NOT OVERTRADE.
Ideally you should have 3-5 positions at a time. No
more than that. If you have too many positions, you
tend to be out of control and make emotional decisions
when there is a change in market. Do not trade for
the sake of trading. Above all the rules, there is
one single most important element in trading success:
YOU. The markets have been the same and will always
be the same. You decide whether the trade is a success
or failure. Losing is part of the game. Don't give
up and keep improving. Be disciplined, determined,
persistent, and most of all enjoy your trading.
About the author:
PT Cheng is the owner of FinanciallyRich. Get excellent
tips on how to be your own boss, have more money,
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