When people start getting involved in the area they’re not aware of a lot, the wisest thing is to start from the basics. If you would ask, every professional trader would say that before even starting to learn all the technical details or the theory of trading you need to be aware of basic “rules”, which is more about you then about the market. So we’re about to talk of so-called “10 commandments” of trading. What follows are ten of the most important aspects of trading that you need to understand, accept and implement if you want to trade successfully and profitably. Let’s start!
1. Get proper training
Regardless of whether you are an absolute beginner or have traded for a while but never really had any real training, you need it. Even if you’re an experienced trader, you still need to train yourself because the market moves quickly, everything changes and so should do the traders.
Trading education is the basis of your trading career, without which you will basically be wandering around in the dark hoping to stumble upon the right path. It is always surprising how many traders are willing to lose money in the markets before they really learn how to trade. Take your time to learn and make a small investment in your trading education if you want to give yourself the best shot at becoming a successful trader. Take every possibility to learn that you’ll have on your way.
2. Be realistic.
You won't become a full-time trader in six months, perhaps not in a year, maybe not even in five years. I hate to be the one who brings it to you, but someone has to. You must be realistic if you want to make success in trading. Traders know that “succeeding in trading” means making money over the course of a year, but If you have a small account, you are not going to get rich quickly, nor should you be bothered by this. Your goal at the end of the year to have a profit; if you have done this, then you can consider it a successful trading year. Obviously, some years will be better than others.
In addition, the trading mindset required to make money is to focus on learning how to trade properly, and not on “getting rich”, profits or rewards. Making money on trading is the end result of being realistic and doing a lot of things right, consistently over time. It doesn’t happen just because you want it. People often believe that trading is a “simple” way to make money, but, like everything else, it takes time, effort, dedication and a passion for the craft. A professional sports play earns a lot of money, but only because he is disgustingly passionate about his chosen field. Thus, passion and skills are something you must have before the money will come, in trading as with anything in life.
3. Know what your trading strategy is and master it.
It always very surprising how many people don’t even have a trading strategy, but still risk money in the market. If you do not have a strategy that you’re trading with, meaning a trading edge that gives you a better than random chance in the market, you are just gambling and may as well just go to the casino instead.
Having a strategy and its development takes time, effort and discipline, which is also why many traders don’t have one. If you think you'll just "catch it" and somehow will make money on the market, you are wrong. Trading success isn't the result of luck or an accident, it requires time, effort, loyalty, and passion.
In addition, once you have really mastered an effective trading strategy you have to stick to it, you cannot hesitate and switch between trading strategies, as many traders do. Trading involves both losses and winnings, and you should be able to stay focused while losing. If you jump from a ship and give up your strategy after a couple of losses, you don’t give it enough time to play and to work in your favor, and you will simply end up in the endless, useless quest for the “Holy Grail” trading method that does not exist. Have a strategy, know it perfectly, master it and stick to it.
4. Be honest with yourself
If you’re drowning in the ocean of debts and really cannot afford to lose any money, you probably shouldn’t be trading live in the near future (but you still can learn and trade in demo account in the meantime). If you're not in the financial position to risk money in the market, you also won't have mental abilities for this.
It means, that people who are trying to trade, but who cannot afford any losses of money, are already entering the market with the wrong approach to trading. You will never be able to let a trade play out or properly absorb losses if you are constantly worried about losing money. Losing money is the part of trading, you lose and win, and if you know what you are doing, hopefully, you’ll win more then you lose at the end of the year. But, to do that, you must be in the right mood, and this won’t happen if you cannot afford to trade. Be honest with yourself about this so that you aren’t starting with the wrong mindset.
5. Don’t let the results of your last trade influence your next trade
This one is big. Traders are often heavily influenced by their last trade. For example, you had a trade that reached your stop loss by one pip and then roaring in your favor. What do you do? How do you react? Such a situation either makes or breaks you. That's what separates the winners from the losers, the pros from the amateurs.
The pro trader in this example will not be affected by such a situation, while the amateur will be mad, angry and want to take revenge. It is true that for successful trading you must have ice in your veins because if you give in to every little feeling and emotion that the market causes in you, you will become an emotional wreck of a trader and quickly lose all your money.
The main part of the logic or fact that allows you to trade with ice in your veins is that any transaction has a random distribution of being a win or loss. This means that your wins and losses will be randomly distributed between a series of deals.
For example: if you expect to win 60% of your trades, then within 50 traders it means that you have to lose 20 of them, but you don’t know WHICH 20 will be loses. Therefore, if you have 5 loses in a row, but you have not yet lost 20, it is still within the natural statistical dispersion of your trading advantage, and therefore there is absolutely no reason to become emotional or do stupid things as a result of these 5 losing trades. It may be hard to remember this in the “heat of the moment”, but if you don’t you’ll probably give in to the emotional impulses that make you do stupid trading and as a result to lose money.
6. Do not avoid losses, control them
The truth is that you cannot avoid losses in trading. So just learn to control them through the risk-reward and money management. The sooner you do this, the easier your life as a trader will become. If you try to avoid losses, you can do it for a while, but if you inevitable have one, it will be big and cost you a lot of money.
Trading is the control of losses and their containing under a certain amount of money per one transaction. Do not avoid them at all, because it is impossible.
7. Be excited about trading, not about money
To succeed in anything in life, you need to be passionate about IT, not about what it can do for you. Trading is no different. You need to love trading and look at charts and price actions to become a good trader and ultimately make money. Professional traders make money as a result of their love and passion for trading, and not because they “want to make a lot of money”. Therefore, you need to focus on learning how to trade and become the best trader you can be, not just on “making money”.
8. Plan your deals
Too often traders jump into the market without a plan. They have no risk management strategy, no exit strategy, and often they just enter a random game, without an entry strategy.
Before you enter a trade and risk your money on the market, you must first find out what your per-trade dollar risk amount is. You don’t exceed this amount at any time.
Then you need to know what your entry is, and when you see it, you can enter, but only then. Do not jump in when your entry signals or strategy is not there, this is called gambling. Before you enter, you need to plan a place of exit or at least plan trading exit strategy. You may end up deviating from this strategy depending on market conditions, but it is important that you have a plan for how you would prefer to get out of the transaction, rather than deviate from it if you really do not feel compelled because of abrupt price action changes as the trade unfolds.
If you just accidentally jump in the market with no risk, entry and exit plan, you end up losing money for a variety of reasons, such as over-trading, over-leveraging, not taking profits / letting winners become losers, etc.
9. Save your capital for “easy prey” trades
Too often, traders spend their trading capital on trades that either does not meet the criteria of their trading strategy or have very poor settings. One of the most important ‘rules’ of trading is to preserve your capital so when the obvious setups come along, you can ‘jump’ on them like a trading predator and get the most from them.
This means you shouldn't be in the market all the time. In fact, most of the time you should not be in the market, but you should be observed as a ‘bystander', waiting for those ‘easy prey' trades to form. Then, when they do, you have plenty of money in your account to take advantage of them since you didn't waste it all on poor trade setups.
10. Do not break the commandments
That’s why they are commandments. Deviation from them will get away with you once or twice. But, sooner or later the error will accumulate, will gain a critical mass, and then the trouble is inevitable. If at least one of these rules seems difficult for you to fulfill, this is a reason to work on yourself. After all, these Commandments were not written from the ceiling, but are the product of a long journey, lessons learned through mistakes and loses.