If you don’t have trading rules set up right from the start before you enter into a trade then you won’t be successful. Everyone wants to make money in the stock market but it’s important to be able to manage risk as well. Keep your losses small, let your winners run, and take your profits along the way. So how do you do this? They key is to keep your losses smaller than your gains and be consistent. Shoot for a 60% or more win ratio and have at least a 1:2 risk/reward ratio. Watch our video on the importance of trading rules.
Whether one trades in the stocks or commodities, there will always be trading rules to abide by. Whether you need day trading rules or swing trading rules, make them. As a trader, there are many rules to success, but the most important one may surprise you.
It’s not the stock you pick, and it’s not the performance of the stock, it’s you. You need to
manage yourself before you can ever turn a profit.
Based on this, I’ve put together five rules that all traders need to take to heart and always follow no matter what. Remember that when it comes to trading, setting rules and being consistent with them is the formula to success.
What Are Trading Rules?
- Here are 5 trading rules for you to follow:
- No chasing
- Do not gamble
- Don’t stick to only one indicator
- Follow the strategy that suits you best
Thou Shalt Be Patient
Now, the first rule would always be to learn how to be patient. When one trades, it is essential not to enter too early even if the price has already hit a key support or resistance level.
The tip here is first to see what the candle will do at that level. See if it holds support or resistance. If the candle leaves a buy or sell pattern after hitting that level, then only enter.
One of the problems I see with beginner traders would be that they enter into trades too early. If one enters too early, then he or she may experience a big pullback which will result in a significant loss.
The loss may be enough to hit the stop loss before it bounces back, so it is always still better to wait it out before entering.
Managing your risk helps you to be patient. Trading rules like avoiding FOMO keeps you patient and protects your brokerage account.
Thou Shalt Not Chase
Rule number two would be never to try to catch a running stock. This means that if one has already missed an entry opportunity, do not try to catch up to it by entering at that point.
If one enters into a trade too late, then he or she may be at the mercy of a big pullback or even a reversal. That in itself will result in massive losses and not to mention a hit to your ego.
So what are you to do if you missed your entry? It’s simple, look for another stock or another pair to trade instead of brooding over the lost opportunity.
Keep in mind that the market will always be full of trading opportunities, so move on and find the next one. One of my trading rules is to use the Parabolic Sar indicator.
It’s a great identifier for trends. And spotting trends can help you not chase a stock that’s already moving.
Thou Shalt Not Gamble
Rule number three would refer to risk management and when to exit a trade. Most beginners would set a fixed stop-loss wherein if they lose a certain amount, and they will cut.
While this is not wrong, it is also a surefire way to miss out a lot of good opportunities as the price may bounce back after hitting the stop loss.
So instead of setting a fixed stop loss, you can have a mental one or exit once the candles break the trend.
Let me use an example to explain further. Say I decide to enter a trade at the cross of a resistance and trend line. It might be a cross above VWAP, and a cross of the 9 EMA over the 20 EMA.
These are some of the buy confirmations for me. However, I will cut my losses and sell once the candles break the trend.
In other words, they close below the trend lines because this signifies the trend has broken. A reversal is likely happening.
There is no bag holding or hoping and wishing the trend will reverse. You exit when the trend breaks, simple as that. Avoid emotional trading. Make that one of your trading rules.
Thou Shalt Not Rely On One Indicator Alone
Rule number four would be never to let one indicator dictate when to enter and when to exit. If one wants to be a successful trader, he or she has to be in the mindset that one indicator does not predict whether the currency or the stock will go up or go down.
Instead, the indicators are there to tell the trader that the price is moving in this direction. It will be up to the trader to use a combination of indicators to determine whether the market is bullish or bearish and what action to take.
That said, there is no magic indicator out there that will predict the movement of the market. Since I like to trade on momentum, I use VWAP, EMA’s, price action and volume to confirm my entry into trades.
In addition to that, watch out for “gurus” who say that they have a magic tool or strategy with a high chance of profits. Quite frankly, this is pure BS because there is no such indicator that can predict the market.
Another point to keep in mind is some indicators are based on historical data. Thus they will not tell anything aside from what has happened before.
The interpretation is up to the trader; you need to figure out what indicators will work best for you. The Bullish Bears Team can help you sort through all the market indicators to help you nail down the few that will work for you.
Thou Shalt Follow a Strategy
The last rule would always be to follow your strategy and never break it no matter what. It is not uncommon for beginner traders to widen their stop loss or hold their position if they are already occurring a pretty significant loss.
They feel that the market will go their way, hopefully. Please see rule 3 on gambling. Take note that playing the market is not a feeling game as one needs to have data and hard facts to execute a good trade.
That also includes knowing when to cut a loss when the trade is already not a good one. With that in mind, it is crucial to always stick to your trading plan.
Most traders would make use of price action strategies when they trade, and price action has been studied to be extremely useful in giving good profits to traders for many years.
So if one has a strategy that has an edge in the market, stick to it because going off strategy will result in more losses. If you want to know how to be a successful day trader, follow a day trading strategy. That goes for swing trading too.
Watch the Daily Trading Coach podcast above to become your own trading mentor while you form your trading rules!
Trading Rules Make Or Break You As a Trader
Those are the five trading rules that one has to follow if he or she wants to become a very successful trader.
Now, the veteran traders would also say that the key to their success would be their iron will and their rock hard discipline when it comes to following the rules.
They rack in profits by being consistent with the boundaries that they have set on themselves and I would have to agree.
With this in mind, always remember that trading without the right set of rules is simply gambling and gambling is a surefire way to lose money in the long run.
Luckily with Bullish Bears trading service, we will help you develop your winning strategy — one which takes the guesswork of the game. With the proper training and mindset, you will not be a gambler.