If you don’t have trading rules set up right from the start before entering a trade, you won’t be successful. Everyone wants to make money in the stock market, but managing risk is also important. Keep your losses small, let your winners run, and take your profits. So how do you do this? The 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.
Whether one trades in 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 setting rules and consistency is the success formula when it comes to trading.
- Here are five trading rules for you to follow:
- Patience
- No chasing
- Do not gamble
- Don’t stick to only one indicator
- Follow the strategy that suits you best
1. Patience
Now, the first rule would always be to learn patience. 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. Only enter if the candle leaves a buy or sell pattern after hitting that level.
One of the problems I see with beginner traders is that they enter into trades too early. If one enters too early, they may experience a big pullback, resulting in a significant loss.
The loss may be enough to hit the stop loss before it bounces back, so it is always better to wait it out before entering.
Managing your risk helps you to be patient. Trading rules like avoiding FOMO keep you patient and protect your brokerage account.
2. No Chasing
Rule number two would be never to try to catch a running stock. For example, if one has already missed an entry opportunity, do not try to catch up by entering at that point.
If one enters a trade too late, they may be at the mercy of a big pullback or even a reversal. That will result in massive losses, not to mention a hit to your ego.
So what are you going to do if you miss your entry? Look for another stock or pair to trade instead of brooding over the lost opportunity.
Remember 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.
3. No Gambling
Rule three would refer to risk management and when to exit a trade. Most beginners would set a fixed stop-loss wherein they cut if they lose a certain amount.
While this is not wrong, it is also a surefire way to miss out on many 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 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, which 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.
4. Don't Stick to One Indicator
Rule four would never let one indicator dictate when to enter and exit. To be a successful trader, one must know that one indicator does not predict whether the currency or the stock will go up or down.
Instead, the indicators 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 market’s movement. Since I like to trade on momentum, I use VWAP, EMA’s, price action, and volume to confirm my trade entry.
In addition, watch out for “gurus” who say they have a magic tool or strategy with a high chance of profits. This is pure BS because no such indicator can predict the market.
Another point to remember is that some indicators use historical data. Thus, they will not tell anything aside from what has happened before.
The interpretation is up to the trader; you must determine the best indicators. 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.
5. Follow a Trading Strategy
The last rule would always be to follow your strategy and never break it, no matter what. It is common for beginner traders to widen their stop loss or hold their position if they are already experiencing a significant loss.
They feel that the market will go their way, hopefully. Please see rule 3 on gambling. Playing the market is not a feeling game, as one must have data and hard facts to execute a good trade.
That also includes knowing when to cut a loss when the trade is bad. With that in mind, it is crucial to always stick to your trading plan.
Most traders use price action strategies when they trade, and price action has been extremely useful in giving good profits to traders for many years.
So, if one has a strategy with 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 trading mentor while you form your trading rules!
Final Thoughts: Trading Rules
Those are the five trading rules that one has to follow if one wants to become a very successful trader.
The veteran traders would say the key to their success would be their iron will and rock-hard discipline when following the rules.
They rack in profits by being consistent with the boundaries they have set for themselves, and I would have to agree.
With this in mind, always remember that trading without the right rules is simply gambling, which is a surefire way to lose money in the long run.
Frequently Asked Questions
Trading rules like cutting your losses and taking your profit are good ones. You never go broke taking a profit.
- Plan your trade
- Trade your plan
- Use a stop-loss
- Cut your losses
- Let your runners run
Always plan your trade. If you go in without knowing your risk/reward ratio, you could blow the trade.
