5 Trading Rules to Live (Or Die) By
If you've been around the markets awhile, you've probably encountered someone who's "blown out their account" and no longer trades. That is not the goal here folks.
One of the most important things about every trade is ensuring you "stay alive" to trade another day. That is why risk management is so important.
Here are 5 trading rules to help you stay alive to trade another day.
- Start small.
If you are trying out a new trading strategy or dipping your toe into a new trading vehicle, start small. It takes time to test a new methodology and learn the mood of a new market. Every market has a different feel, moves differently and has different liquidity flows. Starting small allows you to learn the ins and outs of a new market or strategy without breaking your account.
- Don't trade with your mortgage or rent money.
Use money you can afford to lose. Again, that's not the goal here. But, if you are faced with the stress of having to turn a profit so you can pay the mortgage or rent, it will decrease the likelihood of your success. Removing financial pressure and stress from your trading will allow you to be objective and unemotional about the trades you choose and how you manage them once they are live.
- If you aren't sure, stand aside.
Unless you are fully confident in your analysis, your methodology and your risk/reward analysis, don't put the trade on. You need to put the odds on your side with every trade. That means doing your due diligence and having confidence before you pull the trigger.
- Don't trade too many positions at once.
How much is the right number is dependent on many things including the size of your account and the amount of time you have to devote to monitoring your positions. Are you a full-time trader that can monitor multiple trades throughout the day? Or, are you a part-time trader that is studying markets in the evenings or on weekends. Again, like #1 – start small. It is better to have a smaller amount of positions on until you build up a steady pattern of consistent trading profits. Having too many pots on the stove and not enough time to stir them all leads to burnt food.
- Let your profits run.
This may sound obvious. But, it is amazing how many traders stubbornly hang onto losers, hoping they will come back. Yet, once a position is profitable, the trader quickly takes a profit, and fails to let it grow. Depending on the type of method you are employing, letting profits run can be an important ingredient in trading success. Some trading strategies, like trend following, will involve multiple smaller losers, with few winners that have a bigger payoff.
Embrace your winners and let them run. One approach you can employ is to move stops incrementally higher as a position moves in your favor. That can lock in more and more of a profit every time the position gains.
Take the long view
Trading is not the 50-year dash, it's a marathon. You have to pace yourself and make sure you have the resources you need as you round the corner on that 20th
mile. After all, at that point you'll still have six more to go.
Connect with me
What are some of the challenges you've faced in your trading? Tweet me at @shecantrade
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I'd love to hear from you.
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