Many individuals start trading, hoping to make big returns, but lack plan and strategy of how to succeed. You need to decide why you are trading. Is it to make money? How are you going to make money? Are your goals realistic and are you willing to take such risks? It is of utmost importance to set out your business plan and strategy prior to trading.

Trading should be treated as a business.

Below are a few important rules to comprehend for both novice and pro traders.

Divide your capital into segments. Don’t put all the eggs into the same basket. Capital can be divided into; various assets, time frames, sectors, stocks etc. Most people know how to be long the market, but it is worth thinking about what happens should the market turn down violently.

Limit your exposure to market losses!

Ask yourself what losses you are willing to sustain?!

Know what products you are trading. Fx, equities, commodities are all different assets that require understanding. It is very important to truly understand the products within the asset. If you are going to trade CFDs it is important to understand leverage. Should you want to trade options, you will need to properly understand how options are priced and what affects pricing of those.

Stop loss is the first aspect of trading to implement for all traders. You must have a stop loss because even monkeys fall from the trees.

Where is your stop loss level? Do you have a time stop loss level, ie do you stop out of a position if time passes and the stock doesn’t move? Is there an opportunity cost where you can deploy your capital instead?

In today’s partly illiquid markets driven by algorithms it is often advisable to apply stop losses that are executed over the day in order to not end up getting filled at bad prices.

Overtrading is very common among short term traders. People are often driven by news or other short term triggers and end up trading way to active, especially if they pay low commissions per trade.

Analyse your p/l and the ratio between p/l and commissions. How many positions do you hold simultaneously? Decide your rules why you enter a trade and stick to those rules. Not only do many traders over trade, they also tend to over leverage. Be aware of your risk and what leverage you currently run.

Over leverage kills many good traders.

It might sound strange, but the best traders know when not to trade! People tend to get triggered by new info they read about or other inputs and use this input to initiate a trade but later lack the strategy and plan for the position. It is very important to know when not to trade. Do your research before and not after the trade is done. People spend several hours deciding on what new pair of skis they are buying for 1000 usd, but when it comes to their trading they make decisions about buying/selling stocks for hundreds of thousands usd in a few seconds. Never feel stressed to make a trade.

Remember the market is always going to be there.

There are 3 parts to a trade; decision makingexecution and the management of the position. Good traders manage their positions well! Bad traders tend to let their losses run and take small often quick profits. Never let quick trades become investments where you start relying on good luck and hope.

Be sure to set aside money from your trading account. It is important to grow your trading business, but it also makes good sense to diversify by withdrawing some of the profits. Spend time thinking about your goals and what risk you are willing to take. Are your goals realistic? Many start trading thinking they will make the big money and therefore neglect the risk they are taking. Remember a trading account that is down 20% needs to gain 25% in order to be flat. If the account is down 50% it will need to gain 100% in order to be flat! Therefore it is vital to manage the risk/money management of all trading accounts.

There is no trader or trading system that always makes money.

Traders tend to feel they must make money everyday, but that is a fallacy and I would argue is an impossible task. Losing is a very important aspect of trading and should be treated as normality. The key is keeping losses small while focusing on maximising gains.

In our trading like a pro session we dig deeper into all these aspects, but the key is finding the ZONE where the trader actively and dynamically adjust his risk in accordance to the p/l. Remember that it should be the current market environment that decides if your strategy works or not. If your strategy doesn’t work then reduce risk, if the strategy works well then you should increase risk;

You should have a dynamic approach to your trading and risk taking!

One paradox many traders tend to do is they reward themselves with short vacations or similar positives when they are making money, while they cancel vacations and continue working hard in periods when they lose money in order to make it back. This is the wrong approach and creates huge frustrations among many traders. One should do the opposite:

Cancel vacations while you are on a winning streak and maximise that period of profitable trading.

Write a trading diary! Professional and disciplined traders write a diary on their trading performance. Every session should be written down and have specific aspects that help improve understanding the p/l and the efforts.

Before trading starts every morning the trader must plan the day. It is well advised to write down chart levels that are of interest, events you are supposed to follow, macro announcements or other relevant events that can affect your trading.

Just as any athlete prepares for a game or race the serious trader needs to prepare for the trading day.

After every trading day you need to write a short diary. What did you do good, what did you do bad, did you follow your plan etc? Be critical and try digging into details objectively. It is also important to write down the emotional state of your mind. Did you get excited when you made money, did you get angry when you lost money etc?

It is important to identify both positive and negative events that affect you as a human being. One example is that fighting with your partner the evening before a new trading day will likely be affecting you emotionally and will most probably lead you to poor decision making. How do you treat such a situation? You should consider various events that affect you and make a set of rules you follow. The example above with big arguments affecting you should possibly make into a rule to not trade anything but model trading that day (with model trading I refer to strategies that are built around mathematical/statistical models and do not have subjectivity as an input and are hence not affected by your mental state).

Another aspect of trading is that the mind gets tired with all the information. Consider what time is optimal for you to spend in front of the computers. Maybe your trading is profitable in the first half of the session? Maybe you should trade only afternoons etc? Sit down and analyze objectively all these aspects of your trading!

Studying your p/l is vital to successful trading!

Trading produces only one thing, positive or negative p/l. We discuss p/l management in greater depth in our course risk and p/l management. The trader needs to plot the p/l on a daily basis and create a historic chart. Our method explains further how to build a methodology around the p/l management aspect of your trading.

Very briefly the concept is to apply various moving averages to your total p/l. This is then built into a concept of how to adjust risk in accordance to the p/l chart of your portfolio. The portfolio is, if applicable, subdivided into sub trading strategies in order to identify what strategy works the best at the moment. Remember the market is always there but not every strategy is going to be making money all the time!

Patience in trading is a virtue. Trading is many times a frustrating game, but be sure to wait for your levels and follow your planwithout panic. Never chase the market.

Think of a surfer catching a wave. In order to catch a wave and ride it successfully, the surfer needs to be prepared physically and mentally, but also needs to time the wave patiently. Only then the effort will look effortless and well timed. Similar approach should be used in trading. Be patient and wait for the trades instead of chasing trades. Another part of being patient is staying with the winning trade (and adding to it as explained in our risk management article). Way too many traders make the preparations and actually catch the good trades, but often take small profits instead riding the winning concept.

At the same time be prepared to be impatient, ie be quick with cutting your losses fast and see it as the most natural process of trading.

Good traders know how to make money; great traders know how to take a loss.

Averaging down is a concept too many traders unfortunately use in their trading. People tend to attach emotions to their trading, hence end up many times buying more of the stock that is moving against them. This behaviour is totally wrong and should not be applied. If anything, use the inverse, buy more of the stock that is moving higher and short more of the stock that is going lower.

Never trade based on other peoples’ tipsinformationresearch etc. Be sure to control and know why you entered a position. You can of course make decision based on information you comply through media, interaction with people etc but be sure to have the trade all planned with enter/exit and never rely your trade on “I am waiting for Mr X to tell me this or that”.

The moment you start waiting for information or feedback from another individual you have lost control of your trade and you will be rewarded by simple coincidence, and even more importantly you will not control the risk.

Jesse Livermore is probably the most famous stock trader ever. Edwin Lefevre wrote a book about Jesse Livermore worth reading, “Reminiscences of a stock Operator”. The iconic trader (1877-1940) came up various rules that are as valid today as they were back then;

Nothing new ever occurs in the business of speculating or investing in securities and commodities.

Money cannot consistently be made trading every day or every week during the year.

Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

Markets are never wrong – opinions often are.

The real money made in speculating has been in commitments showing in profit right from the start.

As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

One should never permit speculative ventures to run into investments.

The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.

Never buy a stock because it has had a big decline from its previous high.

Never sell a stock because it seems high-priced.

I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.

Never average losses.

The human side of every person is the greatest enemy of the average investor or speculator.

Wishful thinking must be banished.

Big movements take time to develop.

It is not good to be too curious about all the reasons behind price movements.

It is much easier to watch a few than many.

If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.

The leaders of today may not be the leaders of two years from now.

Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.