Most people who are interested in becoming successful traders usually stumble upon phrases like “plan your trade; trade your plan” as well as “keep your losses to a minimum. To be successful in trading, you need to understand the importance of rules for successful trading.
Mere phrases won’t work if you don’t understand or follow the idea behind them. In this article, we will talk & Learn Finance Brokerage Education about some useful rules to follow when you’re just beginning to learn the trade. If you are determined to become a successful trader, you have to read this article.
Rule 1: Use a trading plan
A trading plan refers to a written set of rules that specifies a trader’s entry, exit, and money management criteria. When you use a trading plan, you can do those activities in a wise manner, even though sometimes it might prove to be time-consuming.
With today’s technology, it has become easier to test a trading idea of Beginners Guide Tips to Forex Trading before risking real money. Backtesting, or applying trading ideas to historical data, enables traders to determine if a trading plan is viable. It also shows the expectancy of the plan’s logic. Once a plan has been developed and backtesting shows some favorable results, the plan can be considered viable in real trading.
The idea behind this is to stick to the plan. Taking trades outside the trading plan, even though they may turn out to be winners, is considered poor trading performance. It also destroys any expectancy that the plan may have had.
Rule 2: Protect trading capital
Saving some money to fund a trading account can take a really long time as well as much effort. It can be even more difficult the next time around. It is important to remember that protecting your trading capital is not synonymous with not having any losing trades.
All traders usually have losing trades and that’s very usual. Protecting your capital means not taking any unnecessary risks and going everything you can to preserve your trading capital and business.
Rule 3: Risk only what you can afford to lose
As mentioned, adequately funding an account can take a long process. Before you can begin using real cash, it is imperative that all the money in the account is truly expendable, meaning you can easily ditch them if there’s no other choice. If the fund is not expendable, you can wait and hold on to them until they are.
To make it more illustrated, you shouldn’t, for instance, risk the money allocated for other purposes like mortgages, loans, college tuitions, et cetera. Never look at it like you’re just borrowing money from these more important obligations.
Losing money is already bad enough; but it could be even worse if it’s money that should have never been put at risk in the first place.
Rule 4: Know when to stop
There is mainly one huge reason why you might have to stop trading: you’re using an ineffective trading plan.
An ineffective trading plan yields greater losses than the expected historical testing. Markets may have changed and volatility within a specific trading instrument may have lessened, or the trading plan is just not working as well as expected.
You can benefit by remaining unemotional and businesslike. Times like that is usually the best time to reevaluate your trading plan and make some changes, or to start over with a whole new trading plan. Just remember that an unsuccessful trading plan is a problem that you need to solve and it is not necessarily the end of your trading business.