Trading live markets are inherently unpredictable, but what sets consistent traders apart from the pack? Below are 7 rules to consider on your trading journey.
1. Cut Losses Short
One universal tenet of trading is “Cut your losses short and let your winners run.” As simple and intuitive as it sounds, many traders will find themselves holding a losing position longer than expected, only to see it grow beyond a manageable loss.
Consistent, seasoned traders do not hesitate to cut their losses short. They have accepted that trade ideas can sometimes be wrong and are swift to exit markets before letting losses turn insurmountable, often using stop-loss orders to protect trading capital.
2. Let Profits Run
The counterpart to the above rule is to let winning positions run – not to exit a favorable market too early. Experienced traders realize that not every trade is going to be a winner and aim to maximize profits whenever possible.
Additionally, winning trades, especially big winners, can help traders recover from losses and regain confidence in the markets.
3. Don’t Get Caught Up in the News & Social Media
In today’s world of relentless media bombardment, it is easy to become distracted. One headline can cause a trader to doubt a trade idea or completely abandon a thesis. Social media also falls into this category. Some traders will scour social media searching for confirmation of a bias or trade idea before executing the trade.
Veteran traders know to trust their own opinions, information, and ideas, regardless of what the talking heads on the news or the chatter on social media are saying.
4. Find Your Trades
Consistent traders each have their trading methodology and particular markets to trade. Instead of seeking gurus for trading advice or ideas, they find opportunities in the markets through their research & due diligence.
Backtesting a trading strategy over historical data can help a trader determine whether a methodology is worth trying in live markets and can build trading confidence.
5. Focus on the Trade, Not the Money
Having trading goals is not a bad thing, but letting those goals influence trading decisions can be. For example, an inexperienced trader might stay in a trade too long waiting for $X amount of profits while the seasoned trader realizes that this type of thinking is undisciplined.
To be in the proper frame of mind to trade, a trader must be focused on the process of trading itself and not the result. Consistent traders realize this and put profit goals aside to focus on the markets and individual trades. Both novice and experienced traders may utilize simulated, or paper trading to practice keeping PnL out of mind while speculating markets.
6. Size Positions Appropriately
Any knowledgeable trader will tell you that position size is an extremely important factor for long-term consistency in the markets. Risking too much too soon can take you out of the game completely and suspend your progress as a trader.
To determine appropriate position size, traders should consider both their account value and the trade risk, or the difference in price between the entry and stop-loss. Additionally, risk management techniques such as percentage-based trading can help confirm trade size.
Please note: It is possible to lose more than the specified risk amount if the price of asset gaps beyond a stop-loss order.
7. Avoid Boredom Trading
New traders often find themselves taking trades often just to be part of the action. After all, they started trading to trade, not sit around waiting. This type of thinking can be destructive and could result in taking trades without looking for confirmation or making sure market conditions are suitable.
Expert traders have great patience and coolly wait until market conditions are right, even if it takes months. Seasoned traders understand that high probability trades are worth waiting for and do not let boredom get in the way of their methodology. They also realize that taking non-qualifying trades can undermine their purpose in the markets: to make money.