Top 5 Rules of Trading: Trading is a task that requires a lot of time and thoughts before starting. Therefore, ensuring your investments yield profitable returns while simultaneously controlling losses is inarguably the most significant rule every trader must understand.
People often encounter losses on their trades because they make decisions by chance – trust me, trading is entirely different from gambling. However, success in trading goes beyond getting your calls right. Traders can only succeed in the forex, crypto, etc., markets by following certain expert-proven trading rules.
Regardless of your status as a trader, these rules can help you survive hard trading times or provide you with new ideas and how to execute them. Below are the top 5 top rules of trading to remember when trading to succeed.
5 Top Rules of Trading Every Trader Must Know
Rule #1: Protect Your Capital
The first and most important rule of trading is protecting your capital. Safeguarding your capital and setting aside an amount in case of losses are some of the best ways to sustain yourself as a trader.
Capital protection implies using it wisely and investing at the appropriate time. Take the right actions when it is essential for your trading strategy and terminate trades that may bring you losses.
The most significant rule of trading is to show great defense, not great offense. If you plan to bag much profit at a go, you are being irresponsible and, at the same time, gambling with your trading capital. In a situation like this, you are not protecting your money.
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Rule #2: Have A Trading Plan
A trading plan is a written rule that specifies a trader’s entry, exit, and money management for every trade. With today’s technology, it is easy to back-test a trading idea before risking the actual money; this allows you to use historical data in your trading ideas to know if it is feasible.
So far, a trading plan and adequate back-testing give the relevant results. However, sometimes your trading plan may fail; don’t deviate; stick to it and restart because taking trades out of your trading plan, even if it probably wins, is not a good strategy.
Additionally, constantly update your trading plan weekly or monthly to add new concepts and remove stale ones.
Rule #3: Trade With a Stop-Loss
A stop-loss is a fixed amount of risk a trader willingly takes in each trade. The stop-loss can be a dollar rate or percentage, but whichever way, it reduces the loss a trader experiences while trading. Also, using stop-loss reduces trading stress.
Not having a stop-loss is a bad idea, even if it leads to a profitable trade. You can set your stop-loss based on technical analysis or affordability. However, it should show the risk you want to take on a position, whether for a long or short-term trade. Also, ensure you are dealing with a protective SL; they help limit the rate of failures and risks.
Rule #4: Be Patient & Disciplined
Discipline can’t be learned in a seminar or acquired through trading software. As a result, traders spend a lot trying to cover up for their lack of self-control, but a few (experienced) traders understand this.
The moral lesson here is that trading involves self-control and discipline. Even in unforeseen circumstances, be confident, and remember you only have one chance to lose all your investment.
Also, staying calm is vital to remain in the trading world long. If you quickly run out of patience, you may find it challenging to cope with trading. Sometimes you won’t make any money; you lose part of it. However, don’t be impulsive during these periods; wait patiently for the right time before making a move.
Rule #5: Respect the Trend
Disrespecting the market trend is like catching a falling knife. Although it is possible, you will most likely get hurt. On the other hand, following and respecting the trend as a trader will make the trend friendlier.
You will likely make more money if you trade by following the momentum. Shunting a bull or bear market is not the right way to go about it. Likewise, catching a falling knife is not the right way. Instead, your trading strategy should channel the trend’s direction.
Conclusion on The Top 5 Rules of Trading
Understanding the 5 top rules of trading and how they work collectively can help a trader accomplish a profitable trading business. Although following these trading rules may not yield huge profits, it can save you from huge trade losses.
Trading entails hard work, and traders that follow these rules with high discipline and patience can increase their chances of success on a very competitive ground.