Top 5 Golden Rules of Trading
No matter which financial instrument you trade, be it equities, commodities or currencies, there are some golden rules of trading which when followed religiously could make you a successful trader. In other words, how you trade is more important than what you trade.
Let’s have a look at the top 5 golden rules of trading:
- Write Down your Trading Strategy: The most important rule for successful trading is having a plan. They say “Don’t fail to plan, or else plan to fail”. You should have a written trading plan in place about how are you going to approach the markets. No matter what may come, stick to your plan. Maintain discipline and the results will follow.
- Listen to the Charts, Not the News: A chart is the most important tool in the hands of a trader. It assimilates all the information you require to trade successfully. When someone takes a position in a particular stock, his or her hand is shown on the chart itself and this happens well before the good news is announced on the television a month or two later. Every bit of information is there on the chart itself. You just need to know how to interpret their language.
- Trend is your Friend: Always trade in the direction of the major trend. If you are taking trades based on the daily chart, then have a look at the weekly chart to determine the larger degree trend of that instrument. Similarly, if you are trading off the hourly chart, have a look at the daily time frame to determine the larger degree trend. By aligning your entries in sync with the major trend, you are harnessing the power of the market’s directional bias to act in your favor. Follow the trend to boost up your chances of success in trading.
- Cut Short your Losses, Let your Profits Run: A novice trader often makes the mistake of exiting a winning trade too early while hanging on to a losing trade for too long only to see his losses compound. It happens due to natural human psychology. We tend to hope that things might turn in our favor while holding on to a losing trade, but alas it often doesn’t. To be a profitable trader, just follow this simple rule. Whenever your stop loss is hit, just exit the trade. Whatever is showing you a loss, just exit. On the other hand, whenever a trade is showing you profits, just hold onto it. By letting your profits run, you are trading intelligently. Why cut a winning trade at 5% that is destined to move 25%?. By doing so, you will create a buffer for the small losses that happen now and then but eventually you will be able to remain in the profit zone overall.
- Learn from your Mistakes: The last but not the least golden rule of trading is to learn from your own mistakes. Discard a trading system that doesn’t work but don’t forget to keep note of it and ensure that such mistakes are not repeated in the future again. By doing so, you will gather invaluable experience that will help you to trade profitably in the future. Never forget to learn.
Trade Well. Trade Wise.