Long-term success in trading is not easy; traders who are consistently profitable share certain skill sets. The first skill is identifying potentially profitable strategies and then using the strategies as part of a trading plan. Second, the strategies must perform well while the market experiences uptrends as well as downtrends.
Read on to find out the 20 rules followed by professional traders to remain profitable over the long-term.
1. Plan your trade, and trade your plan
Follow your trading plan as it will help you to develop self-discipline and deter you from taking more risk than you can handle. Once you have confidence in your trading plan, you will have the discipline to carry it through, even when there are the inevitable losing streaks. Always follow this rule: plan your trade and trade your plan.
2. Lose the crowd
Long-term profitability requires you to position yourself ahead of or behind the crowd, but never in the crowd. The crowd is made up of different individuals who are prone to competing and conflicting emotions. Also known as herding behaviour, crowd behaviour can trigger large and unfounded market rallies and sell-offs that may often lack fundamental support to justify the price action.
3. Update your trading plan
Update your trading plan on a weekly or monthly basis and include new ideas as well as removing bad ones. Go back and read the plan whenever you need to, or when you’re looking for a way to get out.
4. Commit yourself by working hard
Your competition spends hundreds of hours on perfecting their strategies, so don’t expect to achieve long-term success without hard work and discipline.
5. Try not to follow the crowd
Profits are usually never a result of following the majority or the crowd. When you see a perfect trade setup, everyone else has probably seen it as well, making you part of the crowd and setting you up for failure.
6. Don’t break your rules
The purpose of creating trading rules is to get you out of trouble when positions don’t go as well as expected. If you break your rules, you’ve lost your discipline and allowing even greater losses.
7. Avoid market gurus
Advice from market gurus may not necessarily be wise advice for your portfolio or goals. Evaluate their advice as it’s your money at risk, and not theirs.
8. Use your intuition
Trading uses the mathematical and artistic sides of your brain, so you should develop both to succeed in the long run.
9. Don’t lose control
If you’re set on trading a specific trading instrument, you may lose control and make the wrong trading decision.
10. Stay calm
Do not allow greed, hope and fear to control your emotions. Before you enter a trade, assess whether you are emotionally and psychologically ready to trade in the market. Even though strategy plays an important role in the market, psychology plays an even bigger role.
11. Don’t try to get even
Drawdowns are a natural component of investing and trading. Accept them and stick to the tested strategies you know will eventually get your trading performance back on track. Try not to make up for a losing trade by trading more.
12. Do not ignore warnings
Big losses seldom occur without numerous technical warnings. Traders routinely ignore those signals and allow hope to take the place of thoughtful discipline, setting themselves up for loss. So, watch out for early signs that market conditions are changing and creating risks to your positions.
13. Tools don’t think
Some traders try to make up for inadequate trading skills with expensive software, pre-packaged with proprietary buy and sell signals. These tools can interfere with valuable experience when you think the software is smarter than your experience. Use tools that suit your trading plan, but remember that you are the one in control.
14. Use your head
Learn what you can from others, then step back and establish your own market identity by basing it on your unique skills and the degree of risk you are willing to face.
15. There is no secret formula
Losing traders dream about the secret formula that will magically improve their results. In reality, there are no secrets because the path to success always passes through careful decisions, effective risk management, and skilled profit-taking.
16. Get rid of the paycheck mentality
We’re taught to labour through the work week for a paycheck. This pay-for-effort reward mentality opposes the natural flow of trading wins and losses during the course of a year. In fact, statistics show that most annual profits are booked on just a handful of trading days.
17. Be cautious
It is fine to feel good about a trade that’s going your way, but the profits aren’t yours until you exit the trade. Lock in what you can as early as you can, with trailing stops or partial profits, so the hidden hands of the market can’t steal your gains at the last minute.
18. Focus on price action
Focus on price action and accept that everything else is secondary. Move forward and create complex technical indicators, while bearing in mind that their main function is to confirm what you can already see.
19. Make peace with losses
Trading is one of those very few professions where losing money every day is a natural path to success. Every loss teaches you an important market lesson. Also, know when to stop and take a break from trading. Accept the losses, take time to re-evaluate, and then return to the market with a new perspective.
20. Beware of reinforcement
Active trading releases adrenaline and endorphins. These chemicals can produce feelings of excitement even when you’re losing. In turn, this encourages traders with addictive personalities to take bad positions, just to get an adrenaline fix. If you’re trading to achieve excitement, you are probably trading for the wrong reasons.
Final thoughts
The majority of day traders and beginners end up losing money after quite a short period of time. As they fail to tap their full potential, they eventually quit and find more traditional ways to make money.
DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication.
