I like to keep things simple. As Albert Einstein said, “Everything should be made as simple as possible . . . but not simpler.”
With that in mind, here is a list of 12 simple rules that I have found to be the key to successful trading. If you’re not getting the results you want as a trader, you’re breaking one or more of these rules.
Rule No. 1: Follow YOUR Dreams
The dream of being a successful trader, especially someone who trades for a living, is one of those “big” dreams that naysayers love to squash. Don’t listen to these cynics. There are too many examples of people who have started with very little and made fortunes trading. You can be certain they’re glad they didn’t listen to the naysayers. On the other side of the coin, make sure that you really enjoy trading before committing to it. All the great traders I know have a true PASSION for the game of trading. If you don’t have a passion for trading, you won’t last long.
Rule No. 2: Put Your Time and Energy into the Things You Can Control and Don’t Worry about the Things You Can’t Control
You must realize that you can’t control what the market, or a particular stock, does. All you can do is control your reaction to what it does. Focus all your effort on making good decisions based on what actually happens and don’t worry about trying to GUESS what happens next or beat yourself up over things that happened in the past.
Rule No. 3: Find the Trading System that Fits YOU Best
Guys like Warren Buffett make millions with value investing, guys like Nicolas Darvas made millions trend trading, and some guys make a living day trading. There is no “Holy Grail” trading strategy that magically spits out money. There are several different trading systems that “work” and each of these strategies will outperform others at certain times. You need to find the system that fits your personality best and stick with it. The new trader will go broke constantly changing their strategies and chasing different systems.
Rule No. 4: Protect the Money You Have with Proper Risk Management
Defense wins championships, in sports and in trading. That means protecting the downside first. I’m all for positive thinking, but to succeed as a trader you must always plan for the worst. You should never enter a trade without knowing exactly where you will exit it if it goes against you.
Rule No. 5: Give Yourself an Unfair Advantage
To succeed as a trader, you need to stack the odds in your favor and the only way to do this is to cut your losses quick and let your winners run. Successful trend traders can make a fortune hitting well below 50% winners. They do this by making sure that, over the long term, the profits on their winners are much larger than the losses on their losers. It’s such a simple strategy, but so many new traders fail to understand it.
Rule No. 6: Follow Your System’s Rules
Never trade on hunches, guesses, predictions, or emotions. Once you decide on the system that’s right for you, you need to follow its rules. Is there ever a time for discretion? Sure, but I like to say that discretionary decisions should be limited to 10-15% of your trades. If you’re making “exceptions” to your system’s rules more often than that, you’re heading down a destructive path.