So what are rules of profitable trading there are rules which some of the best traders in world find about after decades of trading. So do you want to become a great trader or you just doing it have some fun.
Are you really serious about your trading career and want to life of your trading income in coming two years. Then you should start with following rules. So that you can become a professional trader fast as possible.
1% of capital
You should never risk more than 1% of your capital on any given trade. For example your capital is Rs. 10000 so the maximum risk that you can take on a trade will be Rs. 100.
For example you have a share which you want to buy whose current price is Rs.50 and stop loss is at Rs. 45. Then the risk per trade will be Rs.5.
= 100/ 5 = 20 shares of that stock.
You should never buy more than 20 shares of that company.
Place stop loss first
You need to place your stop loss first and then the trade that you want to make. So that when the stock or security that you are trading will be stopped out if the trade goes against you.
Even the greatest trader did not make profit on all trades so you should always keep your losses small and profits big at least 1:2 which mean that if you risk as in the previous example Rs.100 you should make at least Rs 200 from the given trader after expenses.
1 profit / loss trade stop trading
This is my rule which works best for my so that I do not over trade. Over trading is one of the reasons why so many people cannot make in market. So protect yourself from it.
There will be another day you can find better trade tomorrow do not worry. If you have a losing trade get up from where you are trading and do something else. Always have something else to do beside trading.
Master one method at a time
Don’t try to be a jack of all investments. Stick to the field you know best. If you keep changing your trading style and method you will never be able to master any method so focus on one method one market till you become really good at trading that.
Know everything there is to know about that method of trading and practice.
50 % of profit out of the market
Whenever you make any money in the market make a rule to take 50% of that amount out of the market. Even if you make Rs. 100 take Rs. 50 out. Even the greatest trader in the world had some time of lag in the market when he was not able to make money. So it is good idea to have reserves.
Accumulate the amount which you can invest in risk free and tax free government bond have interest amount equal to what you will need for your living expenses.
For example your living expense per month is Rs. 50000 and current rate of risk free interest is 7.5 % so you will need Rs 80,00,000 to make that much interest. I know that amount is large but you can make this money if you follow the method of taking 50% of your profit out of the market.
Trade with long term trend
Always trade with the main trend and when you cannot tell what is the main trend do not tread at all. You will make a lot of money if you follow this principle.
Always move the stop loss with the trend
You should always move your stop in the direction of you trade, which mean if you are long on a trade you should move your stop loss up never down and when you’re short you should always move your stop down never up.
Never take advice
Taking advice in other parts of you life can be helpful but not in trading you should make you decision yourself and take full responsibility of it.
You should always make a trade according to your analysis and never according to advice given to you by others.
Ignore the news media
The media is there to report the news to give you what had already happened so what you see on the news have no future implications.
Know everything about the security that you trade
When you are trading you should know everything that you can find about that market and security so and keep learning about it.
Don’t try to buy at the bottom and sell at the top.
Selling top and buying bottoms is not possible. This can’t be done – except by liars.
This is pretty self explanatory that you should not try to take out highs or lows you should focus on high probability. Mean you should be focusing on getting the best return by taking the least risk.
Don’t buy too many different securities.
It is not a good idea to buy too many securities. It is better have only a few investments which can be watched.
Know your trading style and time you can give to the market and accordingly you should select the number of securities that you should trade in. The maximum limit is 20.
Check your investments periodically.
If you’re a intraday day trader who focus on 1 hr chart you should check the market every 4 hrs for new setups and what your old set ups have done. If you’re a short term trader you should check your trade daily. If you’re a long term trader you should check your trades weekly.
Keep it cash
Always keep a good part of your capital in a cash reserve. Never invest all your funds.
You never know then a good trade is going to show up so having sufficit capital to trade will come in handy at the time like this.
Ask yourself what you really want.
Most people trade the market for fun and excitement what they get from trading that is why most of them fail. If you want to make money in market your first focus should to make trades which are high on risk reward ratio more than 1:2.
Keep it simple and consistent.
Long term profits are made and kept by those who have a simple system that they understand and master by following it in long term. Consistency to follow the system in the long term so that you can get returns.
Have realistic expectations.
When trading markets you should have realistic expectations. When you start to trade do not think that you can double or triple your money every month that is not possible. Even the greatest trader in world George Soros have a annual return of 35 %.
Learn to wait.
Patience is a virtue that will make you rich in long term. That do I mean by “learn to wait” is when you do not see a trade according to your trading setup you should not trade just for sake of trading.
Clearly understand the risk/reward Ratio.
Before entering any trade you should always know what is your risk on the given trade and who much you are going to earn if the trade goes in your direction. If you risk Rs. 100 on a given trade you should make at least Rs. 200 or more on that trade.
Never trade with serious personal problems.
If you have any serious personal problem you should not trade because you will not be able to give your 100% on the trade and you will lose your edge. Always remember there will be other day and you should wait.
When in doubt reduce the amount of investment
If when in a trade and your previous analysis of the trade is not make sense anymore you should reduce your position.
If want to average, average up with 10% profit if the position reverse after investment.
If you have been trading for less than 1 year and you profit is less than 20% annually you should not think about averaging at all you should first get to or above the level of 20% annual return level.
If you are above that level you should only average when you have profit in trade is more than 10% of current investment.
You should only add new position when even after adding a new position if the trend reverse you will lock in 10 % of profit at your stop loss level.
Cut your loss with stop loss and let your profit run
The golden rule of trading your profit must always be bigger than your losses. If you are able to achieve a bigger profit than your loss you will always be profitable in the end.
When in doubt stay out
When you do not have clear reason to sell or buy do not trade there will be another day and you can make money then.
Look after the losses and the profit will take care of themselves.
If you focus on keeping your losses under control and never let them go above the predefined level. Your profits will take care for themselves.
This are some of the rules that you should follow when trading if you follow them every day in your trading and read them before you trading and make sure after the trading that you have followed them all in less than 2 years you will become a professional trader. You can read more this rules by great trader in Investment Psychology Explained: Classic Strategies to Beat the Markets by Martin J. Pring in the chapter “Classic Trading Rules”. I love this book if you haven’t read it you should read before you start trading.
Reference: Investment Psychology Explained: Classic Strategies to Beat the Markets
Martin J. Pring
Image Source: investopedia.com