What are trading rules?
Everything in life has rules. Without rules, the world would be in complete chaos. We are taught important life rules from the day we are born. Trading is no different. Yes, I know, the last thing we want is more rules to follow but I promise, you will be glad you did!
Trading rules help keep your money safe. TheY take emotion out of trading and make you follow on the process.
Trading rules is kind of like an outline you want to follow on each trade you make. Just like in life, rules are there to help protect you. These rules set guidelines for you to follow on your trades and help keep you in a more down-to-earth mindset.
Why trading rules are important?
As I mentioned earlier, trading rules help to keep you and your funds out of chaos. While you will still make mistakes along the way or a bad judgment call on a trade, these rules will help you keep a steady ground and your anxiety at bay. We have enough things to worry about in life without having to stress ourselves into premature greying of the hair about stocks. After all, we are in this to make money not make anxiety, right?
Example trading rules
1Always use a trading plan
This will layout your enter, exit and the management of your funds. Sticking to the plan will help you not to make poor trades by taking trades outside of your plan. It will also stop you from FOMOing or trading emotionally. It helps keep you focuses on the trading process, not result.
Technology is everywhere around us! We use our smartphones for everything and if you become a trader, your social media apps should take a backseat to apps that contains content that is aimed at the stocks! We are never too old to learn and stocks require lifelong learning!
Top tip: A list of over 40 female traders on Twitter is here for you to keep up to date.
3Listen to the charts (trade objectively)
Charts have shown time and time again that they can help you make better trading decisions. Hence the reason they are used for multiple different areas other than stock trading. Even though your anxiety may tell you otherwise, listen to the charts. Do not enter into trades blindly, let the charts introduce you!
Top tip: learn the basics to read a trading chart.
4Treat it like a business
Trading is like owning a business. It is important for you to stay up-to-date on what is going on by researching and coming up with new ways to maximise the potential of your business! What are new trade opportunities? How is the market responding to news? What is changing in the market and driving change in the market?
5Document every trade
Trading is treated as a business, therefore, it is important to document everything. This means all your earnings and losses, not just so they can be accurately reported for tax purposes but so you can learn from them. This builds on your trading plan in documenting your entry, exit, chart expectation, risk and return ratios, plus the outcome.
Analysing trades is the easiest way to see patterns of wins and losses. The be more objective on your trades.
Aside from that, just like you keep an eye on your bank account funds, you also want to keep an eye out on your assets.
6Protect your capital
Although you will experience a loss a time or two during your trading career, you want to make sure you are doing everything within your power to not take risks that are unnecessary and following your trading plan!
7Risk what you can afford to lose
There is nothing wrong with not risking a large sum of money! Be honest with yourself and only risk what you can afford to lose. No, I’m not trying to put a jinx on your trading! That is simply saying to be prepared for every trade to go bad at any moment.
While we hope that we earn the big bucks on every trade, it doesn’t always happen that way.
It is better to lose within your means than to get yourself into financial trouble. After all, our main goal is to make money!
8Always use a stop loss
Give yourself a little peace of mind and always practice using a stop loss! Losing is going to make you feel all those mind torturous feelings. However, knowing that you only lost a certain amount set by you, will help you not only feel better but keep your finances in check.
Top tip: check out the trading jargon buster for beginners if you’re not sure what a stop loss is.
9Always be comfortable with risk vs reward
If you think you have a 50% chance of being right, but if you’re right then you make 3-times your initial investment or losing it. If you’re managing the level of risk well enough as a rational trader you’ll take it. If you have a 50% chance of being right, but you’ll only make 50% if right and lose it all if you’re wrong, then don’t make the trade. This isn’t betting or gambling. So know your level of risk and return levels.
10Know when to walk away and stop
We have been told our entire lives to just say no when it comes to bad decisions or bad gut feelings. Trading is definitely one of those subjects that just saying no applies to! If you do not feel comfortable with a trade or if it is outside of your plan, then walk away and stop.
11Be above average
Most people lose money, so don’t be like most.
Yes, unfortunately it is true. Most people lose money trading. So, make sure you do everything you can to be above average. The good news is that background, gender or education play very little in determining the success of a trader. Mindset and application are key traits that that regularly link to success.
Top tip: see why women make better traders than men.
What are your trading rules?
We’d love to hear what trading rules you use or questions you have on setting rules, leave a comment below.