Your trading rules can help guide you through your trading decision making. This can ensure that you take guess work out of your trading and you have some sort of structure and guidance to your trading. Below are some common trading rules traders can incorporate to their trading regiment.
1. Understanding Risk
Never risking more than set percentage of trading account per trade (e.g. 2 to 10 percent on any one trade. Always calculate and trade the proper position size for your risk, and look out for leverage on your account if holding multiple positions at the same time.
2. Trade with the Trend
The most successful traders who ever lived are trend traders. From time to time about traders who have been successful picking tops and bottoms, but that is mostly luck and not very sustainable in the long run. Trading with the trend is actually simpler and so much easier than other strategies. Generally speaking, simpler is also easier to implement and easier to follow. The key is to have a system that just aims to catch the middle third of a trend.
The reason is because; again it’s hard to pick the top and bottom (impossible to do on a consistent basis). Trying to trade against the trend may cause you to overtrade and potentially lose when the trend “catches up” with your trade.
3. Don’t be limited to Day Trading Only
Use a good end of day system. It is a well established fact that over 95% of day trader’s lose all their money in less than one year, so stay away from “scalping” and other forms of short term trading, especially new traders who have a tendency to overtrade the markets and not let good trades develop. However, by using daily charts when the market is closed removes 95% of the emotion of trading. Plus it also helps to trade and have a life outside of trading and the markets. Day trading is much more intense and stressful. Find a good daily swing trading system to start out with.
4. Be a Technical Trader
The only people really pushing long term fundamental trading are the financial advisors or money managers who are looking for more funds to manage and the longer they can lock up your money, the more money they have under management and the more management fees they make.
All technical traders understand that all known fundamentals are already factored into the price. So it is important to follow price as the leading indicator of where the market is going. Technical trading allows one to focus on the price and not get distracted with other recommendations out there. Only a few carefully selected indicators are required for technical analysis, with each one serving a specific purpose. Many indicators are redundant and all indicators are derived from the price anyway.
5. Adhere to your trading strategy or system
When your system says to take profits, take the profits. The trend might continue after you have exited a position about half the time, but don’t get greedy by always looking for the last percentage of the move. If you are always going for maximum profit you can lose what you have, looking to maximize profits. It's fine if you leave some money on the table, as long as you aim for the middle third of the move in the first place. This will produce more consistent results.
These simple trading habits may not be complex or difficult to understand, but sometimes they are harder to implement. If they are consistently followed and implemented into your trading routine and trading plan, they can give you a much higher probability of success and lead to a much lower stress and happier trading life.
6. Avoiding looking for the “Holy Grail” system
Traders are always looking for the “one” perfect system or the “Holy Grail” of trading systems. However, success has much less to do with the system a trader uses and more to do with the implementation of good trading habits and proper risk management. There are many good systems that you can use depending on what type of trader you are: long-term position trader, medium-term swing trader or short-term scalping.
7. Avoiding Chasing Trades
The third common mistake traders make is to enter a trade late. If one passes up or misses a setup and the market moves in the direction of the potential trade, a trader often has the inclination to enter the trade late. Fear of missing a big move plays an emotional role on trading. Avoid this mistake to enter a trade late because, often when you enter a trade late, you have already missed some of or perhaps even the entire move.