Having a solid set of stock trading rules is a critical part of being a successful stock trader. Most new stock traders lose money initially. One of the reasons for this is not having a good set of trading rules.
Your Trading Strategy
Your trading strategy is one of your most important rules. The first thing you need to decide on is the time frame you want to trade. The options include long term trading, swing trading, day trading and scalping.
One of the main stock trading rules is that once you have decided on your trading strategy, you need to stick with it to the letter and never deviate from it. I know it is easy for me to sit here and say this, but I know how difficult this can be at first. Emotions creep into the equation and it becomes extremely difficult to stick with your trading plan.
One rule you need to realize is that no trading system works all of the time. Be prepared to accept some losing trades.
There will inevitably be occasions where you encounter a losing streaks of trades. This is normal, even amongst the most successful traders. This is often the time to be most disciplined. The losing streak will most likely pass and you should turn back to winning ways again if you have good trading discipline and a good strategy.
One very important thing to remember is that stock trading is a marathon not a sprint. The returns at the end of the year are much more significant than the returns at the end of the day or week. Try not to get bogged down by the short term results, and keep the big picture in mind. Again I know this is far from easy.
Keep Your Risk Well Controlled
This is definitely one of the most important stock trading rules. While assuming a certain amount of risk is necessary for successful trading, make sure you give yourself a chance by not taking on too much unnecessary risk.
Depending on your trading strategy, risking a certain amount per trade may be suitable. If you only want to risk a certain amount per trade, make sure you use stop loss orders as part of your risk management plan.
Make sure your trading account can survive a very bad run of trades. Risking 10% of your account on each trade is often too much, as a run of 10 losing trades could wipe out your entire account. Whilst this is not likely, it is certainly a possibility.
Make sure you only trade stocks with money you can reasonably afford to lose.
It is often not the best idea to put your entire life savings into stocks. Stock markets can crash. There have been many historical crashes that have taken many years to recover from.
Be Realistic In Your Goals
Lastly, one of the most crucial stock trading rules is to always be realistic with your trading goals and objectives. Don’t expect to turn a $100 trading account into $1,000,000 in a year. It’s highly unlikely to happen.
A realistic goal for a conservative trader may be 10% per year. A more aggressive trader may aim for 35% per year. Remember if you can earn 20% per year, you will double your account balance in less than four years.