Why do traders need rules when they can trade at will? I mean, you can pretty much get in and out of a trade whenever you want. The only factor that could prevent you from making a trade is the money required to trade. Then why do so many successful traders follow a set of rules? The basic answer is that, rules help you to be more consistent with your trading and help you avoid making expensive mistakes that can wipe your trading account.
Irrespective of you trading style (day trader, swing trader, momentum trader, position trader), you will need to come up with your own set of rules to guide you in your trading career. Once you have come up with your set of rules, tape them to your computer so whenever you make a trade, these rules should remind you of the structured approach you need to take and not let emotions hinder your decisions. Always act in your best interest.
Some of the rules that I follow:
- Always cut your losses.
- Always use a stop order or trailing stop if the position is showing profit.
- Before initiating a position ALWAYS check the general trend of the market. If in doubt, stay out.
- Always check the volume. Lack of volume indicates low institutional interest. You want volume to confirm your decision.
- Check earnings release date before taking the trade. Don’t be a hero and predict the next move.
- Do not add to a losing trade. Instead think of averaging up as the stock moves in your direction.
- Take profits and don’t let a trade turn into red.
- Have patience and sit tight once you enter a trade.
- There is NO need to trade every day.
Once you have come up with your rules, test it over and over until you are comfortable with it. If you follow your rules, you will be ahead of most of the people on Wall Street.
There will be times that you will be tempted to not to follow your rules. This has happened to me quite a few times and can very well happen to the best traders. Lets say, you see major indices jump over 2-3% in a day and you feel that you missed the train by not trading. At this point you don’t want to miss any big moves no matter even if it involves breaking your rules. Avoid this trap at any cost as it will get the best of you. The market was there yesterday and will be here tomorrow and there will be big moves every day. I hope that I have helped you with this article.
Have a successful trading !