8 Trading Rules Experts Live By

Trading might be seen as a way to make a quick buck. However, experts allocate a great deal of time and effort to assess the markets and make careful decisions regarding entries and exits. Their goal is to consistently make the most of any opportunity, whether the market is bullish or bearish. For this, they carefully design strategies and abide by strict rules. Here's a peek into the rule book of expert traders to help you navigate the financial markets and maximise chances of long-term success.

Rule 1: Develop a trading strategy

Would you jump into the deep end of a swimming pool without learning to swim? It’s the same in the financial markets. There’s no substitute for preparing to trade—plan for every instrument you choose to speculate on and under diverse market conditions. Not having a tried and tested strategy could increase risks and lead to emotion-based decision-making. Also, revisit and revise your plan regularly, based on your learnings, to ensure satisfying long-term trading experiences.

As Michael Carr, financial market research analyst, says, “Don’t worry about what the markets are going to do, worry about what you are going to do in response to the markets.”

Rule 2: Protect your trading capital

Expert traders even consider capital protected as profit made. This starts with quantifying your risk tolerance limits and ensuring that the risk associated with each position lies within those limits. Traders need to understand that this does not mean that you never make a loss. Strategically taking only tolerable risk means that losses do not get out of hand even when an untoward incident occurs.

In the words of the legendary trader, Paul Tudor Jones, “The most important rule of trading is to play great defence, not great offense.”

Rule 3: Recognise, accept and exit a losing trade

This rule comes from a famous proverb among experienced traders: Cut your losses short and let your profits run. It can be hard sometimes to accept that your prediction went wrong. But recognising it early and acting fast can minimise losses. Accepting and learning from failure separates great traders from the average ones. Setting your emotions aside and exiting a losing position may save you capital that can be used open other positions with effective analysis and lessons from that trade.

As Ray Dalio once said, “What is most important isn’t knowing the future — it is knowing how to react appropriately to the information available at each point in time.”

Rule 4: Know when to take a break

Traders often underestimate the power of a break. If you are experiencing losses in a certain market condition or you are constantly making a profit, taking time off to reflect on what worked and what didn’t can help. It protects you from getting carried away by the event's emotion and helps you stay grounded. Also, knowing when not to trade is a trait that distinguishes successful traders. For instance, when your strategy cannot conclusively signal the next move during a particular market condition, it is better to stay on the sidelines and learn rather than risking your capital and losing peace of mind.

According to Adam Grimes, “Mental capital is just as important as financial capital. Protect both.”

Rule 5: Lose the "I'm gonna get my money back" mindset

The first step to becoming a successful trader is to understand that losses are a part of the trader life and vengeful trading will only lead to further losses. The experts recommend getting back to the drawing board, reassessing your strategy and refining it to make the most of the ongoing market conditions. Traders must remain focussed on learning each day, irrespective of how the day turns out and not become bitter due to unfavourable market conditions.

As Tom Bosso puts it, “As long as you learn something from a loss, it’s not really a loss.”

Rule 6: If not Booked, it isn’t profit

If your position is profitable, you can let it run, especially if market signals are consistent and you expect the favourable trend to continue. However, booking partial profits and letting the position run partially is the boss move. This prevents losses from accumulating in a market reversal and builds confidence in your strategy.

Here’s what trading guru Yvan Byeajee says, “Confidence is not ‘I will profit on this trade.’ Confidence is ‘I will be fine if I don’t profit from this trade.’”

Rule 7: Remain consistent

Perseverance is key to achieving any goal. To become a successful trader, consistently making small wins and learning from experience are more important than one big win. Having a well-designed trading plan will only be effective if you stick to it in the long term. Building trading discipline is simple – develop a plan, trade your plan, review your trades and refine the plan.

Learn from what Brett Steenbarger wrote in his book, Trading Psychology 2.0, “We become what we consistently do. Routine is necessary for efficiency; breaking routine is necessary for adaptation.”

Rule 8: Trade the charts, not the buzz

Analytical and predictive technology has evolved to the point where you can get real-time analysis of what is happening in the market and how it may proceed further. So, learn how to make the most of market signals as training cues and nothing else. Make sure you are trading because you understand the risk and profit potential. Similarly, avoiding an instrument just because you previously incurred a loss may not be a good idea when the charts show clear signals of profitable opportunities.

Here's what the legendary Jesse Livermore has to say, “To anticipate the market is to gamble. To be patient and act only when the market gives the signal is to speculate.”

To Sum Up

  • A great trading experience requires consistency.
  • Develop a solid trading plan.
  • Play great defence, not great offense.
  • Cut your losses short, and let your profits run.
  • Do not revenge trade.
  • If it isn’t booked, it isn’t profit.
  • Build trading discipline with your trading plan.
  • Trade market signals


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