1: Treat trading like a business
As a hobby, trading quickly gets expensive: Just dabbling can prevent traders from gaining the proficiency and experience they need to become consistently profitable. As a job, trading can be discouraging because there is no such thing as a regular paycheck: Traders can work 10-hour days all week and end up empty handed on Friday. Rather than thinking in terms of a hobby or job, it is important to approach trading as a business. Always use a trading planA new trader would not have to look far to come across the well-known saying, “Plan your trade and trade your plan.”
The first part — plan your trade — is accomplished through a trading plan: A written set of rules that defines entry, exit and money management criteria. Good trading plans often are based on experience or market observations and developed through research and exhaustive testing. While it is time-consuming and challenging to develop a profitable plan, a major advantage is the consistency it delivers.
Risk only what you can afford to lose
While traders plan on making money (that’s why people trade, after all), it is important to acknowledge that it does not always work out that way. It is essential that the money used to fund a trading account be what can be lost without impeding the ability to meet other financial obligations. Losing money is difficult enough, but it is even more so if it is capital that never should have been risked in the beginning.
Use technology to your advantage
Electronic trading has been around for a while, but the tools that are available to modern traders are constantly improving and evolving. Faster computers, high-speed Internet, all-electronic markets and direct-access trading all have helped the independent retail trader. Additional technologies, such as trade automation, innovative market research tools and the ability to test trading systems accurately on historical data have given traders even more powerful tools. Mobile trading apps make it possible to scan for trading setups, enter orders and manage positions from a smart phone or tablet, giving traders a tremendous amount of previously unseen flexibility.
Develop a trading plan based on your own research
A trader’s own research, not emotions or speculation, should be the driving force behind developing a trading plan. With so much information readily available in the public domain these days, it may be tempting to rely on someone else’s work or research. This can backfire for a few reasons.
First, whatever methodology is being promoted actually may not be profitable. Second, even if it is profitable to someone else, it does not guarantee that it will be to other traders. Different trading styles and risk tolerances mean that trading plans are not one-size-fits-all.
Finally, traders should fully understand the logic behind a trading plan; otherwise, it is possible to lose trust in a plan, making it easier to deviate from the rules.