7 Golden Rules That Professional Traders Use
You hear of people making money in the stock market. It sounds easy. Yet when you try your hand at it, consistent profits seems to elude you frequently. When you do make profits, they tend to be small whereas when you lose, you lose BIG! Why is this so? How can you reverse it and start making decent profits trading in the markets?
Like in any game, there are rules. There are the basic rules everyone is familiar with like buying low and selling high. Then there are the additional rules that professional ‘players’ use to get an edge and perhaps it is time that you adopt them too.
Here are the rather simple yet important rules that will aid the novice investors and speculators to increase their chances of winning the game.
- Adopt a Clear Trading Plan
As you have probably heard the saying “Failing to Plan is Planning to Fail”. When you are speculating on stocks, there is a high element of stress and excitement involved that usually results in wrong decisions made if you do not have a clear plan to follow.Instead, one should be armed with a predetermined method of operations for your trading. For example, do you have clear method to calculate your stop loss or do you know how to determine the number of stocks you should buy per trade so as not to overexpose your risks?Without a clear plan or strategy is like being a manager of a football team going into a match without knowing who the strikers and defenders are. Basically it is like grabbing the first 11 people that comes along, put them into the field and pray that luck is on your side and it will all work out! Do not be surprised then if the game ended with a lot of ‘goals’ scored against your team.
- If You Are Not Sure, Don’t Trade
Contrary to popular belief, professional traders do not trade all the time and make from every single trade. Instead experienced traders know when to stay out of the market to preserve their capital so that they have the ‘bullets’ to make more when the market is ripe.If you are in a trade and unsure of the trend, take your loss or protect your profits with a stop. If you are not confident of your position you will be easily influenced by a multitude of extraneous and unimportant details and will probably end up making loss-making decisions. Therefore trade only when you feel confident and assured.
- Be Right 40% And Still Make Handsome Profits By Cutting Your Losses And Let Your Profits Ride
Another common misconception is that professional traders are right every time they trade. The truth is definitely far from that. Instead they use proper trading techniques to cut losses short when they are wrong and let profits run when they are right so that even if they are right less than half the time, the overall net result is still excellent profits.The basic failing of most speculators is that they put a limit on their profits and no limit on their losses. Basically when a trade goes against a speculator, they hang on rather than admit that they picked the wrong stock. Most of the time, these stocks plunge further and finally the speculator will lose faith and realize the big loss. On the other hand, when a speculator sees a quick profit, they get anxious to cash in on their profits for fear of losing it and end up winning small.There is an old saying, “You never go broke taking a small profit.” That is true but you will never grow rich either! Being satisfied with small profits is the wrong approach that most novices take. Instead, the approach should be to ‘jump on a bullet train and enjoy the ride but bail out of a sinking ship… fast!’
- Don’t Trade In Too Many Markets
There are many markets that you can trade in to meet your financial objectives. While it is possible to make money from any of the markets it will be a folly to try to make money from multiple markets as long as there is money to be made!The important decision is to select ONE market. Try to select the one that you are most familiar with. For beginners, the stock market is a good start because it is most common and has a sizeable public participation. The last thing you want to do is trade in a market with low trading volume because it will be difficult to liquidate a position at the price you want when there are not enough buyers.Don’t fall into the trap of thinking that the more markets you trade in, the more money you can make. There are enough potential profits trading in just one market and professional traders normally stay focused.
- The Trend Is Your Friend
It is vitally important that a trader be aware of the strong force in the market whether it is bullish or bearish. When this force is at its height, it would be foolish to attempt to buck the trend. For example, isn’t it common to hear people say “The market is so low now, it is a good time to buy!” only for the markets to go even lower.However, professional traders would not enter the market until they see signals of a trend for example a reversal trend in a bear market. Or when they see trends of bullish stocks hitting a period of exhaustion.Therefore novice traders need to learn about trends either by doing their own research, reading books or find a mentor to coach them.
- 6. Don’t Attempt To Buy The Bottom Or Sell The Top
This bring us to the quest of the holy grail, the perfect trading system that can correctly predict the bottom of the bottoms and the top of the tops. Professional traders know for a FACT, that such a crystal ball trading system does not exists unless someone has invented time travel without their knowledge.Instead, professional traders are usually patient and wait for a trend to develop and only take action when a clear signal has surfaced.
- Never Answer A Margin Call
This rule acts as a stop loss when your position has weakened considerably and if you are doing margin trading. By dogmatically and arbitrarily adhering to this rule, you will be forced to get out of the market before disaster sets in.It is often difficult to admit you are wrong and get out of the market (which you probably should have done well before you received a margin call) However, the presence of a margin call should serve as a final warning that you have let your position gone too far. Therefore professional traders will never answer a margin call and likewise for beginners.It is better to make profits than to be right.
- Adopt a Clear Trading Plan