10 rules for successful trading strategies

Anyone who wants to become a profitable stock trader need only spend a few minutes online to find phrases such as “plan your trade; trade your plan” and “minimize your losses”. For new traders, this information may seem more like a distraction than practical advice. If you’re new to trading, you probably want to know how to hurry up and make money.

Each of the rules below is important, but when they work together the effects are powerful. Keeping them in mind can dramatically increase your chances of succeeding in the markets.

Key points to remember

  • Treat trading like a business, not a hobby or a job.
  • Learn all about the company.
  • Set realistic expectations for your business.

Rule 1: Always use a trading plan

A trading plan is a set of written rules that specify a trader’s entry, exit, and money management criteria for each purchase.

With today’s technology, it’s easy to test out a trading idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading.

Sometimes your trading plan won’t work. Free yourself and start over.

The key here is to stick to the plan. Making trades outside of the trading plan, even if they turn out to be winners, is considered bad strategy.

Jack Schwager: Investopedia Profile

Rule 2: Treat trading like a business

To be successful, you need to approach trading as a full-time or part-time endeavor, not a hobby or a job.

If approached as a hobby, there is no real commitment to learning. If it’s a job, it can be frustrating because there’s no steady paycheck.

Trading is a business and brings expense, loss, taxes, uncertainty, stress and risk. As a trader, you are essentially a small business owner and need to research and strategize to maximize your business potential.

Rule 3: Use technology to your advantage

Trading is a competitive activity. It’s safe to assume that the person sitting on the other side of a trade takes full advantage of all the technology available.

Charting platforms offer traders an endless variety of ways to view and analyze the markets. Backtesting an idea using historical data avoids costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, such as a high-speed internet connection, can dramatically increase trading performance.

Using technology to your advantage and keeping up to date with new products can be fun and rewarding in trading.

Rule 4: Protect your trading capital

Saving enough money to fund a trading account takes a lot of time and effort. It can be even harder if you have to do it twice.

It is important to note that protecting your trading capital does not mean never having a losing trade. All traders have losing trades. Protecting capital means not taking unnecessary risks and doing everything in your power to preserve your business.

Rule 5: Become a student of the markets

Think of it as continuing education. Traders should stay focused on learning every day. It is important to remember that understanding the markets and all their intricacies is an ongoing process that lasts a lifetime.

Thorough research allows traders to understand the facts, such as what different economic reports mean. Concentration and observation allow traders to sharpen their instincts and learn the nuances.

Global politics, current events, economic trends – even the weather – all impact the markets. The market environment is dynamic. The more traders understand past and current markets, the better prepared they are to face the future.

Rule 6: Only risk what you can afford to lose

Before you start using real money, make sure that all the money in this trading account is really usable. If this is not the case, the trader must continue to save until this is the case.

Money in a trading account should not be used for children’s school fees or mortgage payments. Traders should never allow themselves to think that they are simply borrowing money from these other important obligations.

Losing money is traumatic enough. This is even more true if it is capital that should never have been risked in the first place.

Rule 7: Develop a methodology based on facts

Taking the time to develop a solid trading methodology is worth it. It can be tempting to believe in the “so easy it’s like printing money” business scams prevalent on the Internet. But facts, not emotions or hope, should be the inspiration behind developing a trading plan.

Traders who are in no rush to learn usually have an easier time sifting through all the information available on the internet. Consider this: if you were to start a new career, you would most likely need to study at a college or university for at least a year or two before you were qualified to apply for a position in the new field. Learning to trade requires at least the same amount of time and factual research and study.

Rule 8: Always use a Stop Loss

A stop loss is a predetermined amount of risk a trader is willing to accept for each trade. The stop loss can be a dollar amount or a percentage, but either way it limits the trader’s exposure in a trade. Using a stop loss can take some of the stress out of trading because we know we will only lose X amount on any given trade.

Not having a stop loss is bad practice, even if it leads to a winning trade. Exiting with a stop loss, and therefore having a losing trade, is still good trading if it follows the rules of the trading plan.

The ideal is to exit all trades with a profit, but this is not realistic. Using a protective stop loss ensures that losses and risks are limited.

Rule 9: Know when to stop trading

There are two reasons to stop trading: an ineffective trading plan and an ineffective trader.

An ineffective trading plan shows much larger losses than anticipated in historical tests. It happens. Markets may have changed or volatility may have decreased. For some reason, the trading plan just doesn’t work as expected.

Remain impassive and professional. It’s time to reassess the trading plan and make some changes or start over with a new trading plan.

An unsuccessful trading plan is a problem that needs to be fixed. This is not necessarily the end of the business activity.

An ineffective trader is one who makes a trading plan but is unable to follow it. External stress, bad habits and lack of physical activity can all contribute to this problem. A trader who is not in top form for trading should consider taking a break. Once all difficulties and challenges have been resolved, the trader can resume trading.

Rule 10: Keep trading in perspective

Stay focused on the big picture when negotiating. A losing trade should not surprise us; It’s part of the trade. A winning transaction is just one step on the way to a profitable business. It is the cumulative profits that make the difference.

Once a trader accepts gains and losses as part of the business, emotions will have less of an effect on trading performance. That’s not to say we can’t get excited about a particularly successful trade, but we should keep in mind that a losing trade is never far away.

Setting realistic goals is an essential part of keeping trading in perspective. Your business must generate a reasonable return in a reasonable time. If you expect to be a multi-millionaire by Tuesday, you are setting yourself up for failure.


Understanding the importance of each of these trading rules and how they work together can help a trader establish a viable trading venture. Trading is hard work, and traders who have the discipline and patience to follow these rules can increase their chances of success in a highly competitive arena.

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