To achieve success in trading, it is necessary to know its basic rules. Otherwise, it is easy to lose concentration. It is not a secret for anyone, that only 10% earns in the Forex market. Does it mean that other traders don't know the basic rules of trading, or their mentality has not got used to conform to the rules? In this article, we will consider the rules of trading to which all traders shall follow.
1. Your rules of capital management
Rules of capital management are one of the basic principles which traders shall include in their trading plan. Only, in this case, they can effectively secure the equity in each specific transaction. One of the aspects of this rule is the risk/profit ratio. There is no need to say that it is the most important element of money management in the market. If you have a formation with a risk/profit ratio 1:3, it means that in profitable transactions your earnings by 3 times will exceed the amount which you risk.
We will consider a hypothetical example in which the risk in the transaction constitutes $100, and the profit can be three times more, i.e. $300. If you open a real account for $5000, then stop loss in the amount of $100 will constitute 2% of your balance. Such rule of 2% risk is recommended by many specialists in trading and is put by many traders into practice.
If within a trading week you have made 25 transactions, then what can be your profit or your loss in a case when 16 transactions were unsuccessful, and 9 - successful? 16 unprofitable transactions of $100 are $1600, and 9 profitable transactions for $300 are $2700.
Thus, having made for a week, 25 transactions, you get profit (gross) of $1100. From here it is necessary to subtract the commissions of the broker, we will allow - $150. As a result, your balance will be refilled for $950. To put it briefly, accept short losses when they occur, and try again. But when positions go to your part, do not take away profit too early, and lets them grow. You can transfer all the positive transactions in the black or use the watching stop for fixation of profit. If you use the strategy based only on price movement, it is necessary to be able to distinguish a depletion candle to leave the transaction timely.
2. Size of your positions
The term “positions size management” means a change of a number of stocks or lots in the transaction for the purpose of their reduction in compliance with the amount of risk which you have established or yourself, and with a stop loss length. For example, the amount of your risk in case of the $5000 equity constitutes $100. It means that it is necessary to trade two mini-lots from stop loss at 50 points. One lot gives $1 for point, two lots - $2 for point x 50 points. $100 stop loss corresponds to your risk.
3. Your personal trading plan
One of the distinctive features of successful traders is that they create trading systems which correspond to their personality. What works for them can not work for you. But it does not mean that you cannot study their trading strategy. Find out what's in their strategy works for their advantage, and then try to create a strategy which will correspond to your personality and lifestyle.
For example, some traders want to buy at the levels of support and to sell at resistance levels. Others prefer to buy and sell on breakdowns.
Some use indicators, for example, crossing of moving averages or oscillators. Find what works in your case and accept this strategy of trade, formulate formation parameters, add strategy of an exit here and apply the reasonable strategy to capital management. Having received own technique, it is important to test it constantly to be convinced that it steadily yields to your desirable result. When the strategy ceases to work it is necessary to develop another strategy. Professional traders accepts what works for them, and are not afraid to refuse system when it ceases to work. It gives them an advantage.
4. Your capability to cope with emotions
The biggest enemy of the trader are the emotions of fear and greed. Success in trading can be achieved if the trader learns to overcome the emotions. But it is easier to say than to make. Availability of the trading plan will help you to develop the mentality, allowing following the trading technique. But emotions will be always present. The best that you can make, it to learn to control situations in which fear of failure, the fear of loss or fear to lose control over the uncertainty of the market hold down your capability to think logically. You will be able to achieve success when you radiate confidence, to cope with the fears and to accept losses as part of trading.
Greed is one more emotional challenge in the course of trading. It appears when the price moves in your direction. The best method to control greed - not to intend to earn the specific amount of profit in the first month of trading. The beginning traders often think that they will be able to get a profit of $5000 in the first month, having started with the $5000 equity. Another popular belief assumes that, in the case of trading in larger lots, you will have profitable transactions at once. The more reliable road to success is finding the self-discipline for the purpose to follow your trading plan.
5. Continue to study
Trading in the financial markets as the main source of the income is similar to any other business. Probably several years will be required before you are able to master the art of profitable and stable trading. Consider it as any other profession which requires a high standard of knowledge. It is necessary to be trained and devote continuously considerable time to studying of various trading strategies, applying them from those which correspond to your personality. It is also necessary to keep расе with the market.
6. What do you trade
Do not think that trading other asset classes will provide you profitable system. Some assets are traded more ordered, than others. For example, working in the Forex market, you will find out that the Japanese yen is, as a rule, more volatile during the Asian session. It is logical because the majority of transactions on yen happen during the working day in Japan. Some strategies, such as range or channel trading give profitable systems when testing with cross currency pairs - EUR/AUD, EUR/GBP, EUR/CHF and CHF/JPY. Therefore, it is important to test your trading system with several tools to determine which of them is better for it.
7. Your trading purposes
It is useful to establish the trading purposes because it forces you to remain concentrated and not to lose the planned route. But be convinced that your purposes are realistic. Success can differ from failure in effective objectives.
Let's assume that you have an equity of $5000, and you have set for yourself the object to earn $12 000 in a year. Such purpose is specific and measurable. But whether it is achievable? If it can be reached, then the term of its achievement can be broken into stages - of days, weeks and months, up to the planned date. It means that you establish the purpose per day in the amount of $50, for a week (5 days) - $250, for a month - $1000, and the purpose for a year turns out $12 000. Dividing the purpose on short-term will help you to belong more seriously to the trading, but at the same time, it can lead to disappointment. Sometimes the fact that it seems achievable on paper can be unreal. Perhaps, it will be required to pass a way of tests and mistakes. It is the best of all to begin with the small amount and to understand how the market works before setting the purposes.
8. Your personality
What type of trader you are? You are a scalper, a day trader, the swing trader, the position trader or another? All these types of traders work differently, but even within one category two similar traders are absent. Trading is an individual profession. It is impossible to imitate other traders. For example, if your mentor is a successful swing trader, it does not mean that you will be able to become the successful swing trader too. At first, it is necessary to understand the trading identity, and then to find a trading technique which corresponds to it. Communicate with other traders, read as much as possible about other traders, observe whether something from their approaches is close to you personally. It is a starting point with which it is necessary to begin development of the trading plan determining the rules of entry and exit from transactions.
9. Your approach to the market
Your approach to the market is closely connected with your trading style. It is useful to apply a method of the descending market research. There are various approaches to trading. To analyze the market, it is necessary to have some knowledge about micro and macroeconomic before you are able to master the fundamental analysis. Applying the technical analysis, it is the best of all to begin with a consideration of more overall picture, for example, from long-term trends or cycles. It is also possible to apply the analysis based on own feelings, trying to determine the general mood of the participants of the market - bull or bear. The general opinion expressed by traders is the cornerstone of such analysis.
The understanding of these various approaches will allow you to formulate the trading strategy. For example, scalpers and day traders can choose a method named - trading on the news. If you want to trade based on these factors, then it is necessary to know when to wait for major news releases.
10. Your trading journal
The importance of a trading journal consists in the possibility to constantly and individually estimate the productivity, introducing necessary amendments. It is useful to create the table in Excel to bring in it the transactions with an indication of the date, the tool, the prices of an entry and exit, the size of a lot, stop loss, target profit, the size of a profit or loss, a formation and drawdown of the account.
Checking these data, you will know as far as you conformed to the rules of trading, and you will be able to reveal opportunities for improvement. Some examples of what you can reveal, checking data of the journal: your stop losses are too short or too long, you take away partial profit too early, the sizes of positions are too big or too small, etc. The better your journal is organized, the easier it will be in use.
Everything depends on you
You are the only person who can develop your trading potential. Therefore, it is necessary to improve the psychology so that you could become the profitable trader. It is necessary to adjust the mentality on overcoming of the weaknesses. For this purpose will be required time, efforts and will power, therefore the best of all to use structural approach to the trading, but not to assimilate to the crowd which considers that trading is a scheme of fast enrichment.
10 principles of successful trading which we have considered in this article are aimed at disclosure of your capabilities in trading. It is necessary to be open for learning and knowledge and to have an opportunity to accept those challenges which are thrown down to you by the market. George Soros, one of the biggest masters of the market, has told once that approach to the market as a mathematical formula, does not work. He has found what works in its case and has earned millions of dollars.
Whatever type of trader you are, it is important to follow the development plan and to adhere the discipline in the course of trading. Do not stop studying, spending money, time and efforts and as a result, you will become the successful trader.