Golden rules of trading (2024)

Traders should take steps, prior to embarking on every trade, to limit the impact that an unprofitable trade could have on their capital.

Protect your capital

Traders should take steps, prior to embarking on every trade, to limit the impact that an unprofitable trade could have on their capital. For any trader their capital is their life blood and therefore should be protected as a priority. Without it they are not only unable to make money but are unable to trade. Therefore limiting risk, even if this means elongating the time taken to achieve ones targets, is a must. The key tools that can be used to do this are Stop Losses and Limiting Exposure.

Stop losses should always be used and never moved away from the market A stop loss should always be used and just as importantly should be used correctly. The golden rule of Stop Losses is that they should never be moved away from the market once the trade is opened. If a trader feels that their stop loss is incorrectly placed, they are recognising that the foundations of their trade are incorrect and therefore they should close out. The best way to place a stop loss is to take the mindset of ‘If this stop loss is touched, I have judged the market wrongly and I should close out’. Once closed out, the trader can always re-evaluate the situation and go back into the market if the market conditions are favourable.

Limit exposure

Limiting exposure simply means limit the percentage of your capital that is exposed both to one sector and to the market as a whole at any one time. This will usually mean limiting your exposure to approximately 5% of capital. The theory behind this is that, should the market go against you in all your positions on the same day, you will still be able to trade in the same manner as before.

Never average down

Every trade should have a well thought out structure in regards to entry and exit. A trader should never average down. Averaging down is a method used to try and double up on a losing position in an effort to lower the average entry price obtained during a losing move.

This is not the same as averaging in, which involves entering the market slightly early with half of the position size in order to take ensure that ,should the market bounce prematurely, the trading opportunity is not lost.

Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don’t be afraid to track the market. Theoretically a trade should never be simply closed out manually; it should always be closed out by a stop loss. This allows the trader to lock in profit but never prevent further profit from being made.

Employ a risk reward ratio

The use of a minimum risk: reward ratio when planning a trade is imperative. The actual ratio that traders use will vary depending on their experience. A typical Risk: Reward ratio that a trader might look for when assessing a trade is 1:3 or £/$ 1 of potential loss in the trade for every £/$ 3 of potential profit. Even if you are trading on a moving average crossover or another imprecise method, you should still be aware of what your potential losses are and what your potential reward could be.

Never stop learning

A trader should never stop learning. As the markets are dynamic and are constantly evolving, any trader that becomes stagnant will eventually start to lose money.

Never trade scared

Trading scared or undercapitalised is one of the leading causes of unnecessary losses. Emotions such as greed and fear often cause errors in judgement and are always present however they are heightened when trading under pressure.

Don’t be afraid to go home

No trader should ever be hesitant to stop trading and if necessary walk away for the day. A morning losing streak is more often than not compounded by the trader that continues to trade. By walking away, you are not being lazy, but being mindful of the fact that something is wrong that day and that you are not in tune with the markets. Walking away is nothing to be ashamed of. Come back fresh the next day.

Plan your trade and trade your plan

All trades should be planned with risk, reward and capital allowances taken into account. Any trade that is taken on the fly is nothing more than a gamble.

Don’t look too hard for your trades, wait for the good ones to come to you

There are so many markets to trade that there are endless supplies of really good quality high probability trades. If you are looking too hard for trades, you will end up moving into positions which you have falsely convinced yourself are high probability trades. The better a trade, the more it will jump out of the charts at you.

Every loss is a learning opportunity, take time out to take advantage of it

Every loss making trade is a learning opportunity. By definition, if you have made a loss, you have misjudged the market. Therefore to move on to the next trade without fully reviewing the last will only increase the likelihood that you will repeat the mistake.

Don’t trade blindly from others trade ideas

Traders new to the markets frequently place trades based on others recommendations. Any trading activity should always be researched in depth. Not doing so will prevent the trader from being able to react to any changes in the market during the life of a trade. Remember positive information being released about the market can still have a detrimental effect on price and anything that you read in the papers is old news, as professional traders will have heard about it and reacted accordingly the previous day.

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Golden rules of trading (2024)

FAQs

Golden rules of trading? ›

Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.

What is No 1 rule of trading? ›

Rule 1: Always Use a Trading Plan

You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.

What is 90% rule in trading? ›

The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days. This is a sobering statistic, but it is important to understand why it is true and how to avoid falling into the same trap.

What is the 3 5 7 rule in trading? ›

What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.

What is the 80% rule in trading? ›

The Rule. If, after trading outside the Value Area, we then trade back into the Value Area (VA) and the market closes inside the VA in one of the 30 minute brackets then there is an 80% chance that the market will trade back to the other side of the VA.

What is the 3 trade rule? ›

You're generally limited to no more than three day trades in a five-trading-day period, unless you have at least $25,000 of equity in your account at the end of the previous day.

What is the 5 3 1 rule in trading? ›

Intro: 5-3-1 trading strategy

The numbers five, three and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades. One time to trade, the same time every day.

What is the 123 rule in trading? ›

The 123-chart pattern is a three-wave formation, where every move reaches a pivot point. This is where the name of the pattern comes from, the 1-2-3 pivot points. 123 pattern works in both directions. In the first case, a bullish trend turns into a bearish one.

What is the 60 30 10 rule in trading? ›

This reinventive basic rule to portfolio structure means allocating 60% to equities, 30% to bonds, and 10% to alternatives. The exact percentages may vary by portfolio, but the key idea is that Alternatives should be an integral part of every portfolio, in some percentage.

What is the rule of 2 in trading? ›

This has since been adapted by short-term equity traders as the 2 Percent Rule: NEVER RISK MORE THAN 2 PERCENT OF YOUR CAPITAL ON ANY ONE STOCK. This means that a run of 10 consecutive losses would only consume 20% of your capital. It does not mean that you need to trade 50 different stocks!

What is the 6% rule for pattern day traders? ›

According to FINRA rules, you're considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.

What is the 70 30 trading strategy? ›

The strategy is based on:

Portfolio management with 70% hedge and 30% spot delivery. Option to leave the trade mandate to the portfolio manager. The portfolio trades include purchasing and selling although with limited trading activity.

What is the 390 trade rule? ›

There are 390 minutes in an average trading day. Placing one order per minute every day of the month will qualify you as a professional trader per the CBOE. The 390 rule is in place to prevent the prioritization of non-professional traders' orders over the orders of professional traders.

What is rule 21 in stock market? ›

The relationship can be referred to as the “Rule of 21,” which says that the sum of the P/E ratio and CPI inflation should equal 21. It's not a perfect relationship, but holds true generally.

What is the 10 rule in the stock market? ›

A: If you're buying individual stocks — and don't know about the 10% rule — you're asking for trouble. It's the one rough adage investors who survive bear markets know about. The rule is very simple. If you own an individual stock that falls 10% or more from what you paid, you sell.

What is the 2 1 trading rule? ›

A positive reward:risk ratio such as 2:1 would dictate that your potential profit is larger than any potential loss, meaning that even if you suffer a losing trade, you only need one winning trade to make you a net profit.

What is the most profitable trading strategy? ›

Three highlighted profitable forex trading strategies are: Scalping strategy “Bali”, Candlestick strategy “Fight the tiger”, and “Profit Parabolic” trading strategy. How to choose: Choose a forex trading strategy based on backtesting, real account performance, and market conditions.

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