Trading Rules

Essential Rules for Profitable Trading

If you're new to stock trading, you may feel overwhelmed by the volume of advice out there. You might be more focused on making money quickly than on following seemingly abstract rules like "plan your trade" or "minimize losses". However, these tips are not just empty phrases - they are crucial for success.

By following the rules below, you can greatly improve your chances of succeeding in the markets. Each rule is important in its own right, but when applied together, they can have a powerful impact on your trading outcomes.


  • Approach trading as a business venture, rather than a pastime or occupation.

  • Acquire comprehensive knowledge about the trading business.

  • Establish practical and achievable goals for your trading enterprise.

Rule 1: Always Use a Trading Plan

A trading plan is a set of written guidelines that define a trader's criteria for entering and exiting trades, as well as for managing money. It is a crucial tool for successful trading, helping traders to stay disciplined and focused on their goals.

Thanks to advances in technology, traders can now test their trading ideas before risking real money. This practice, known as backtesting, involves applying a trading idea to historical data to see how it performs. By using backtesting to evaluate a trading plan and confirming that it produces positive results, traders can feel more confident in using the plan for real trading.

Sticking to your trading plan is key. Taking trades that aren't part of your plan, even if they turn out well, is poor strategy.

Note: If your trading plan isn't working, it's best to cut your losses and start fresh.

Rule 2: Treat Trading Like a Business

Treating trading as a serious business, rather than a hobby or a job, is essential for success. If you view it as a hobby, you may lack the commitment to learn and improve. Treating it like a job can lead to frustration due to the lack of a regular paycheck.

Trading is a business that involves expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are like a small business owner, and you must research and strategize to optimize your business's potential.

Rule 3: Use Technology to Your Advantage

In the competitive world of trading, it's important to stay ahead of the game by leveraging technology. Charting platforms offer countless ways to analyze the markets, while backtesting can help you avoid costly mistakes. With the ability to receive market updates on your smartphone, you can monitor your trades from anywhere.

Technological advancements, such as high-speed internet connections, can significantly enhance trading performance. By staying up-to-date on new products and features, and using them to your advantage, you can find trading to be both enjoyable and rewarding.

Rule 4: Protect Your Trading Capital

Saving up enough money to fund a trading account is a time-consuming and challenging process. Losing that money and having to start over can be even more difficult.

It's worth noting that protecting your trading capital doesn't mean you'll never experience losses. All traders have losing trades. Protecting your capital involves avoiding unnecessary risks and taking steps to preserve your trading business.

Rule 5: Become a Student of the Markets

For traders, continuous learning is essential. Viewing it as ongoing education helps traders remain focused on improving their skills and knowledge. Understanding the markets, and all their intricacies, is a lifelong process.

Conducting thorough research can help traders learn the facts, such as what different economic reports mean. Focusing and observing can help traders hone their instincts and recognize the nuances of the markets.

Factors such as world politics, news events, economic trends, and even weather can impact the markets. The market environment is dynamic and constantly evolving. The more traders understand the past and current markets, the better prepared they will be to face the future.

Rule 6: Risk Only What You Can Afford to Lose

Before trading with real cash, it's essential to ensure that all the funds in your trading account are truly disposable. If they're not, it's important to keep saving until they are.

Money that's designated for your kids' college tuition or mortgage payments shouldn't be used for trading. Traders must never view trading as borrowing from these crucial obligations.

Losing money can be distressing, and it's even more so if you've risked capital that should never have been put at stake.

Rule 7: Develop a Methodology Based on Facts

Taking the time to establish a solid trading approach is well worth the effort. Although it can be tempting to believe in get-rich-quick schemes that promise effortless profits, it's important to base your trading plan on facts, not emotions or wishful thinking.

Traders who aren't in a rush to learn often find it easier to navigate the abundance of information available online. Consider this: when starting a new career, it's usually necessary to study at a college or university for at least a year or two before you can even apply for a job in that field. Learning to trade requires a similar amount of time, as well as research and study driven by facts.

Rule 8: Always Use a Stop Loss

A stop loss is a pre-determined level of risk that traders are willing to assume with each trade. This can be expressed as a dollar amount or a percentage, but it always restricts the trader's exposure during a trade. By implementing a stop loss, traders can alleviate some of the stress associated with trading, knowing that they will only lose a certain amount on any given trade.

Avoiding a stop loss is not advisable, even if it leads to a profitable trade. Exiting a trade with a stop loss, and incurring a loss, is still considered good practice if it adheres to the rules of the trading plan.

While it's ideal to close all trades with a profit, that's not always feasible. Using a protective stop loss can help mitigate potential losses and risks, and ensure that you have preserved enough capital to continue trading in the future.

Rule 9: Know When to Stop Trading

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

An ineffective trading plan may result in greater losses than anticipated during historical testing. This can occur due to market changes or decreased volatility. In this case, it's important to remain unemotional and analyze the trading plan, making necessary adjustments or starting anew.

An unsuccessful trading plan is a challenge that requires a solution. However, it doesn't necessarily signify the end of your trading business.

An ineffective trader is someone who creates a trading plan but struggles to follow it. Factors such as external stress, poor habits, and physical inactivity can contribute to this issue. If not in the right mindset for trading, taking a break may be beneficial. Once any obstacles have been addressed, the trader can resume business.

Rule 10: Keep Trading in Perspective

Stay focused on the big picture when trading. Losing trades are part of the process, while winning trades are just one step toward building a profitable business. The ultimate goal is to generate cumulative profits.

By acknowledging wins and losses as inherent aspects of trading, emotions will have less impact on trading performance. While it's natural to feel excited about a particularly successful trade, it's important to remember that a losing trade could occur at any time.

Setting realistic goals is crucial for maintaining perspective in trading. Your business should aim to earn a reasonable return over a realistic time frame. Expecting to become a millionaire overnight is unrealistic and sets oneself up for disappointment.

Frequently Asked Questions

What do I do if my trade is in the money (e.g. profitable)?

During bullish markets, trading can be profitable and straightforward. However, it requires skill to know when to take profits. To remove emotions from closing a profitable position, traders may use trailing stops. This tool allows for automatic adjustments to the stop-loss order to follow the price trend.

How much should I risk on any given trade?

A crucial part of any trading plan is having a stop loss in place. This could be a financial stop, such as setting a limit of $500, or a technical stop based on market indicators like breaking a 50-day moving average or reaching new highs. Regardless of the type of stop loss used, it's essential to always include it as part of your trading plan.

What are the key elements to a trading plan?

The beginning of a trade is crucial and should align with your trading plan. Whether your trade is based on fundamental factors or technical analysis, your strategy should reflect that. It's important to adjust your position size to allow room within the stop loss and avoid risking everything on a single position.

How much money should I commit to a single trade?

Position size is crucial in determining the success of a trading strategy. It's important to ensure that your stop loss can withstand a small loss relative to your trading capital. For instance, if your stop is $1.50 away from the current market, you'll need to determine a position size that won't consume too much of your trading capital.

For example, if you're willing to risk $500 on the trade and your stop is $1.50 away based on a technical price level, your position size should be around 333 shares, requiring $6,600 in tradable capital.

Keep in mind that a smaller position will use up less of your trading capital while still allowing you to execute your strategy.


The rules mentioned above all emphasize the importance of managing risk and minimizing losses. As a trader, your goal is to generate profits in the markets, but losses are inevitable. The key is to limit losses to a manageable level so that you can continue trading and find more winning opportunities.

Experienced traders recognize when it's appropriate to cut losses, and they incorporate this strategy into their trading plan. They also know when it's time to take profits, whether by moving their stop loss to lock in gains or by selling at the current market price. Rest assured, there will always be new trading opportunities in the future.

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