Top 10 Rules for Successful Trading (2024)

Anyone who wants to become a profitable stock trader needs only spend a few minutes online to find such phrases as "plan your trade; trade your plan" and "keep your losses to a minimum." For new traders, these tidbits seem more like a distraction than actionable advice.

The rules below work together for results that increase your odds of succeeding in the markets.

Key Takeaways

Treat trading like a business, not a hobby or a job.
Plan your strategies and stay educated.
Set realistic expectations for your business.

Rule 1: Always Use a Trading Plan

A trading plan is a set of rules that specifies a trader's entry, exit, and money management criteria for every purchase.

With today's technology, test 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. Bail out of it and start over.

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

Rule 2: Treat Trading Like a Business

To be successful, you must approach trading as a full or part-time business, not as a hobby or a job.

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

Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are essentially a small business owner, and you must research and strategize to maximize your business's potential.

Rule 3: Use Technology to Your Advantage

Trading is a competitive business. It's safe to assume that the person on the other side of a trade is taking full advantage of all the available technology.

Charting platforms give traders infinite ways to view and analyze markets. Backtesting an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can increase trading performance.

Using technology to your advantage, and keeping current 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 time and effort. It can be even more difficult if you have to do it twice.

It is important to note that protecting your trading capital is not synonymous with never experiencing a losing trade. All traders have losing trades. Protecting capital entails not taking unnecessary risks and doing everything you can to preserve your trading business.

Rule 5: Become a Student of the Markets

Think of it as continuing education. Traders need to remain focused on learning more each day. It is important to remember that understanding the markets and their intricacies is an ongoing, lifelong process.

Hard research allows traders to understand the facts, like what the different economic reports mean. Focus and observation allow traders to sharpen their instincts and learn the nuances.

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

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Rule 6: Risk Only What You Can Afford to Lose

Before using real cash, make sure that money in that trading account is expendable. If it's not, the trader should keep saving until it is.

Money in a trading account should not be allocated for college tuition or the mortgage. Traders must never allow themselves to think they are simply borrowing money from these other important obligations.

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

Rule 7: Develop a Methodology Based on Facts

Taking the time to develop a sound trading methodology is worth the effort. It may be tempting to believe in the "so easy it's like printing money" trading scams that are prevalent on the internet. But facts, not emotions or hope, should develop a trading plan.

Traders who are not in a hurry to learn typically have an easier time sifting through all of the information available on the internet. If you were to start a new career, you would need to study at a college or university for at least a year or two before you qualify to apply for a position in the new field. Learning to trade demands the same amount of time and fact-driven research and study.

Rule 8: Always Use a Stop Loss

A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be a dollar amount or percentage, but it limits the trader's exposure during a trade. Using a stop loss can take some of the stress out of trading since 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 a losing trade is still good trading if it falls within the trading plan's rules.

The idea is to exit all trades with a profit, but not realistic. Using a protective stop loss helps ensure that losses and risks are limited and that you have preserved enough capital to trade another day.

Rule 9: Know When to Stop Trading

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

Rule 10: Keep Trading in Perspective

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

Once a trader accepts wins and losses as part of the business, emotions have less effect on trading performance. That is not to say that we cannot be excited about a particularly fruitful trade, but we must keep in mind that a losing trade is never far off.

Setting realistic goals is an essential part of keeping trading in perspective. Your business should earn a reasonable return in a reasonable amount of time. If you expect to be a multi-millionaire by next Tuesday, you're setting yourself up for failure.

What Do I Do If My Trade Is in the Money, i.e., Profitable?

In bull markets, it can be easy to make money in the market. Knowing when to take profits takes practice. One way to take the emotion out of closing a profitable position is to use trailing stops.

How Much Should I Risk on Any Given Trade?

First off, the answer to that question should already be part of your trading plan in the form of a stop loss. As a stop loss, you can use a financial stop, e.g., $500, or a technical stop price, such as if the 50-day moving average is broken, or new highs are made. The key is to remember that you always need a stop loss as part of your trading plan.

What Are the Key Elements of a Trading Plan?

The starting point is the impetus for the trade. If from a fundamental development, such as an economic data report or a comment by a Fed official, your trade is based on those fundamental factors, and your trading plan should reflect that. If your trading plan relies on technical analysis, such as remaining above the 50-day moving average, again your strategy should rely on that. The key is to adjust your position size to give yourself enough room to stay within the stop loss and not risk everything in a single position.

How Much Money Should I Commit to a Single Trade?

Position size is the primary determinant of the outcome of any trading strategy. You want to be sure your stop loss can tolerate a minor loss relative to your trading capital. If your stop is $1.50 away from the current market, you'll want a position size relative to your stop loss that does not consume too much of your trading capital.

Say you're only willing to risk $500 on the trade, and your stop is $1.50 away, based on a technical price level, from the $20 current market price. That dictates a position size of approximately 333 shares.

$20-$18.5=$1.50; $500/$1.50=333.33 shares to fit your trade strategy, which would require $6,660 in tradeable capital (333 shares x $20 current market level).

Note that a smaller position will use less of your trading capital while allowing you to pursue a specific strategy.

The Bottom Line

Most of the rules outlined above have one thing in common: attention to risk or losing money. That's because you're in the business of making money in the markets. Losses will inevitably occur. The trick is to keep the losses small enough to keep trading until you find more winning trades.

Experienced traders know when it's time to take a loss and have incorporated that into their trading strategy. Traders also know when it's time to take profit, so they may move their stop loss in the direction of the trade to lock in some profit or take profit at the current market price. Either way, there will always be another trade setup down the road.

Correction—May 3, 2023: A previous version of this article showed an incorrect calculation in the FAQ section to determine the number of shares and the value of tradeable capital required to commit to a single trade.

As an enthusiast with a deep understanding of stock trading, let me share my expertise on the concepts discussed in the article.

Trading Plan (Rule 1):
- A trading plan is a comprehensive set of rules defining a trader's entry, exit, and money management strategies for each trade.
- Backtesting, using historical data to test a trading idea, is crucial to validate the effectiveness of a plan before risking real money.
- Flexibility is important; if a plan fails, it's essential to exit and reevaluate rather than stubbornly sticking to a non-working strategy.
Treating Trading Like a Business (Rule 2):
- Trading should be approached as a business to foster commitment, learning, and long-term success.
- Traders are akin to small business owners, incurring expenses, losses, taxes, stress, and risk. Regular commitment to learning is vital.
Using Technology (Rule 3):
- Trading is competitive, and embracing technology is crucial for success.
- Charting platforms, backtesting tools, and real-time market updates via smartphones provide traders with essential resources.
- A high-speed internet connection enhances trading performance.
Protecting Trading Capital (Rule 4):
- Saving and protecting trading capital is paramount for sustainability.
- Protecting capital involves avoiding unnecessary risks and preserving the trading business by managing losses effectively.
Continuous Learning (Rule 5):
- Traders should view learning as a continuous process, understanding market intricacies, economic reports, and global events.
- Hard research and staying informed about various factors affecting the markets contribute to successful trading.
Risk Management (Rule 6):
- Traders should only risk capital that they can afford to lose.
- Money in a trading account should be expendable and not tied to essential expenses like tuition or mortgage payments.
Methodology Based on Facts (Rule 7):
- Developing a sound and fact-driven trading methodology is essential.
- Avoiding the lure of "get-rich-quick" schemes and focusing on research and fact-driven strategies is crucial for success.
Using Stop Loss (Rule 8):
- Implementing a stop loss is crucial for limiting losses and managing risk.
- Exiting trades with a stop loss, even if it results in a loss, aligns with good trading practices.
Knowing When to Stop Trading (Rule 9):
- Traders should reevaluate their trading plan if it proves ineffective, adapting to changing market conditions.
- Recognizing personal limitations and taking breaks during challenging times contributes to long-term success.
Keeping Trading in Perspective (Rule 10):
- Maintaining focus on the big picture helps traders cope with wins and losses.
- Realistic goal-setting, understanding that losses are part of trading, and focusing on cumulative profits contribute to a successful trading mindset.

The bottom line is that attention to risk, continuous learning, and a disciplined approach to trading are fundamental principles for anyone aspiring to become a profitable stock trader.