Whether your passion is sports, stock car racing, or the stock market, there are “rules of the trade” that control everything. Albert Pujols can’t hit a baseball into foul territory and expect to be awarded a home run. Tony Stewart can’t drive the opposite direction of the other drivers in a NASCAR race and expect to be given the trophy. And successful traders can’t ignore the trading rules established long before they began to trade and expect to have a profitable trading career. While the trading rules of the stock market are relatively simple, they provide the framework for all traders.
Emotional Trading
Emotional trading needs to be understood, and controlled, by the trader. Hope, greed and fear are emotions, not stock market strategies. While it is important to understand emotional trading from the aspect of its effect on other traders, it cannot be part of the trading rules. Trading is a psychological game; the market is not “against the trader”, only the trader’s emotions are an opponent.
It is important to remember that losses are the result of taking risks. Risk reward ratios are concepts that are important trading rules; admitting losses early and learning from them will keep this ratio in a positive direction for the trader. The key is to accept the fact that losses will come and use your trading plan to minimize their impact. Also, it is important to realize that a missed opportunity doesn’t exist, and dwelling on stock market results outside of the investor’s portfolio creates undue pain. Realize that the market will create all of the opportunities that an investor can handle; it is important for an investor to learn from the trading rules, monitor his own performance, and learn from his, or her, investing mistakes.
Trading Plan
Some traders think that gambling with their portfolio is the cornerstone of their trading rules. Without a stock trading plan, stock technical analysis, or even a clue, they throw money at the market. Such an approach usually has disastrous results. An analytical approach can produce results that guessing and emotional trading can never duplicate. With a dedication to a trading plan and a stock trading system, a trader truly has the cornerstone of trading rules. What kinds of principles make a trading plan? Here are a few:
- Never trade based on emotions. Have an established action plan and do not change these trading rules based on the events of any given day.
- Establish and adhere to stop loss strategies and techniques. Even the best plan can miss and it’s important not to lose the entire portfolio over one loss. Stop loss strategies are not trading rules that add to the bottom line, but minimize losses there.
- It is important to achieve portfolio diversification. A portfolio that is heavy in one or two stocks is vulnerable to heavy losses. It is wise to balance investments based on volatility, profitability, and stability.
Technical Analysis
Technical analysis is a systematic review of stocks and their movements. By understanding the dynamics of a company and charting its performance, an investor can attempt to discern a pattern for the movements of its stock. This trade rule is based on research and probabilities; it is the one tangible element in a largely unpredictable endeavor. Using understanding and a system such as technical analysis with Japanese Candlesticks, it is possible to find patterns and actually make sense of the stock market.
Conclusion
Above all, it is important to remember that the stock market is a business. With any business, a serious approach is crucial to reach the desired result. After learning the trading rules and perfecting the stock market strategies, it is important to do one more thing. Take a part of the profit as a reward. All of the hard work is in vane if it is not enjoyed. So when it is all finished, relax and enjoy that ball game or stock car race knowing that the trading rules have worked!
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