Before you start trading, it is very important that you make yourself some rules and that you follow them. It doesn’t matter what your trading style is or how good you are: if you don’t follow your rules, you will never be a profitable trader.
This article will tell you what the 3 basic principles are for becoming a successful trader. By following these simple guidelines, you will be well on your way to trading more profitably and building a solid way to trade on the stock exchange.
They are particularly suitable for Forex, indices, crypto trading and commodities with spread trading.
Don’t get me wrong. I don’t want to be like one of the many hot aired salesmen.
There are so many out there. I will seriously tell you some things you MUST DO. They are the basics.
They are a base that 80% of aspiring traders do not apply and they lose money. So if you already do these things you will be a thousand steps ahead of most people.
A bit like teaching you to stop with your car when the light is red. Or to slow down before a difficult corner. Or even if I taught you not to brake sharply when the asphalt is wet.
Now in these cases I mentioned above, as you know very well 99% of people already know and apply them. People immediately learned these rules about driving cars: otherwise they would get hurt, risking their life and endangering that of others, or they would demolish the car and remain on foot.
In trading, on the other hand, people think they are playing. A bit like those who play slot machines. Believeing that if they lose money, nothing changes.
They keep making the same mistakes that are super easy to correct.
Maybe it doesn’t change anything for someone to lose money, because they are rich. Still it’s silly, since he gives money to others.
While others that are poor, burn their savings for not braking at red lights or slowing down when it’s wet (which even a child learns).
So if you want to be smart you can make a real difference with these very important rules.
Ray Dalio also applies them and Joe Ross did it. If you don’t know who they are … or I don’t tell you … you won’t know.
RULES TO BECOME A PROFITABLE TRADER
1 – Always put the stop-loss
What is he stop-loss: it is a limit that you set before opening the tradet. That is, you say: “If the market goes against me and goes down at that price, I sell so as not to lose too much.” Or vice versa if the market goes up, and you have sold.
So if you create the stop-loss you avoid big losses. If you do not set it, you risk suffering heavy losses that could compromise your trading activity.
It is very always important to insert the stop-loss in your trades. Don’t wait for the market to go against you to set it, because by then it will be too late.
You must also respect it: do not touch it if the market goes against you, even if it seems to you that it is a bad decision. The fear of losing money cannot influence your decision to stop or not.
Use psychology: you know well that following the market and its fluctuations, this could come back in your favor. But you can’t be 100% sure.
Therefore it is better to cut the losses when they are still small, in order to limit the damage.
There are a lot of people who set it up and then take it off. Very serious mistake. You have to be very firm with your internal dialogue.
Kind of like when you decide to go on a diet. You have to stand up to any ice cream, cake, sweet drink, or pizza … and you have to have a will of steel.
2 – Always check risk/profit
When you open a trade, you need to check good risk / profit ratio.
This means you need to understand how much you are willing to lose in terms of money before placing the stop-loss and compare it to the potential profit.
– if you set the stop-loss at 100 pips (points) and you want to earn only 50 pips, you are in an unfavorable ratio. That is, if you make 10 trades all with this ratio even if you win 7 and lose three you will have a really small gain compared to the risk you ran in all 10 trades
– if instead you put the stop-loss at 10 pips and try to get a profit of 100 pips, the risk /profit ratio is much more favorable. Only one out of 10 trades wins to earn as much as the other 9 combined.
(Remember to consider the commission you pay to the broker every time you open and close a trade).
Certainly the second example was also very exasperated, but to make you understand what I wanted to tell you. You must always keep an eye on what you are doing.
Now many are talking a lot about the fact that it is better to only have trades where you lose one and earn at least two or three.
Of course, it would always be nice to be able to do such tradess. But it’s hard to spot times when the market is running so fast and heading in the direction of your target.
I believe that a risk return of 1 to 1 or 1 to 1.2 is already excellent. In my opinion, you have to check something else that is as important as the risk return. I’m talking about profitability.
3 – Profitability in trading
By profitability I mean how many times you make trades where you earn. That is, if out of 10 trades you are wrong only two, then you have a profitability of 80%.
How do you know how profitable a person is? Well, you have to learn trading strategies from people who have a good statistic of their trading methods.
A strategy that performs around 75% of the time is very good. With 80% even better.
With numbers like this you can afford a risk return of 1 to 1 or even 1 to 1.2.
These last two indicators (profitability and risk/return) must always be taken together.
If you can maintain a ratio of 1 to 3 for each operation, for example, you can be satisfied with being only 50% profitable.
This is what it means to set yourself rules and follow them.
I also want to add that in practice it is never that simple, and there are a lot of variables. Variables that you will discover and refine step-by-step with practice.
But if you start from scratch or with little knowledge and apply these basic rules, I am sure that you will not get a ZERO account by losing money as 80% who want to trade.
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