With that in mind, here is a list of 12 simple rules that I have found to be the key to successful trading. If you’re not getting the results you want as a trader, you’re breaking one or more of these rules.
Rule No. 1: Follow YOUR Dreams
The dream of being a successful trader, especially someone who trades for a living, is one of those “big” dreams that naysayers love to squash. Don’t listen to these cynics. There are too many examples of people who have started with very little and made fortunes trading. You can be certain they’re glad they didn’t listen to the naysayers. On the other side of the coin, make sure that you really enjoy trading before committing to it. All the great traders I know have a true PASSION for the game of trading. If you don’t have a passion for trading, you won’t last long.
Rule No. 2: Put Your Time and Energy into the Things You Can Control and Don’t Worry about the Things You Can’t Control
You must realize that you can’t control what the market, or a particular stock, does. All you can do is control your reaction to what it does. Focus all your effort on making good decisions based on what actually happens and don’t worry about trying to GUESS what happens next or beat yourself up over things that happened in the past.
Rule No. 3: Find the Trading System that Fits YOU Best
Guys like Warren Buffett make millions with value investing, guys like Nicolas Darvas made millions trend trading, and some guys make a living day trading. There is no “Holy Grail” trading strategy that magically spits out money. There are several different trading systems that “work” and each of these strategies will outperform others at certain times. You need to find the system that fits your personality best and stick with it. The new trader will go broke constantly changing their strategies and chasing different systems.
Rule No. 4: Protect the Money You Have with Proper Risk Management
Defense wins championships, in sports and in trading. That means protecting the downside first. I’m all for positive thinking, but to succeed as a trader you must always plan for the worst. You should never enter a trade without knowing exactly where you will exit it if it goes against you.
Rule No. 5: Give Yourself an Unfair Advantage
To succeed as a trader, you need to stack the odds in your favor and the only way to do this is to cut your losses quick and let your winners run. Successful trend traders can make a fortune hitting well below 50% winners. They do this by making sure that, over the long term, the profits on their winners are much larger than the losses on their losers. It’s such a simple strategy, but so many new traders fail to understand it.
Rule No. 6: Follow Your System’s Rules
Never trade on hunches, guesses, predictions, or emotions. Once you decide on the system that’s right for you, you need to follow its rules. Is there ever a time for discretion? Sure, but I like to say that discretionary decisions should be limited to 10-15% of your trades. If you’re making “exceptions” to your system’s rules more often than that, you’re heading down a destructive path.
Rule No. 7: Keep It Simple
I’ve found that the best trading systems are simple. It’s easy to understand why they work and it’s easy to follow their rules. The more complicated a system is, the more room for error there is. That’s probably why I’m such a fan of the Darvas Trading System, which remains a very simple trend following strategy.
Rule No. 8: Trade Less, Not More
I see a lot of new traders who think they have to be in the market at all times. They also tend to think that every trade decision needs to be all-in or all-out. The truth is, there are times when the right trade is no trade at all and you have to wait for the market to show you where it’s heading. Trying to be all-in, all the time will lead to whipsaws that whittle away at your portfolio.
Rule No. 9: Focus on Fewer Stocks
Due to popular images of the trading world’s go-go culture, many people think that being a successful trader means frantically chasing hundreds of stocks. The truth is, most of history’s great traders – legends like Jesse Livermore, Gerald Loeb, and Nicolas Darvas – spoke often about the danger of trading too many stocks. For Darvas System traders, we focus on the 4-8 true market leaders. The big money is made in those elite leaders, so there’s no reason to be trading dozens of lesser-quality stocks.
Rule No. 10: See the BIG Picture and Follow the Larger Trend
For trend traders, it’s important to focus on the big trends in the market and in individual stocks. Getting too caught up in the intraday action can cause you to make poor, emotional decisions. Often times, the best traders only need to check the market once or twice a day. Some check it even less. When you find yourself getting rattled by the day-to-day market noise, switch to weekly charts or step away from the market altogether for a day or two. A big picture perspective is essential.
Rule No. 11: NEVER Stop Learning
The moment you think you’ve got it all figured out is the moment you’ve likely topped out. Great traders never stop learning, researching, and getting help from other traders. Though the general trading strategies that have been proven to work for decades will continue to work, the details are changing often and need to be adapted to. Be humble and don’t ever stop learning.
Rule No. 12: Don’t EVER Quit
You have to have patience, discipline, and perseverance to succeed at this game. Every trader will hit losing streaks and frustrating times. It’s during these times when the urge to quit or change strategies is at its highest. Don’t do it. If it was easy, everyone would be making millions trading. It requires hard work and mental toughness to be a successful trader and there will be times when you have to swallow your pride, buck up, and persevere even when you don’t feel like it. But remember, as Mike Ditka said, “You’re never a loser until you quit trying.”