Trading 101: 10 Essential Trading Rules for Rookies

As we already stated, trading is more of an art than an exact science, but still, there are some rules that can help you in being consistently profitable despite the seemingly chaotic environment in financial markets. While some of the commandments below might be treated flexibly in certain cases, as a rookie, it’s best to follow them almost religiously. Why? Because the virtue of independence will come with experience in this field—and your experience will only build up if you stay in the game. These basic rules are vital for just that; assuring that you don’t make the mistakes that all too many traders already made.

A great trader once said that for you to be successful you should lose all of your capital at least once. While this might be an exaggeration, it is true that learning to lose is an important skill in trading. That said, we are here to help you through those early, sometimes wild days of trading, by swiftly enhancing your skills and protecting you from the common errors of this profession.

Let’s dive into the most crucial rules!

1. Don’t hold positions that keep you up at night

In other words, mind the size of your positions. To be honest, this rule is probably THE rule of new traders. There are probably no traders out there who lost all of their capital by losing 50 trades in a row that cost 2% of the value of their portfolio, but there are thousands and thousands who blew away their account with 2 trades that took 50% of their capital. This is an easy filter— if you are excited about a position and you feel the urge to check it every hour, then there is a good chance that it’s too large.

2. Get rid of your losers and let your winners run

This might sound obvious and easy, but believe us, the best way to spot successful traders is to look for green “Open Positions” tabs. Of course, from time to time you will have losers that stay open for a while (not hitting the stop-loss) but in general, your open positions should be winners.

3. Focus on the performance of your strategy not individual positions

Your success as a trader, in the long run, will be mostly determined by two things: the quality of your strategies and your risk management skills. Any single position will only be a small part of your long-term statistics. That said, experienced traders make concentrated bets all the time, but starting with large positions as a beginner is like trying to run a marathon after one training—it might work, but most likely it won’t be pretty. When you start trading, don’t look for “The Trade of Your Life” that will make you rich; it will lead to oversized positions and way too difficult decisions.

4. Trade in the direction of the prevailing trend

We already mentioned this rule in our previous articles, but it’s worth repeating; the best way to start trading is to trade when the trends on different time-frames align in one direction. Leave the reversal trades for later, when you are already confident in your strategies, risk management practices, and, above all, yourself.

5. Try to stay in trends as long as possible

Staying in a winner has the opposite effect than sticking with a loser; you become more confident, you will be making decisions easier, and what’s more, you are likely to stay in a trend that goes on for longer than you’d have expected. If a position keeps on delivering, the best thing to do is trying to stay in t while it lasts. A great way to achieve that is to take a part of your profits and leave a small position on the table. This way you can set a wider, trailing stop-loss (as your drawdown will be smaller) and, in a sense, “forget about” the position.

6. Don’t try to rationalize staying in losers

This relates closely to the previous rule, but it’s a very important one. In several cases, you will feel the urge to stay in a position that is getting near to your stop-loss level. What’s worse you will inevitably get into situations when the asset hits your stop-loss, just to turn back and hit your target without you. These situations will hurt your ego and make you regret following your strategy, but this is a dangerous road, and it can lead to serious losses. This doesn’t mean that you shouldn’t revise your strategies if this happens too often – maybe your stop levels are too narrow, and you should consider smaller positions – but the wrong answer is to start moving your stop-loss order because “it will come back”. This is just one of many ways to “escape” from taking a loss, but usually, they all serve one purpose: to protect your ego.

7. Never double down on losers

Another dangerous way of dealing with losers is to double down on them, buying more at lower prices or shorting more higher. This usually goes hand-in-hand with the excuse of “it’s now a long-term position”. While this can work once, twice, or several times, that just makes it even more dangerous. There will inevitably be a time when it won’t work, and it will be way harder to take a much larger loss. Even great traders can be caught in these kinds of situations, where they will simply lose their discipline and double down again, and again… Don’t be one of them!

8. Start trading with capital that you won’t need for at least a year

People mostly invest and trade to grow capital, to have another source of income, and eventually to be financially independent. As a beginner, planning on trading for a living is like trying any other profession without learning the skills required. Also, counting on instant profits from trading, or even worse relying on those profits, will put you under immense pressure. That pressure could very well be a game changer when learning the peculiarities of trading. If you follow this rule, you will be able to make decisions with relative ease, while being less exposed to markets when you are the most vulnerable. As you grow your savings and get more experienced, your invested capital will naturally grow together with your skills. This way, the mechanics of compounded returns will work in your favor.

9. Start trading with assets that you understand

Have you heard about time decay? No? Then probably you should avoid options trading. Does delivery date ring a bell? No? Futures might be tricky for you; you could even end up with a few barrels of crude oil. Jokes aside, this is a very important rule, as all financial markets have opportunities and traps that are essential for traders. Be sure to know the basic rules of trading, the commissions, spreads and other costs, the trading units, and the special features of your asset of choice before putting real money on the table. Demo accounts are great tools for getting acquainted with the different asset classes.

10. Don’t start your trading career with day-trading

A lot of new traders get lured by day-trading on forex markets, and lately binary options markets, because it’s easy to start trading in those markets, and after all day-trading seems exciting. But if you think about it, day-trading requires potentially tough decisions several times a day, and a beginner is much more likely to make bad choices, especially under pressure. Wouldn’t it make more sense to start with maybe only a few decisions a week before diving into the furiously fast world of intraday positions? We suggest that until you are not familiar with, at least, one asset class, while also having some experience in trading, DON’T start day-trading.

Following these general rules won’t be enough to transform you into a successful trader instantly, but they will help you in staying on the right track, while avoiding some of the biggest traps of this exciting profession. With these rules in mind, you will be free to experiment with different asset classes and strategies until you find the most suitable ones for you.

As you already know, investing is fundamentally different from trading, so next time we will go through the essential rules of long-term value investing.

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Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.