Profiting from trading stocks is not a matter of luck. Successful traders develop a set of trading rules and diligently stick to those rules, no matter what. Here are the three essential rules that should be part of every trader's strategy.
Rule number one is that you do not know what the market is going to do.
No matter how skilled and how experienced you become, you do not know, with any certainty, what the market is going to do. All you ever have is an estimate, or educated guess, as to the path that the market is following.
Some of the greatest mathematical geniuses of all time have spent many years trying to write a system to accurately predict the ups and downs of the market and they have all failed. The reason why they failed is that there is no system. The market is a mass of individual psychology. It is impossible to predict all the various things that are going to influence that psychology let alone predict what that influence will be.
One of the great temptations for traders, who are experiencing a run of successful estimates, is to believe that they now understand the market. My advice to you, if you are experiencing this delusion, is to take a holiday in a nice, relaxing environment and then come back to trading only when sense has returned to your brain.
Rule number two is to decide, before entering a trade, what your strategy will be if your market estimate is wrong.
The biggest losses in trading occur when the traders have neglected to predetermine their loss cutting strategy or when a trader fails to follow their predetermined loss cutting strategy. Once the emotions of potential loss come into play our sound decision making ability takes a sudden and profound decrease. We start to kid ourselves that we know that the market will turn around and that we won't need to take a loss. If that ever happens to you then it is a good time for you to read rule one again.
If you were in the retail sales business then you would have to spend money buying your stock from the wholesaler in order to have the stock to sell at a retail profit. That is the nature of retailing. I see the inevitable losses in stock market trading as being equivalent to those wholesale purchases and the profitable trades as equivalent to the retail sales revenue. As long as the profits outweigh the losses then you have a sound business.
Of course in retailing you try to minimize the cost of acquisition of your stock. By the same logic, in trading you have a system to minimize the size of each loss and that is what rule two is all about.
Rule number three is to decide, before entering a trade, what your strategy will be if your market estimate is right.
The stock market is a volatile entity. You may be in profit today but if you don't collect that profit then it could turn into a loss tomorrow. For this reason you need a strategy for collecting your profit.
In discussing rule two I spoke about the psychological pressures and influences that you experience when you are in loss. Well the psychological issues are just as prevalent when you are in profit. I have seen so many new traders who fall victims to greed and hold their profit for so long that it turns into a loss before they collect a single cent.
Remember rule one; you don't know what the market is going to do. So make sure that you have a predetermined profit collecting strategy and that you have the strength of character to stick to it when the time comes.
The three rules above should be the first three rules in your personal trading system. If you can't accept and abide by these rules then I suggest that you stay away from trading.
Rule number one is that you do not know what the market is going to do.
No matter how skilled and how experienced you become, you do not know, with any certainty, what the market is going to do. All you ever have is an estimate, or educated guess, as to the path that the market is following.
Some of the greatest mathematical geniuses of all time have spent many years trying to write a system to accurately predict the ups and downs of the market and they have all failed. The reason why they failed is that there is no system. The market is a mass of individual psychology. It is impossible to predict all the various things that are going to influence that psychology let alone predict what that influence will be.
One of the great temptations for traders, who are experiencing a run of successful estimates, is to believe that they now understand the market. My advice to you, if you are experiencing this delusion, is to take a holiday in a nice, relaxing environment and then come back to trading only when sense has returned to your brain.
Rule number two is to decide, before entering a trade, what your strategy will be if your market estimate is wrong.
The biggest losses in trading occur when the traders have neglected to predetermine their loss cutting strategy or when a trader fails to follow their predetermined loss cutting strategy. Once the emotions of potential loss come into play our sound decision making ability takes a sudden and profound decrease. We start to kid ourselves that we know that the market will turn around and that we won't need to take a loss. If that ever happens to you then it is a good time for you to read rule one again.
If you were in the retail sales business then you would have to spend money buying your stock from the wholesaler in order to have the stock to sell at a retail profit. That is the nature of retailing. I see the inevitable losses in stock market trading as being equivalent to those wholesale purchases and the profitable trades as equivalent to the retail sales revenue. As long as the profits outweigh the losses then you have a sound business.
Of course in retailing you try to minimize the cost of acquisition of your stock. By the same logic, in trading you have a system to minimize the size of each loss and that is what rule two is all about.
Rule number three is to decide, before entering a trade, what your strategy will be if your market estimate is right.
The stock market is a volatile entity. You may be in profit today but if you don't collect that profit then it could turn into a loss tomorrow. For this reason you need a strategy for collecting your profit.
In discussing rule two I spoke about the psychological pressures and influences that you experience when you are in loss. Well the psychological issues are just as prevalent when you are in profit. I have seen so many new traders who fall victims to greed and hold their profit for so long that it turns into a loss before they collect a single cent.
Remember rule one; you don't know what the market is going to do. So make sure that you have a predetermined profit collecting strategy and that you have the strength of character to stick to it when the time comes.
The three rules above should be the first three rules in your personal trading system. If you can't accept and abide by these rules then I suggest that you stay away from trading.
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