Success as a trader means being consistently profitable over the long term, and that requires developing a good trading plan and, most importantly, sticking to it. One of the most destructive habits a trader can have is ignoring the rules of their own trading plan about when to enter and exit a trade. Breaking this bad habit means critically examining how you view the success or failure of any single trade.
Key Takeaways
- Success as a trader requires developing a profitable trading plan and sticking to it over time.
- Ignoring their own trading rules is one of the most destructive habits a trader can have.
- It is vital that a trader view the success or failure of each individual trade according to whether they followed their trading rules—not whether the trade resulted in a profit or loss.
Redefining Success and Failure in Trading
To break bad trading habits, it is vital that traders judge the success or failure of each trade on whether they stick to their trading plan—not whether the trade resulted in a profit or a loss. If you make an undisciplined trade, one not dictated by your plan, you must view that as a failed trade. You can't reinforce poor discipline by congratulating yourself.
On the other hand, if you execute your trade according to plan but still lose money, you must view that as a successful trade because you followed your plan. Every good trading plan accounts for losing trades. If you beat yourself up over a losing trade that was made according to plan, you will be much less likely to follow that plan in the future. That will result in impulsive trading that can wipe out trading accounts over time.
Example of a Bad Trade That Makes Money
One of the most common bad habits that can lead to disaster is holding onto a money-losing trade once it moves well beyond your stop-loss level in the hopes that it will turn around—and then seeing it turn around and generate a profit. The profit itself reinforces the bad habit.
But it's even worse if you congratulate yourself for holding on until the trade turned around. Coming out with a profit on a trade like this is almost always a result of luck. And luck always runs out, usually with disastrous results if stop-loss levels are ignored.
Using Rewards to Create Good Trading Habits
The first step to redefining success and failure on individual trades is to change your internal dialog. Traders should praise themselves when they follow their plans, whether the trade was profitable or not, and they should acknowledge failure when they don't. They might even grant themselves some small reward for following their trading plan during a losing trade or withhold one for deviating from the plan.
Breaking your trading rules is a recipe for disaster over the long run.
Adjusting Your Trading Plan
The first step to becoming a successful trader is making sure your plan is a profitable one. Yet market conditions change over time, and a trading plan that is profitable one year may not work as well the next. So if you start losing money consistently while following your trading rules religiously, you can always go back and re-examine and adjust your trading plan.
Frequently Asked Questions
What does it mean to be successful at trading?
Being a great trader means being consistent over the long-run. This means being diligent, learning from your mistakes, and keeping emotions in check. Stay within your risk tolerance and if you don't know something, learn about it.
How can people be unsuccessful trading?
Trading too often, being swayed by fear and greed, herding behavior, and trend chasing can all lead to failure.
Is luck important?
Luck, whether good or bad, is always a factor - but over time, the effects of luck will wash out and patterns of success or failure will emerge.
The Bottom Line
Still, the fact remains that no trading plan will work if it's not followed. So in the short term, you should define success and failure according to how disciplined you are. Always stick to the plan, and don't deceive yourself into thinking you made a successful trade when you only got lucky.
FAQs
To break bad trading habits, it is vital that traders judge the success or failure of each trade on whether they stick to their trading plan—not whether the trade resulted in a profit or a loss. If you make an undisciplined trade, one not dictated by your plan, you must view that as a failed trade.
What is the 1 rule in trading? ›
Enter the 1% rule, a risk management strategy that acts as a safety net, safeguarding your capital and fostering a disciplined approach to navigate the market's turbulent waters. In essence, the 1% rule dictates that you never risk more than 1% of your trading capital on a single trade.
What is the 3-5-7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
How to follow your trading rules? ›
- 1: Always Use a Trading Plan.
- 2: Treat Trading Like a Business.
- 3: Use Technology.
- 4: Protect Your Trading Capital.
- 5: Study the Markets.
- 6: Risk Only What You Can Afford.
- 7: Develop a Trading Methodology.
- 8: Always Use a Stop Loss.
Hence, there are different styles of trading systems for different traders.
- Draw a plan and execute it. No trader would survive if he did not go through with executing the plan he made. ...
- Willingness to accept loss. ...
- Records of trade. ...
- Learning Attitude. ...
- Believe in Yourself. ...
- Review the Trading System. ...
- Play it like a game.
Understanding the Rule of 90
According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.
What is the 80% rule in trading? ›
The Rule. If, after trading outside the Value Area, we then trade back into the Value Area (VA) and the market closes inside the VA in one of the 30 minute brackets then there is an 80% chance that the market will trade back to the other side of the VA.
What is the 80-20 rule in trading? ›
The 80-20 rule, also known as the Pareto Principle, states that 80% of all outcomes result from 20% of all causes. In business, this means seeking the most productive inputs that will generate the highest outcomes/returns.
What is the golden rule of trading? ›
Key Rules from Iconic Traders
Trade with the trend: Follow the market's direction. Do not trade every day: Only trade when the market conditions are favorable. Follow a trading plan: Stick to your strategy without deviating based on emotions. Never average down: Avoid adding to a losing position.
What is the 11am rule? ›
The 11 am rule suggests that if a market makes a new intraday high for the day between 11:15 am and 11:30 am EST, then it's said to be very likely that the market will end the day near its high.
To break bad trading habits, it is vital that traders judge the success or failure of each trade on whether they stick to their trading plan—not whether the trade resulted in a profit or a loss. If you make an undisciplined trade, one not dictated by your plan, you must view that as a failed trade.
What is the number one rule in day trading? ›
The so-called first rule of day trading is never to hold onto a position when the market closes for the day. Win or lose, sell out. Most day traders make it a rule never to hold a losing position overnight in the hope that part or all of the losses can be recouped.
What is Rule 611 trading? ›
The Order Protection Rule requires trading centers to establish and enforce procedures designed to prevent "trade-throughs"—trade executions at prices inferior to the best-priced quotes displayed by automated trading centers. The Order Protection Rule is not an outright prohibition on trade-throughs.
How do you control your mindset in trading? ›
So what should be the Mindset of a trader?
- Self-awareness: Self-awareness is probably the most important part of trading psychology. ...
- Risk management. Trading in the stock market is subject to risk. ...
- Keeping emotions at bay. ...
- Quick decision maker. ...
- Patience. ...
- Self-disciple. ...
- Learning from your mistake. ...
- Goal setting.
On the flip side, those with long positions may move to sell if prices that have been trending higher face resistance in the final minutes. Either way, it's wise to wait until the last 10 to 15 minutes to determine whether the day's trend will hold or reverse.
How to be unemotional when trading? ›
Here are five ways to feel more in control of your emotions while trading.
- Create Personal Rules. Setting your own rules to follow when you trade can help you control your emotions. ...
- Trade the Right Market Conditions. ...
- Lower Your Trade Size. ...
- Establish a Trading Plan and Trading Journal. ...
- Relax!
For example, following the one percent rule, which suggests that no more than 1% of a trader's capital should be risked on a single trade, can help manage and reduce risk. Practicing diversification is also a key risk management strategy.
What is the 1% rule for day trading? ›
The 1% risk rule means not risking more than 1% of account capital on a single trade. It doesn't mean only putting 1% of your capital into a trade. Put as much capital as you wish, but if the trade is losing more than 1% of your total capital, close the position.
How does the 1 rule work? ›
The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.
What is rule 1 in stock market? ›
According to Mr. Buffett, there are only two rules to investing: Rule #1: Don't lose money, and Rule #2: Don't forget rule #1.
