About Trading

A trading plan is a set of rules that specifies a trader's entry, exit, and money management criteria for every purchase. Use technology to test a trading idea before risking real money. This process is known as backtesting. It allows you to apply your trading idea using historical data and determine if it's viable.  

Always Use a Trading Plan

A trading plan is a set of rules that specifies a trader's entry, exit, and money management criteria for every purchase. Use technology to test a trading idea before risking real money. This process is known as  backtesting. It allows you to apply your trading idea using historical data and determine if it's viable. The plan can be used in real trading after it's been developed and backtesting has shown good results.

The key here is to stick to the plan. Taking trades outside the trading plan deviates from your predicted performance and nullifies the value of your plan even if they turn out to be winners.

Always Use a Stop Loss

A loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be a dollar amount or a percentage. It limits the trader's exposure during a trade. Using a stop loss can take some of the stress out of trading because you know you only lose X amount on any given trade.Not having a stop loss is bad practice even if it leads to a winning trade. Exiting with a stop loss and a losing trade is still good trading if it falls within your trading plan's rules.

The idea is to exit all trades with a profit but this isn't realistic. Using a protective stop loss helps ensure that losses and risks are limited and that you've preserved enough capital to trade another day.

Know When to Stop Trading

An ineffective trading plan and an ineffective trader are two good reasons to stop trading.

An ineffective trading plan shows greater losses than anticipated in historical testing. That happens. Markets may have changed or volatility may have lessened. The trading plan simply isn't performing as expected for whatever reason. Stay unemotional and businesslike. It's time to reevaluate the plan and make a few changes or start a new one. It's not necessarily the end of the trading business.

An ineffective trader makes a trading plan but is unable to follow it. External stress, poor habits, and lack of physical activity can all contribute to this problem. A trader who's not in peak condition for trading should consider taking a break. The trader can return to business after any difficulties and challenges have been dealt with.

Keep Trading in Perspective

Stay focused on the big picture when you're trading. A losing trade is a part of trading. A winning trade is just one step to a profitable business. It's the cumulative profits that make a difference. Emotions have less effect on trading performance when a trader accepts wins and losses as part of the business.