Five things that you must do to become a successful trader

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Top 10 Rules For Successful Trading

Most people who are interested in learning how to become profitable traders need only spend a few minutes online before reading such phrases as “plan your trade; trade your plan” and “keep your losses to a minimum.” For new traders, these tidbits of information can seem more like a distraction than any actionable advice. New traders often just want to know how to set up their charts so they can hurry up and make money.

Important

To be successful in trading, one needs to understand the importance of and adhere to a set of tried-and-true rules that have guided all types of traders, with a variety of trading account sizes.

Each rule alone is important, but when they work together the effects are strong. Trading with these rules can greatly increase the odds of succeeding in the markets.

Key Takeaways

  • Day trading is only profitable when traders take it seriously and do their research.
  • Day trading is a job, not a hobby or passing fad of a pastime. Treat it as such—be diligent, focused, objective, and detach emotions.
  • Here we provide some basic tips and know-how to become a successful day trader.

Rule 1: Always Use a Trading Plan

A trading plan is a written set of rules that specifies a trader’s entry, exit and money management criteria. Using a trading plan allows traders to do this, although it is a time-consuming endeavor.

With today’s technology, it is easy to test a trading idea before risking real money. Known as backtesting, this practice applies trading ideas to historical data, allows traders to determine if a trading plan is viable, and also shows the expectancy of the plan’s logic. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading. The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor trading and destroys any expectancy the plan may have had.

Jack Schwager: Investopedia Profile

Rule 2: Treat Trading Like a Business

In order to be successful, one must approach trading as a full- or part-time business—not as a hobby or a job. As a hobby, where no real commitment to learning is made, trading can be very expensive. As a job, it can be frustrating since there is no regular paycheck. Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are essentially a small business owner and must do your research and strategize to maximize your business’s potential.

Rule 3: Use Technology to Your Advantage

Trading is a competitive business, and it’s safe to assume the person sitting on the other side of a trade is taking full advantage of technology. Charting platforms allow traders an infinite variety of methods for viewing and analyzing the markets. Backtesting an idea on historical data prior to risking any cash can save a trading account, not to mention stress and frustration. Getting market updates with smartphones allows us to monitor trades virtually anywhere. Even technology that today we take for granted, like high-speed internet connections, can greatly increase trading performance.

Using technology to your advantage, and keeping current with available technological advances, can be fun and rewarding in trading.

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Rule 4: Protect Your Trading Capital

Saving money to fund a trading account can take a long time and much effort. It can be even more difficult (or impossible) the next time around. It is important to note that protecting your trading capital is not synonymous with not having any losing trades. All traders have losing trades; that is part of the business. Protecting capital entails not taking any unnecessary risks and doing everything you can to preserve your trading business.

Rule 5: Become a Student of the Markets

Think of it as continuing education—traders need to remain focused on learning more each day. Since many concepts carry prerequisite knowledge, it is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process.

Hard research allows traders to learn the facts, like what the different economic reports mean. Focus and observation allow traders to gain instinct and learn the nuances; this is what helps traders understand how those economic reports affect the market they are trading.

World politics, events, economies—even the weather—all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they will be to face the future.

Rule 6: Risk Only What You Can Afford to Lose

Rule No.4 mentions that funding a trading account can be a long process. Before a trader begins using real cash, it is imperative that all of the money in the account be truly expendable. If it’s not, the trader should keep saving until it is.

It should go without saying that the money in a trading account should not be allocated for the kids’ college tuition or paying the mortgage. Traders must never allow themselves to think they are simply “borrowing” money from these other important obligations. One must be prepared to lose all the money allocated to a trading account.

Losing money is traumatic enough; it is even more so if it is capital that should have never been risked, to begin with.

Rule 7: Develop a Trading Methodology Based on Facts

Taking the time to develop a sound trading methodology is worth the effort. It may be tempting to believe in the “so easy it’s like printing money” trading scams that are prevalent on the internet. But facts, not emotions or hope, should be the inspiration behind developing a trading plan.

Traders who are not in a hurry to learn typically have an easier time sifting through all of the information available on the internet. Consider this: if you were to start a new career, more than likely you would need to study at a college or university for at least a year or two before you were qualified to even apply for a position in the new field. Expect that learning how to trade demands at least the same amount of time and factually driven research and study.

Rule 8: Always Use a Stop Loss

A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be either a dollar amount or percentage, but either way it limits the trader’s exposure during a trade. Using a stop loss can take some of the emotion out of trading since we know that we will only lose X amount on any given trade.

Ignoring a stop loss, even if it leads to a winning trade, is bad practice. Exiting with a stop loss, and thereby having a losing trade, is still good trading if it falls within the trading plan’s rules. While the preference is to exit all trades with a profit, it is not realistic. Using a protective stop loss helps ensure that our losses and our risk are limited.

Rule 9: Know When to Stop Trading

There are two reasons to stop trading: an ineffective trading plan, and an ineffective trader.

An ineffective trading plan shows much greater losses than anticipated in historical testing. Markets may have changed, volatility within a certain trading instrument may have lessened, or the trading plan simply is not performing as well as expected. One will benefit from remaining unemotional and businesslike. It might be time to reevaluate the trading plan and make a few changes or to start over with a new trading plan. An unsuccessful trading plan is a problem that needs to be solved. It is not necessarily the end of the trading business.

An ineffective trader is one who is unable to follow his or her trading plan. External stressors, poor habits and lack of physical activity can all contribute to this problem. A trader who is not in peak condition for trading should consider a break to deal with any personal problems, be it health or stress or anything else that prohibits the trader from being effective. After any difficulties and challenges have been dealt with, the trader can resume.

Rule 10: Keep Trading in Perspective

It is important to stay focused on the big picture when trading. A losing trade should not surprise us—it is a part of trading. Likewise, a winning trade is just one step along the path to profitable trading. It is the cumulative profits that make a difference. Once a trader accepts wins and losses as part of the business, emotions will have less of an effect on trading performance. That is not to say that we cannot be excited about a particularly fruitful trade, but we must keep in mind that a losing trade is not far off.

Setting realistic goals is an essential part of keeping trading in perspective. If a trader has a small trading account, he or she should not expect to pull in huge returns. A 10% return on a $10,000 account is quite different than a 10% return on a $1,000,000 trading account. Work with what you have, and remain sensible.

Conclusion

Understanding the importance of each of these trading rules, and how they work together, can help traders establish a viable trading business. Trading is hard work, and traders who have the discipline and patience to follow these rules can increase their odds of success in a very competitive arena. (For related reading, see “20 Rules Followed by Professional Traders”)

Five things that you must do to become a successful trader

Here is a list of essential things that I feel a trader needs to have in order to become successful.

1. Stop overtrading!

Overtrading is the one thing that will destroy your account like nothing else. Obviously if you don’t trade or trade minimally it’s difficult to make money. Some newer traders are almost afraid not to be glued to their computer watching the markets 40+ hours a week in fear of missing out on trades and therefore losing out on money that they could be making. But understand that not trading is a position in and of itself. Honestly, trading too much and trading on a whim is an easy recipe for disaster. I learned the hard way by wiping out more than one trading account when I first started out, compounded by the fact that I didn’t have a viable trading strategy to begin with. This brings me to my next point.

2. Have a trading plan

Having impeccable self-discipline is absolutely vital to trading success. This might seem like an obvious statement and it’s easy to say, “okay, I’m going to be disciplined while trading.” But it’s very simple to gauge whether or not you truly are maintaining the discipline required to be a successful trader. If you’re not, you will overtrade, experience emotion while trading, and very likely lose your money. Therefore, you need to follow a trading plan, which first and formost includes how to execute your strategy over and over again with minimal error. This is what the bulk of my blog articles cover – how I execute my trading strategy over and over and over again with as little emotion as possible.

The second thing that your trading plan should cover is your money management. How are you going to invest your money in each trade? My recommendation is to trade fixed investment sizes. In the past I did not do this given that I was trying to turn a small amount of capital into a larger amount. But by that point I was already very confident in my trading ability due to being profitable in the past. Now, however, I do trade fixed investment sizes. That is, each trade I take is the same size. And it’s also never more than 1% of the amount of money I can afford to lose that I dedicate to trading. Keep this investment fixed – don’t scale up or down until you’ve achieved a sizable increase in profit. The trade size should be so small that it almost feels like you’re wasting your time even trading. It sounds counter-intuitive being your goal as a trader is to make money. But if you try to invest more than you should in each trade, it’s demonstrative of a lack of discipline and invites emotion into your trading. And emotion-based trading will destroy anybody. Always define your risk as part of your trading plan.

And never ever use the Martingale method of money management to recoup past losses. Even if your Martingale strategy is set up such that you won’t wipe your account until you accumulate six losses, it could very well happen. I can speak from personal experience on this point. I had a Martingale money management system set up such that I wouldn’t wipe out my account unless I lost EIGHT trades in a row. You know how long my account lasted? Two days. Even if a trader is very good and averages 70% ITM, it is extremely likely that over time, at some point in his career, he will lose six trades in a row. In fact, it’s nearly a certainly if enough trades occur. So please don’t use Martingale in your trading at any point, as gratifying as it might sound to be able to make up for several consecutive losing trades in a row with the help of a single winning trade. But if enough time elapses, the end result is never pretty.

It can also be helpful for your trading plan to have set trading rules that you willfully adhere to (because you need infallible self-discipline to a successful trader). For instance, it could be something like “if I lose more than two trades in a row, I’m done for the day.” This, in my opinion, is a solid rule being that after three straight losing trades, you’re probably feeling pretty bad about how the trading day has gone and you might just very well have a strong temptation to get back at the markets to try and win your money back. And revenge trading is emotional trading, and will only serve to destroy your account. Having a “must-win” mentality might be good if you’re an athlete with a strong determination to perform your best, but it certainly will not work as a trader.

You could also put into your plan the opposite rule about never trading beyond three winning trades in a row during the course of one day. Trading with a sense of euphoria or overconfidence can often be just as dangerous as trading with frustration.

To summarize this point, the entire purpose of a trading plan is to keep yourself accountable. A trader’s biggest enemy is always himself, not the market. A trading plan, in some way, is basically a means of saving yourself from yourself, if that makes sense.

3. Keep a trading journal

I believe that it’s important to keep track of all your trades in the form of a journal. Of course, in this day and age it only makes sense for it to be electronic based given that all your trading occurs on a computer. My blog here on is actually what I consider to be my own trading journal, in addition to my personal thread on the forum here on binaryoptions.net.

Keeping a blog or a thread on an trading-themed Internet message board is a great way to archive your progress. Granted, you don’t need to type up 1,000+ word posts for a trading journal as I do here on my own personal part of the website, unless your aim is to directly educate other traders in an in-depth manner. But starting a thread in the forum, as other traders have done, is a fantastic way to chronicle your progress and share it with others. It can work to inspire other traders and hopefully help them learn from your own mistakes. Posting screenshots and very brief descriptions is all you need to do, and it shouldn’t consume more than ten minutes of each trading day. Even if you have a really bad trading day, it’s worth it. It’s never a shame to have several days of bad trade results if you’re still learning the ropes of trading the markets. When I first began, I would have some good stretches and also some very bad stretches where I would lose five trades in a row and other similar streaks. In fact, I remember a time looking at my trade history screen on my account profile, and I had gone 1/10 ITM on my last ten trades. I think it would have been cool if I had been archiving my trades somewhere from the very beginning. It would really show how far I’ve come since then. But regrettably, I never did keep a trading journal of any sort when I first started out.

It can also be private if you so choose, by keeping screenshots of your charts with annotations showing where you took the trades and perhaps any brief description of your thought process as to why you took that particular trade.

4. Appropriately choose your asset and charting timeframe

You should always choose assets that you’re very familiar with before beginning to trade them live with real money at stake. If you read my binary options blog articles here, you’ll see that I pretty much trade the same exact asset every single trading day. Choosing the highest paying asset(s) your broker has to offer can be a good way to maximize your profit margin. But be sure that you’re considering assets that you feel comfortable trading with respect to volatility, how it obeys its support and resistance levels, the relative smoothness or choppiness of its price action, and so forth. Choose assets that fit your personal trading preferences.

For me, I always avoid exotic currency pairs in my trading. For instance, I’m pretty sure I would be awful trying to trade the EUR/SEK (Euro/Swedish Krona). To me, the chart looks like a mess on most, if not all, timeframes. Overall, skipping around from asset to asset and trading impulsively is never a good thing. Sticking with the same asset (or same couple or few) and applying your strategy/system to it continuously is your best bet.

Considering your trading timeframe is important, as well. For short-term binary options, many like the 1-minute chart and many like the 5-minute chart. Some use both nearly equally. With the common ten- and fifteen-minute expiries, using a timeframe encompassing price candlesticks with a shorter duration than the trade expiry makes sense. Viewing shorter chunks of organized price data can give you a better resolution of how price is acting on a smaller scale. For me, I think the one-minute chart contains a ton of noise given the fact that you get a limited viewing window of previous price history and the simple fact that not a lot of action usually occurs in the span of one minute. Therefore, when trading ten- or fifteen-minute expiries, I like to use the five-minute chart, which gives a solid blend of viewing the price action on a more microscopic level while still giving enough of a viewing window to see how price has been acting over the course of the past several hours. But if the one-minute chart is your preferred viewing window, then that’s perfectly okay. Trading is largely about sticking with what works for you.

5. Always strive to improve

Looking toward resources that can help you improve your trading is essential. Investing in yourself in the form of education is important throughout life. Learning a new trading strategy or investment technique or anything related to trading can be very rewarding. The Internet has many great resources (binaryoptions.net being one of them) and there are many trading books out there that you can look to for technical analysis related assistance, strategy, or basic inspiration.

Conclusion

Trading successfully boils down to self-discipline, consistency, and putting in the required effort. The very best traders and investors almost always have years/decades of experience behind them. Most of all, be sure that you’re finding some level of happiness in the pursuit of trading. If trading is something that’s causing you stress and you have trouble enjoying it, chances are that it’ll be very difficult to become successful at it. That being said, it’s perfectly fine to follow quality trading signal service provider or to have your account managed by an investment service altogether. Having a passion for trading in the first place is what should ultimately allow you to have success at it and for you to thrive at this pursuit going forward.

10 Traits of a Successful Options Trader

Options are one of the most versatile instruments in the financial markets. Their flexibility allows the trader to leverage their position to boost returns. These products also allow the user to manage risk by using them for hedging or to make a profit from the upside, downside, and sideways movement in the market.

Despite its many benefits, options trading carries substantial risk of loss, and it is very speculative in nature. Not everyone can become a successful options trader. Like any other business, becoming a successful options trader requires a certain skill set, personality type, and attitude.

1. Be Able to Manage Risk

Options are high-risk instruments, and it is important for traders to recognize how much risk they have at any point in time. What is the maximum downside of the trade? What is the implicit or explicit position with respect to volatility? How much of my capital is allocated to the trade? These are some of the questions traders always have to keep in their minds.

Traders also need to take appropriate measures to control risk. In particular, if you are a short-term options trader, you will regularly come across loss-making trades. For example, if you hold a position overnight, your bet may go bad because of adverse news. You need to be able to minimize the risk of your positions at any time. Some traders do so by limiting their trade size and diversifying into many different trades so all their eggs aren’t in the same basket.

An options trader also has to be an excellent money manager. They need to use their capital wisely. For example, it wouldn’t be wise to block 90% of your capital in a single trade. Whatever strategy you adopt, risk management and money management cannot be ignored.

2. Be Good With Numbers

While trading in options, you are always dealing with numbers. What’s the implied volatility? Is the option in the money or out of the money? What’s the break-even of the trade? Options traders are always answering these questions. They also refer to option Greeks, such as the delta, gamma, vega, and theta of their options trades. For example, a trader would want to know if his trade is short gamma.

3. Have Discipline

To become successful, options traders must practice discipline. Doing extensive research, identifying opportunities, setting up the right trade, forming and sticking to a strategy, setting up goals, and forming an exit strategy are all part of the discipline. A simple example of deviating from the discipline is following the herd. Never trust an opinion without doing your own research. You can’t skip your homework and blame the herd for your losses. Instead, you must devise an independent trading strategy that works in order for it to be a successful options strategy.

While formal education in the form of higher degrees can be associated with elite traders, it is not necessarily the case for all. But you must be educated about the market. Successful traders take time to learn the basics and study the market—various scenarios, different trends—anything and everything about how the market works. They are not usually novices who have taken a three-hour trading seminar on “How to get rich quick trading,” but rather take the time to learn from the market.

4. Be Patient

Patience is one quality all options traders have. Patient investors are willing to wait for the market to provide the right opportunity, rather than trying to make a big win on every market movement. You will often see traders sitting idle and watching the market, waiting for the perfect time to enter or exit a trade. The same is not the case with amateur traders. They are impatient, unable to control their emotions, and they will be quick to enter and exit trades.

5. Develop a Trading Style

Each trader has a different personality and should adopt a trading style that suits his or her traits. Some traders may be good at day trading, where they buy and sell options several times during the day to make small profits. Some may be more comfortable with position trading, where they form trading strategies to take advantage of unique opportunities, such as time decay and volatility. And others may be more comfortable with swing trading, where traders make bets on price movement over periods lasting five to 30 days.

6. Interpret the News

It is crucial for traders to be able to interpret the news, separate hype from reality and make appropriate decisions based on this knowledge. You will find many traders eager to put their capital in an option with promising news, and the next day they will move on to the next big news. This distracts them from identifying bigger trends in the market. Most successful traders will be honest with themselves and make sound personal decisions, rather than just going by the top stories in the news.

7. Be an Active Learner

The Chicago Board of Trade (CBOT) reported 90% of options traders will realize losses. What separates successful traders from average ones is successful traders are able to learn from their losses and implement what they learn in their trading strategies. Elite traders practice…and practice some more until they learn the lessons behind the trade, understand the economics behind the market and see the market behavior as it is happening.

The financial markets are constantly changing and evolving; you need to have a clear understanding of what’s happening and how it all works. By becoming an active learner, you will not only become good at your current trading strategies, but you will also be able to identify new opportunities others might not see or may pass over.

8. Be Flexible

You cannot stake a claim on the market but must go with the market or leave it when it is not the type that suits you. You must accept losses occur and that it is inevitable that you will lose. Acceptance rather than fighting the market is paramount to understanding, clarity and finally winning.

9. Plan Your Trades

An options trader who plans is more likely to succeed than one who operates on instinct and feel. If you don’t have a plan, you will place random trades, and consequently, you’ll be directionless. On the other hand, if you have a plan, you are more likely to stick to it. You will be clear about what your goals are and how you plan to achieve them. You will also know how to cover your losses or when to book profits. You can see how the plan has worked (or not worked) for you. All these steps are essential to developing a strong trading strategy.

10. Maintain Records

Most successful options traders keep diligent records of their trades. Maintaining proper trade records is an essential habit to help you avoid making costly decisions. The history of your trade records also provides a wealth of information to help you improve your odds of success.

The Bottom Line

Top options traders get a thrill from scouting and watching their trades. Sure, it’s great to see a pick come out on top, but much like sports fans, options traders enjoy watching the whole game unfold, not just finding out the final score. These characteristics will not guarantee your success in the options trading world, but they will definitely increase your chances at it.

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