How To Be A Successful Trader - Rule 3

On March 7th 2009 I talked about the 7 rules of successful trading and the second rule of successful trading. Today I will talk about the 3rd rule about successful trading.

Rule 3: Cut Your Losses

This is a fundamental rule of successful trading and this is where many traders tend to go wrong. You must always cut your losses. You should never predict or believe a trend is going to reverse and then adjust your stop loss limit accordingly. This is where so many people go wrong. Sometimes you might be right, but the majority of the time you will be wrong, and you will lose money in the long term. Like I always say, the only way to make a profit from trading is to ensure that your winning trades yield more profit than your losing trades.

With trading and accepting a specified loss per trade, you can afford to lose money on more losing trades, and make higher returns from less winning trades. For example, if you set a maximum stop loss of 2% per trade, and you lost 6 of 10 trades, losing a total of 12%, you have to make sure that the profits from the 4 remaining trades exceed that 12%.

If you can consistently trade under this method you can make a decent income. These days lots of traders and investors tend to overtrade. By this I mean they trade far too many trades and their bet sizes per trade is often too high. This means that they will suffer bigger losses than normal, and there is no way that they can make a profitable income from trading.

The correct way to successful trading is to risk a small amount per trade, and keep this amount consistent, for example 2% per trade. Set a stop loss, and if the trade reaches this stop loss, just accept it, and accept the loss. Do not move your stop loss which invites bigger losses. By following this rule, you can keep your losses to a minimum and you can also catch some of the really big winning trades.

This is a really simple concept in successful trading and although it sounds very simple, in reality traders tend to predict that the markets will pick up, and they tend to move the stop loss. Please do not do this because you will lose money in the long term if you do this!

I will post my 4th rule in the next few days.

Kind Regards

Robert Stewart