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1. Write Down Your Trading Rules and Actually Follow Them
Easier said than done. Most traders fail because they don’t have a trading system in place that keeps them disciplined. Trading rules define how to find trade candidates, execute strategy, take profits and cut losses. Making trades based on guesses, emotions or random strategies is simply gambling.
2. Know When to Stay on the Sidelines
3. Don’t Try to Pick Tops or Bottoms
When investors start thinking they can predict price tops and bottoms, their trading gets very expensive. Traders refer to calling a bottom as “catching a falling knife” for a reason; it’s impossible to pick a bottom as the price is falling. It will likely run through and strip your account. Trying to pick a top in a strong market is no different. When looking to establish a short position after a strong rise, investors should stay away from assuming they know where the top will be.
4. Have an Exit Plan
Investors would be wise to define the exact levels at which they’ll start to take profits or cut their losses. An exit plan should be covered in an investor’s trading rules, but it deserves reiterating. Without an exit strategy we become emotional, letting losses mount or profits slide away. Since it’s impossible to predict exact tops and bottoms (see rule #3), simply choose in advance how you will exit losing and winning trades.
5. Tame Your Emotions
6. Review Your Action
Overall
Markets are in a constant state of flux between trending, ranging, choppy, volatile, and sedate. Take time to write down how you will trade (enter, exit and manage trades) in each of the conditions in which you choose to trade. Follow your plan and realize there will be periods when you should avoid trading. Know the emotions that affect your trading, and plan for them. Finally, be honest with yourself and constantly evaluate your plan and yourself. If either are not working, stop trading until you come up with a way to overcome the obstacle.
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