Trading Rules

Trading Rules refer to a set of parameters and guidelines that every investor, trader and market participant should follow. These rules particularly help traders when buying and selling stock or any financial asset. Having a set of rules allows traders and investors to explore how to trade for acceptable returns and results.

These rules are many, but not every rule suits every trader or investor. For instance, trading rules in the stock market would be different from the forex trading rules. When followed respectively, these rules help determine whether their strategy has a positive expectancy, thereby assisting them in assessing their trading performance. The sole purpose of these rules is to automate all parts of the trading process to prevent traders from making behavioral mistakes.

Trading rules guide a trading process for a trader or investor, eliminating the emotional factor and improving their trading performance. Following these rules helps traders manage risk, money and their portfolio based on several factors. The evolution of trading guidelines dates back to the 1960s. Commodities trader Ed Seykota started putting these rules in the 1970s without even knowing that the strategies and planning implemented were part of the trading rule expected to be followed by every trader or investor. 

During the 1980s, Jim Simons and Niederhoffer acknowledged the power of strict trading rules, but only during the early 2000s did quantified trading strategies and rules come into the spotlight. The two major rules center around buying and selling stock or the underlying asset, including risk management. Most traders majorly concentrate on the buy trading rule and give less importance to the sell rule, but it is equally important from the perspective of risk and money management. 

The most critical aspect of such rules is that the traders must ensure discipline and consistency. Many traders skip following these rules due to the lack of self-control and confidence in these guidelines, which form the pillars of any successful trading strategy. With the right mindset and approach, a trader can earn maximum returns, protecting their capital and portfolio from potential market threats and risks.

While trading, one finds a lot of guidelines that work for different traders in the market. However, some of the most common rules that seem appropriate to follow in almost every market one deals in have been listed below:

#1 - Have a Trading Plan

This is not only a trading rule but also the initial step of every trading and investment decision-making process. The trader must have a plan reflecting their intentions and goals with the market. The strategies are decided here, which traders/investors can check using technology. With the help of software solutions available today, they can implement the idea on software to assess the strategy’s effectiveness before they start dealing in real money. If found suitable after back testing, it becomes one of the best trading rules for beginners, who can then implement the same in the real financial market.

#2 - Keep Calm

This rule focuses on money management and ensuring that behavior and psychological factors do not affect the trader’s mind. An emotional or sentimental approach might lead to losses as traders/investors might make a trading decision hurriedly, jeopardizing their capital. For traders, it is important to keep calm and make decisions wisely, considering different factors that affect the market.

#3 - Use Stop Loss

Stop loss is directly related to risk management, mitigating losses and ensuring that traders do not make a hefty financial loss when they are unavailable or not monitoring the market. When one focuses on trading, they normally go on investing frequently. In such a scenario, ensuring that the loss exposure is significantly limited is important. That’s where this rule guides traders/investors.

#4 - Maintain the Discipline

It comes from consistently following a trading strategy and not letting emotions take over or any short-term or unexpected market shift forcing traders to mold their strategy. Consistent and disciplined trading eventually reaps higher returns.

#5 - Learn From Mistakes

Making mistakes in the stock market is a common phenomenon. Every trader has lost some capital, but the point is to learn from those mistakes and never repeat them. Experimenting with different ideas and strategies helps investors/traders identify the right approaches and excel accordingly.

#6 - Diversify Portfolio

Another very important trading rule that is applicable for both short-term and long-term trading and investments. Structuring the portfolio reaps benefits from multiple stocks and protects the capital from market risks.

#7 - Stick To Your Risk Appetite

Every trader has a specific risk tolerance capacity based on how much loss they can afford to incur in the market. This rule recommends that no trader or investor go overboard with their risk appetite.

#8 - Be Flexible

As an investor/trader, consider fundamental and technical analysis to assess market trends. A trader must not restrict themselves when evaluating a company or stock before taking any position. They must try every technique, likely to give them an idea about the current market.

#9 - Leverage Technology

With technology, all parts of the trading process become automated, ultimately helping to eliminate human errors and setting a framework for effective trading. The more automated the process is, the more effectively it transforms the trading performance of the traders.

#10 - Respect Market Trends

Capital markets are dynamic and every trader must respect the prevailing market patterns and make revisions in their trading strategies in accordance with that. Despite forming a negative opinion about the markets, one should try reframing or transforming their rules to live up to the market or trading requirements.

Following the rules paves the path towards disciplined trading, ensuring one uses strategies and techniques favorable to them. Some of the points that talk about the importance of these rules are as follows:

• These rules automate all parts of the trading process to enhance the trading performance.
• When followed, the guidelines improve trading discipline and consistency of buying and selling stocks.
• These help traders/investors make trading decisions without emotions involved, preventing traders from getting fooled by their own behavioral mistakes.
• These parameters promote risk management and proper money management.
• Trading rules allow traders to record, track and evaluate their trading performance.
• It encourages traders to create a framework to oblige and adhere to while trading to become successful and earn profits.