In trade, just as is the case in any other profession, there are certain guidelines better known as ‘commandments’ that will determine either your prosperity or downfall, should you fail to observe them that is. Therefore, when you venture into trading particularly in finance trade, you must be ready to follow these commandments to the letter.
They are ten in total, but can be expanded. Below is a list of some of the known and most effective trade commandments in practice today. Click to download PDF.
Protect your capital
Here, you ought to make sure that your trade earns more than it stands to lose. The main aim of protecting the capital of your business is reducing the risks associated with doing business. In other words, it helps a big deal in risk management. It does also help a business to avoid big losses that can happen in any given trade and probably lead to its closure.
This is a commandment that you should observe right from the moment you start trading. When observed or implemented, this rule helps a big deal especially the times of economic downturns and consequently surviving your trade during such times.
Professional traders usually put the percentage of amount of capital that you should risk at about 1% with a maximum of 2% per trade.
Set a stop loss
According to seasoned traders, conducting any trade with no stop loss measures in place equals to rock hiking without safety harnesses. One simple mistake can lead to something that you will live to regret in your trading career.
The essence of stop loss is making sure that at least a trade makes as minimal losses as possible and is able to recover swiftly and continue.
There are number of stop loss measures as briefly discussed below.
This is a measure that you can take to caution your trade capital.
Breakdown stop helps a trader stay in a no loss zone. It is, in most cases implemented once a trader feels that there is no, or little, threat to the initial stop. In addition, this stop comes handy in reducing any prospective account drawdown.
These are types of stop loss which are used to protect a trade’s profit. It is always important and advisable that once your trade starts making some really good profits, you too move and extract some money, that is, if your trade hits the profits that you had projected.
This is essential particularly before exiting any trade. Experts argue that it pays to give your trade some time to co-operate as opposed to making straight away exit. However, they at the same time, advise traders to exit in the event that your trade ends up making huge losses than what you had thought of.
Cut your losses short and let your profits run
This is one of the best strategies that any trade must adopt. It shouldn’t go unimplemented if you really want to make it big in your trade. According to many seasoned traders, making any trade without putting measures in place to cut losses is as good as gambling with your trade.
You should not, at any given time, assume that the losses that you have incurred will go down. Such actions may lead to the losses becoming something big an unmanageable whose effect may mean ending your trade. That is, bowing out.
Market analysts warn that ‘cut your losses short and let your profits run’ should not be just said but implemented as well. Though implementing it, at times, tends to be an uphill task to most traders.
Trade what you see, not what you think
Any smart trader must be alive to the fact that he ought to control his emotions and remain focused on his set objectives as opposed to keeping on hoping or even fearing on what will happen next. However, many experts argue that it is absolutely one factor to understand that you are not supposed to do business emotionally and totally a different thing understanding how to do that.
In order to better implement this very important tip, you will need to observe the following points.
- Do not try to outdo the market. That is, don’t try to presume the next move in the market.
- Do not stick to one trade only
- Really mind controlling your emotions
- Seek to understand first whether the trade you are about to involve yourself in does meet your trading plan and learn more about the setup.
Never chase your losses
If you have been in trading for quite some time, you must be aware of the dangers and how bad it can be to chase losses in a trade. Chasing losses is usually considered the most grave of all the risks that a trader can do. In trading, just like in gambling, chasing your losses can turn out to be a path leading out of your trade. As they say, let the by-gone be by-gone.
Never average down
Many trade definitions of ‘average down’ explain it as an act of purchasing more stocks in a certain company when prices are much lower than you had earlier bought them.
When a trade, for instance stocks, goes down than you had expected, it wise to stay away from buying any such stocks. When the value of such stocks falls by about 3%, it is advisable to sell them and make minimal loss than wait expecting that things will be better only for them to worsen.
That is a fact which experienced traders fully understand. However, new traders tends to think the other way, they are always tempted to buy more when the value is going down. That shouldn’t, however, be the case.
Keep good records
There nothing which as important as keeping good records when trading. This is very wide strategy and one which should not be overlooked. You will need to understand how to that, the consequences of not doing it, the kinds of record that you ought to keep in a trade, how long you ought to keep them and finally why you should keep records.
For instance, there are many reasons why you must keep your trade records. That is, record keeping does help a big deal in improving internal control in your trade something which comes in handy when planning and making decisions as far as your trade is concerned. Records also help in making sure you know when your trade is running in a loss or profit, if there are theft, fraud and such things. The records are also heavily used when preparing your taxes as well as other important reports about your trade.
The following are a few of the many records that you should keep about your trade.
- Bank statements
- Transactions records
- Accounting records
- Sources documents such as receipts, vouchers, invoices and many more
According to experts, you should keep records for a minimum period of five years.
Maintaining discipline is not an option if you are in trading. It is a must unless you want to initiate your trading downfall. There are many ways of maintain monetary discipline.
For example, it is good and always advisable to maintain a close check on your balance sheet, be sure to extend payables, reduce inventory, liquidate any underutilized assets, and increase cash buffers and so on.
If followed well, these tips will help you a lot in maintaining discipline in your trading.
Keep it simple
You might be asking yourself, why is ‘keep it simple’ important and after all the trade is yours? It is important, believe it or not and many studies have proven this fact. You should try to avoid anything that is complex. This tip is applicable to many situations ranging from planning your trade to executing that particular plan.
In addition, the power of simplicity in a business or trade for that matter is also important even when dealing with branding, determining your workspaces, time management as well as when communicating to other people in your trade.
Plan your trade and trade your plan
It is more of a cliché nowadays but they say; ‘if you fail to plan you are planning to fail’. That is what this tip tends to point towards. It is essential that you ask yourself a few questions before you start trading in order to be clear in your mind what exactly you want out it and where you would like your trade to lead you to.
Your trade plan should, therefore, capture your mission and objectives. That is your dreams, hopes and wishes that you have for your trade.
So, what is a trade plan? This is a listing of a variety of diagrams as well as steps that will guide you into getting or achieving your goals as a trade within a certain period of time. It is more of a strategy that you will implement to achieve that which you have purposed for your trade.
With a good trade plan in place, it will be easier to hit your targets when trading.
A good trading plan must have a minimum of three sections addressing different questions as far as your trade is concerned. That is, Me, Goals and Strategy.
Trading your plan is usually the next to do once you have it place. This simply refers to making sure you use the plan you have developed to do your trading.
There you have it. That is the list of the much important ‘ten trading commandments and if followed one after the other, your trading will, beyond any reasonable doubt, grow and become the next big thing.