A lot of people like the idea of day trading. They have the vision of sitting on a laptop on a beach, or in front of a rank of monitors showing pretty graphs - and somehow deciphering all that to make thousands per day.
The reality is the vast majority of retail traders lose money. Somewhere in the region of 75 - 85% in fact. And chances are, of the remaining 15-25% of traders, half of those are probably only breaking even.
So how can you avoid being part of the herd and instead become successful at trading? Well, if you follow these 11 rules, you stand a much better chance of turning trading into a consistently profitable activity.
You are unlikely to be able to quit your job and become a full-time trader. Very few people do. So stop setting yourself unrealistic targets for what you can achieve.
It makes for great marketing material to say you can turn £500 into £100,000 within a year. But, you probably won’t. So instead set yourself some realistic targets. If you’re just setting out, then you’ll want in the region of £1,000 - £2,000 available to trade.
For the first 12 months your goal is to not lose money. You’ve got so much to learn, that even if you do lose all your starting capital, if you’ve learnt along the way - just think of it as the price of your education.
Once you’re up and running, if you can make 30% a year consistently then you’re onto a bit of a winner. There will be times where you could make considerably more than this, but that shouldn’t be your baseline definition of success.
You could well make a 100% profit on a trade. But unless you’re risking your entire capital on one trade… that shouldn’t translate into a 100% increase in your trading.
Risk is everything when it comes to trading. You want to minimise your risk while maximising your gains.
How much of your capital do you want to risk per trade?
Hint: anywhere from 0.5% - 2%. Personally I like to use 1%.
How are you going to protect your downside risk?
Will you use stop losses? (yes you will)
Will you use a trailing stop loss once you are in profit to make your trade risk free? (I would)
Will you move your stop loss down to make sure you don’t get stopped out? (see point 8)
How long do you want to hold your trades?
All these (and more) questions come into play when deciding your risk profile. The longer you hold a trade, the more opportunities there are for something to come along and screw up your plan. But on the flip side you’re also giving yourself more chance for your plan to work and for you to make a shit ton of money… where do you want to balance that risk?
For most beginner traders I’d suggest something like a 3 day - 4 week trading timeframe. It’s short enough to see things happening, but not so volatile that you have to pay attention every hour of every day to make sure you aren’t suddenly broke.
Money Management is the secret sauce to any and every successful trader.
If you don’t have a money management system that you follow rigidly, you’re headed straight to destination fucked.
Figure out how much you’ve got available. Figure out how much you can afford to lose per trade. Figure out how many trades you can lose in a row before you’re broke. Figure out how much profit you want to make per winning trade. Figure out what % of winners you need to break even.
Once you’ve got these numbers, you have a starting point to assess any strategies against. If they don’t meet your criteria, it’s an easy no. If they do, happy days.
Protecting your capital should be your number 1 priority.
When are you going to trade? Ideally you want to trade the same time each day / week. So coming up with a strategy that requires you to watch the ticker every minute of the day isn’t going to be a great plan.
Figure out a routine that you can work with first, then get the strategy that fits in with your routine.
When I was working full time and trading, I used to spend 15 minutes in the morning look at potential trades. Enter them, and then know I wouldn’t be able to look again until that evening or the next morning. So I planned my trades to last a few days rather than a few hours.
When I was trading full time, I changed strategy and went for much more high frequency trading.
It’s important to make it work for you - IN THE REAL WORLD. Not just follow someone else’s strategy and try to make your life fit around it. It won’t. Life is pretty inflexible most of the time.
This is the part most people focus on, but it’s actually not that big a deal. If you have proper money management rules in place, then you’ll quickly realise you only need a success rate of around 40% to be successful as a trader.
If you’ve gone through this list in order, you know how much you’ll be trading, and when and what the risk is per trade. Now you just need to find a strategy - any strategy - that fits in with your trading plan.
If you’re trading, then you’ll most likely be using technical analysis, so pick some indicators you understand and can read quickly and then test out some theories of what signals are usually followed by what price movement.
E.g. XYZ indicator crosses over this line, price usually drops after that.
It sounds pretty simple. But it’s not easy. Which is why we...
This is the trading equivalent of Location, Location, Location.
When you have the slightest of ideas for a strategy. First thing you need to do is backtest it. Then backtest it some more.
You want a minimum of 20 scenarios where your signal would have told you to do something. Work out if what happened next would have lead to a profitable trade or a loss.
Once you’ve done it 20 times, you’ll have a % win rate. Is that enough for you to make a profit? If so, try using a demo account and fake trade the strategy.
We’ve all been there. You put a trade on and the market instantly goes the opposite way from what you wanted it to do.
You start to think someone is plotting against you and just waiting for you to pull the trigger. They aren’t. You aren’t important. Get over yourself.
Figure out what you’re going to do beforehand, and then just do it. It’s not an emotional thing, it’s just a series of numbers on your computer. You’ll find it much easier to not get emotional if you’re sticking to your money management rules. You are confident you can lose 50 times in a row and still not be broke. So it’s fine. Just chill out and stick to your plan.
This goes with the above. Have a strategy for when you’ll get in. Then have a plan for when you’ll sell - both if it goes against you and for you. When it hits those points, execute your plan.
Don’t deviate from it. Don’t extend your losses - cos you know it’ll come back!
Don’t let your profits run past where you planned them - cos you know it’ll keep going!
Maybe it will once or twice. But maybe it’ll fuck you over as well.
If you keep finding yourself getting out too early on a stop loss or a limit order, then review your strategy. Backtest it a whole bunch, and then make that the new plan for your trades.
ALWAYS STICK TO YOUR PLAN.
You’re going to. You’ll have losing trades. You’ll have losing days. You’ll have losing weeks. Maybe even months.
If you have losing quarters, then your strategy sucks. If you have losing years, then your money management sucks.
Fix those two things and you should be fine again. But accept that you will take losses every so often. Remember Rule 7 - don’t get emotional.
Then have confidence in your plan. If you need to, from a psychological perspective, then stop live trading and go back to demo trading your strategy. Maybe your strategy used to work, but now it doesn’t. In which case it’s time for a new strategy.
But losing is all part of the game. Accept it and you’ll be fine.
Doesn’t matter how or where, but make a note of every trade you ever make.
What did you do, why did you do it, what was your plan ahead of time, what happened after the trade was put on, when did you sell, how long did it take, what was the profit.
The reason we do this is to keep an eye on strategies. What works now might not work in the next market cycle. Maybe you’ve got a perfect strategy for a bull market, but it sucks in a bear or ranging market.
By tracking the data on each trade (and therefore each strategy), we can start to see when something is going wrong. If you’ve previously had a win rate of 60% but it’s now down to 40%... heads up, you should probably look into that.
Depending on how you manage your trades, you may also want a record for tax purposes. You can trade tax-free in the UK using spread-betting accounts. But if you trade full time for a living, then it is deemed to be your main source of income and therefore is taxable. Few people mention that when they are selling you a course...
This might be a weird addition to a post telling you to do a bunch of stuff, but at the end of the day your success is all down to you.
You can subscribe to other peoples tips services, but are you really learning anything? What strategy are they following, and have you tested it? If they stop, do you stop as well?
It’s a dangerous thing to rely on someone else entirely for your trading success. So learn the basics and get comfortable with formulating strategies.
Pay for education all day long (so long as you implement it), but don’t pay to be spoon-fed.
Just crack on with it and have fun. Trading is something that you can add as a fun, profitable hobby, but it’s unlikely to make you rich.
There are a whole bunch of people out there desperate to take your money off you to show you how to turn £1.48 into £500,000 in 3 months. It’s bollocks, don’t fall for it.
Instead, if you’re really keen on trading, then learn the basics, apply the principles, practice, then implement.
I tend to stay quiet about trading as I find it attracts people who are looking for the easy, get rich quick scheme. Instead I focus on building a solid investment portfolio, and use elements of trading to build a resilient, long term investment strategy.
If that’s something you could get on board with, then check out when the next Mastermind is going to be and get involved.
Do you want to know how to invest your money wisely and make it work for you? Do you want to get a grip and secure your finances for troubled times or understand how to invest your money in todays’ uncertain times?