20 Rules Followed by Professional Traders

Booking reliable profits in the financial markets is harder than it looks at first glance. In fact it’s estimated that more than 80 percent of all participants eventually wash out and take up safer hobbies. But the brokerage industry rarely publishes client failure rates, since they're concerned the truth might scare off new accounts, so the washout rate could be much higher.

Long-term profitability requires two interrelated skill sets. First, we need strategies that make more money than they lose. Second, those strategies must perform well while the market shape shifts through bull and bear impulses, with plenty of choppy periods in between. While many traders know how to make money in specific market conditions, like a strong uptrend, they fail in the long run because their strategies don't adapt to inevitable changes. (To learn more, see: Tips For Investing In Volatile Markets).  

So can you break away from the pack and join the professional minority with an approach that raises your odds for long term prosperity? Start with a clear and concise plan (Read: What It Takes To Become An Elite Trader).

Now, internalize these 20 rules that long-time pros use to stay in the winner’s circle. 

1. Follow Your Discipline – Discipline can’t be taught in a seminar or found in expensive trading software. (But you can learn more by reading: The Importance Of Trading Psychology And Discipline). Traders spend thousands of dollars trying to compensate for their lack of self-control but few realize that a long look in the mirror accomplishes the same task at a much cheaper price!

2. Lose the crowd – Long term profitability requires positioning ahead of or behind the crowd, but never in the crowd because that’s where predatory strategies target. Stay away from stock boards and chat rooms. This is serious business and everyone in those places has an ulterior motive. (Check out How The Power Of The Masses Drives The Market to learn more).

3. Engage your trading plan - Update your trading plan weekly or monthly to include new ideas and eliminate bad ones. Go back and read the plan whenever you fall in a hole and are looking for a way to get out.

4. Don’t cut corners - Your competition spends hundreds of hours perfecting strategies and you’re in for a rude awakening if you expect to throw a few darts and walk away with a profit. It’s even worse if you cut corners in the rest of your life because that bad habit is much tougher to break.

5. Avoid the obvious – Profit rarely follows the majority. When you see a perfect trade setup, it’s likely that everyone else sees it as well, planting you in the crowd and setting you up for failure.

6. Don’t break your rules – You create trading rules to get you out of trouble when positions go badly. If you don’t allow them to do their job, you’ve lost your discipline and opened the door to even greater losses.

7. Avoid market gurus – It’s your money at stake, not theirs. Keep in mind that they're probably talking up their positions, hoping the excited chatter will increase their profits, not yours.

8. Listen to your intuition – Trading uses the mathematical and artistic sides of your brain so you need to cultivate both to succeed in the long run. Once you're comfortable with math, you can enhance results with meditation, a few yoga postures or a quiet walk in the park.

9. Don’t believe in a company or a product – If you're too in love with your trading vehicle, you give way to flawed decision-making.  It’s your job to capitalize on inefficiency, making money while everyone else is leaning the wrong way. (For related reading, see: How To Avoid Emotional Investing).

10. Get your personal life in order – Whatever is wrong in your life will eventually carry over into your trading performance. This is especially dangerous if you haven’t made peace with money, wealth and the magnetic polarity of abundance and scarcity.

11. Don’t try to get even- Drawdowns are a natural part of the trader’s life cycle. Accept them gracefully and stick to the time-tested strategies you know will eventually get your performance back on track.

12. Pay attention to early warning signs – Big losses rarely occur without multiple technical warnings. Traders routinely ignore those signals and allow hope to replace thoughtful discipline, setting themselves up for pain.

13. Don’t confuse execution with opportunity – Traders make up for insufficient skills with expensive software, prepackaged with all sorts of proprietary buy and sell signals. These tools interfere with valuable experience because you think the software is smarter than you are.

14. Play with your head, not over it – It’s natural for traders to emulate their financial heroes but it’s also a perfect way to lose money.  Learn what you can from others, then back off and establish your own market identity, based on your unique skills and risk tolerance.

15. Forget about the Holy Grail – Losing traders fantasize about secret formula that will magically improve their results. In reality, there are no secrets because the road to success always passes through careful choice, effective risk management and skilled profit taking. (See: Risk Management Techniques For Active Traders).

16. Ditch the paycheck mentality – We’re taught to grind through the work week and then pick up our paychecks. This pay-for-effort reward mentality conflicts with the natural flow of trading wins and losses during the course of a year. In fact, statistics indicate that most annual profits are booked on just a handful of days the market is open for business.

17. Don’t count your chickens – Feel good about a trade that’s going your way but the money isn’t yours until you close out.  Lock in what you can as early as you can, with trailing stops or partial profits, so hidden hands cant pickpocket your success at the last minute.

18. Embrace simplicity – Focus on price action, understanding that everything else is secondary. Go ahead and build complex technical indicators but keep in mind their primary function is to confirm or refute what your trained eye already sees. (For rekated reading, see: Introduction To Technical Analysis Price Patterns).

19. Make peace with losses - Trading is one of the few professions where losing money every day is a natural path to success. Every trading loss comes with an important market lesson, if you’re open to the message.

20. Beware of secondary reinforcement – Active trading releases adrenaline and endorphins. These chemicals can produce feelings of euphoria even when you’re losing money. In turn, this encourages addictive personalities to take bad positions, just to get the rush. 

The Bottom Line

The vast majority of traders fail to tap their full potential, eventually cashing in their chips and finding more traditional ways to make money. Become a proud member of the professional minority by following classic rules designed to keep a razor sharp focus on profitability.