Investing

Three Rules Successful Traders Follow

People working at a trading desk.

All traders have different styles and methods, but they all share a few notable traits. Here are the three most important rules successful traders know and follow.

I spent a couple of decades in dealing rooms, working with and learning from a whole host of successful, long-tenured traders. They all had different styles and methods, but they shared a few notable traits. Here are the three most important lessons they taught me. These are rules that all traders should know and follow.

1: Know that You can Lose

This may sound obvious. The fact is though that even the best traders, with all the advantages of access to information and speed of execution, lose on a good percentage of their trades. The reason they survive is that when they do, they recognize it quickly and cut for a small loss. That is a lot easier to do if you follow rule number 2.

2: Have a Plan

There are many differences between those that trade from home and those that trade in a dealing room, but the biggest is strategy. Not which strategy they have, but whether or not they have one at all. Most retail traders buy something with a vague idea that if it goes up fifty percent or so, they will sell. Occasionally they will go into great detail about where they would like to buy something, but rarely do they think about where they would sell it, and even less rarely do they think about where they would sell it if it goes down.

“Bracketing” a trade, setting a stop-loss level and target level at the time you initiate it, is a good habit to get into. It makes you consider the risk/reward ratio of a trade and keeps losses to manageable levels. It can be frustrating at times when your stop is hit before a recovery, but there will be many more times when running a loser into the ground would have killed your account and stopping out saved you.

Targets can be places where you take a profit, or they can just be levels at which you will review the position. The best traders tend to take the second approach, raising and tightening stops when a target level is hit. That allows you to run your profits if the move continues, which is almost as important as cutting your losses.

3: Know What You Trade

Desk traders regularly read detailed analysis by experts paid to do research on anything and everything that they trade, be that stocks, commodities, currencies, bonds, or whatever. They are aware of most of the things that could influence the trade, good and bad. You don’t have access to the same research and information, but you can at least imitate it.

To start, go to Nasdaq.com and in the search box on the right, type in the ticker symbol of the stock you are considering. You will see a chart and, when you scroll down, lots of data. Read it. If anything confuses you, just google it. Scroll further still and you will see recent articles about the stock. Read them, in case there is something you missed. After a while you will begin to get a feel for a stock based on the P/E, the analysts’ targets, the short interest, and everything else that is there. All of that will help you decide whether or not to take the trade, and to set the parameters when you do.

The increasing use of Robin Hood and the like and the interest in the stock market from young people doesn’t have to be a shoeshine boy moment. Most of the accounts are small, and the potential damage to the finances of those trading is also small. Combined, though, millions of small accounts have power, and it is the power of the wisdom of the crowd. That is how markets are supposed to work, so those that believe in free markets should welcome this new generation, not shun them with an arrogant attitude.

Markets thrive on liquidity, and liquidity can only be maintained if people succeed. I want you to succeed, and everybody involved in the market should too. Following the three rules above will increase your chances of doing so.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio