5 principles for better trading in 2024 (2024)

Academy News 5 principles for better trading in 2024

Published:23.01.2024

Trading is not as easy as it may seem at first glance. Alternating profits with losses is often the order of the day, and for new traders a deleted account is no exception. This understandably leads to doubt and traders then sometimes start looking for complicated methods to get out of it.

Sometimes, however, you just need to follow the principles, which are surprisingly quite simple. That's why in this article we have prepared five recommendations that will definitely come in handy in your trading career.

Principle 1: Set a clear goal

Every trader perceives success in trading differently. Be that as it may, each of us still needs to have a goal set, before we can evaluate whether we have succeeded or not.

In general, a meaningful goal should be SMART (specific, measurable, achievable, relevant and time-bound).

For some, the goal will be to survive the first year on the market and not wipe out the account. Someone else will consider any profit as a success, while another will want to achieve an appreciation higher than the SP500 index after tax in a year's time.

But goals are not just about percentage account appreciation. In fact, the end result depends on the steps a trader takes throughout the process, which then result in the final state. So process goals need to be followed. To illustrate, here are some examples:

• I will write down a trading strategy.

• I will record all trades in a trading journal.

• I will trade from 15:00 to 17:00.

• I will study trends in trading (for example, the smart money concept).

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• I will test my trading strategy on a demo account.

• I will risk 0.5% on each trade, etc.

Write down your goals and evaluate them regularly. This will make your personal goals more motivating as they will give you a higher sense of importance and commitment.

Principle 2: Know your enemy

If there's one thing we can say about markets, it's that they are very unpredictable. When it seems like they should be rising, they start to fall, support breaks instead of bouncing, and explanations for unexpected moves are usually not forthcoming until it's too late, etc. It’s clear that the markets are not friendly. But the market is far from being the trader's worst enemy.

The trader's biggest enemy is someone else entirely. Often we sabotage our success and do things in the markets that we shouldn't do. Therefore, we are our enemy. If you want to succeed, you will have to step out of your comfort zone and do things differently than most of those who lose money in the markets.

Therefore, to do things differently than how most do them, you will have to know yourself. That means you will have to know your limits, test them, and push them.

This also implies another key aspect of knowing yourself, namely answering the question: "Why do I trade?". In short, traders should be clear about their motivation for trading. If the only motivation behind it is the desire to make money and the fun of the activity itself is secondary or non-existent, then this will most likely not be enough to potentially succeed. Trading should sooner or later lead you to the realization that, apart from making money, it is also about personal development, and you need to spend some time on that.

Principle 3: Learn to think critically and rationally

The human mind is set up to seek out various shortcuts. Professionally, this is called cognitive biases, which can lead us to wrong conclusions. A simple real-life example is the first impression effect, where the first 5 seconds determine what conclusion we draw about a person. If he or she has not impressed us with something, then it practically doesn't matter how good that person is in his or her field. Another example: if you see a label in a shop with €40 crossed out and a price of €20 underneath it, it is more tempting than if the sign only says €20.

There are about 180 cognitive biases in total, they affect how we perceive the reality around us and manifest themselves in different areas of life. In trading, of course, these influences are also at work, and unfortunately, they certainly don't serve us well. Some of them have a strong potential to trigger emotions and various unpleasant psychological contexts in trading, which will surprise a newcomer.

Examples of cognitive bias in trading:

• Selective thinking: we prefer stimuli that are more interesting to us, and have a more emotional charge, at the expense of other stimuli.
• Hot hand syndrome: belief that after a series of successes we are "on a roll" and will continue to do well
• Loss aversion: significantly negative emotions caused by every - even the smallest - loss.
• Revenge trading: constantly opening new trades in order to "heal" from previous losses.

These four and many other examples of cognitive bias are behind the explanation of why many traders fail to stop losses or even the opposite, why after making a profit they tend to continue trading even when the signal is not there. Which ultimately leads to losses, of course.

But what to do about it?

The first step to avoid succumbing to these phenomena in trading is to get familiar with them and understand them. The second step to counteract emotional influences in trading is maximum rationalization and critical thinking. Therefore, base your approach to the markets on facts.

Principle 4: Risk only what you can afford to lose

This rule is an old one, but it's still so relevant that it's worth remembering again. Never borrow money for trading and always make sure you only allocate the amount of money you can afford to lose to your trading account. That is, only trade an amount of money that, if you lose it, will not cause you to lose your lifestyle.

In finance, unfortunately, the risk is omnipresent. It is true that if you want to make potentially above-average returns, the risk, which is expressed in terms of losing money, always increases with it. Bank accounts are low risk. There is no market risk due to price fluctuations. But that is also why the yield is low.

If you want to try to actively profit from market volatility, you cannot avoid exposure to risk. That means you have to learn to manage that risk to reduce the likelihood of it occurring. Therefore, you should only ever trade a system that you trust 100%, know where to place your stop loss, etc.

Principle 5: Trading is not everything

This paragraph could be summed up in one sentence: trading must not become the center of your entire life. This could lead to isolation from the outside world and, in extreme cases, to addiction.

Therefore, you should have different sources of joy that provide a stronger positive emotional experience than the trading experience. So do not forget yourself. If you have a harmonious family, that's great. Meet with friends, play sports, travel, play with your pet, etc. In short, do more of what you enjoy.

Lifestyle is related to this. If you "sleep in" at McDonald's, it will have a different effect on your mind and body after a while than if you eat a nutritionally balanced diet. And definitely don't underestimate quality sleep. Trading is mentally demanding and your mind needs to regenerate. So turn off your platform two hours before sleep and don't turn it on until an hour after you wake up. Then you will have more energy, which will definitely come in handy in the demanding profession of a trader.

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