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The 3 Basic Principles of Trading

The 3 Basic Principles of Trading


The 3 Basic Principles of Trading

Trading is a risky business whether it is stock, commodity or Forex trading. It requires discipline, patience and experience, not to mention knowledge. In financial assets (like stocks, commodities, Forex), there is no perfect buy or sell. When someone buys, another person sells, which means that someone might end up with the short end of the stick. Trading can a tough job even for experienced traders as they have to follow a set of rules defined by him before taking up the trade.

  • 1. Discipline

Discipline is the key to success in trading. Traders can become successful in the financial market only if they follow set rules and strategies in trading. In the beginning, profit and loss should not matter for novice traders; the only thing that matters is how they trade as in the long term, traders will make huge profits if they follow the discipline of trading. Disciplined trading also helps traders overcome the problem of greed and fear. Some of the basic rules which have to be followed by traders are as follows:-

  • A) Honesty

  • B) Set trading hours

  • C) A clear view of how much loss are they able and willing to bear

  • D) Profit targets

2. Market psychology

Market sentiments also play a key role in trading. Greed, fear, emotions and expectations are the most important factors which affect investment or trading decisions. Behavioral finance generally disagrees with economics’ concept that the market behaves rationally and it is difficult for traders to go with a rational decision in the irrational market. Market psychology suggests that the market’s sentiment, whether it is positive or negative, ends up being the key direction for the market, whether the pair is undervalued or overvalued. Technical analysts use chart patterns, trends, oscillators and other important momentum indicators to gauge the expected behavior of the

market. Technical analysis reflects not only the fundamentals but also the emotions of the crowd.

3. Trading system

A trading system is a set of rules and parameters defined by traders, based on which they execute forex trades. It provides guidelines on entry

points, exit points and the most significant factor- the stop loss, which traders have to keep in the front of their minds before even entering a trade. It is essential for every trader to design a trading system so that it takes the emotion out of the game and saves a lot of time. Things

that traders have to keep in mind, while designing a trading system are as follows:-

  • A) Designate all key parameters, including entry and exit points, as well as stop loss.

  • B) Decide the trading amount.

  • C) Select the time frame or holding period

  • D) Make extensive use of technical indicators such as RSI, OBV, and stochastic oscillator

  • E) Back-test the system.

  • F) Start trading!

In summary - beginners and experienced traders alike must remember the key principles of forex trading- discipline, method and a strong understanding of market psychology.

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