Use the money you can afford to lose.

This advice is not just simple ethical, or basic financial planning. To succeed as a trader, you need to have your mind confident to make trading decision despite the future use of the profit. If you use funds that you had saved for family projects, you will not trade with an independent mind, and will likely fail.

Control your emotions. Trade emotionless.

Develop an emotionless attitude toward your position. Never let a big hit become euphoric and feel powerful, never let a failure turn you down. Be a machine. The battle of the market is not really in the floor, it is in your mind. As a small trader, you are in a run trying to build a good asset based on securities, but also develop the proper skills to succeed. Even if you initially lose money, if it teaches you something, it will be money well invested.

Start small. Learn by paper trade.

This refers to start with small positions, specially if you are starting with a new market or type of trading. It will help to learn the mechanics and minimize the loses due to initial mistakes. As a small trader, you have no room for failures on the mechanics, so the advice is to paper trade to master that area.

Don’t trade based on hope.

The reason to enter a trade should be to prove your belief on the future movement of the price, not in your desire of profit, which will lead you to trade based on hopes. Trade based on what you will think will happen, not what you want to happen. Also, don’t stick to your opinions if the market says you are wrong after you enter the trade.

Prefer your money over your ego.

When trading, having your own opinions is good, but stick to them and lose money is very bad. Forget your ego. If you made a mistake, accept it, take your lose immediately while it is small, and move on.

Plan your trade, trade your plan.

Don’t form new opinions during the trading day. Successful traders form their opinion before the market opens, and then look for the proper moment to execute a decision previously made. Don’t let the emotion of the trading day to alter your decision. Changing the decision based on the trading day events is often disastrous not only for your pocket, but for your discipline and self confidence.

Take planned breaks.

Plan a stop on your trading. Some successful traders schedule a stop every 5 or 6 weeks for at least one week. This gives you a detached view of the market, provides you a fresh look of yourself and allow you to decide calmly your trading approach for the next trading weeks.

Don’t follow the crowd.

Successful traders feels unconformable with their trades when their position gets popular with the buying public, specially the small traders. So, don’t follow other small traders’ trades. When a position is becoming very popular, it’s probably time to go out.

Block out other opinions.

Once you have formed a basic opinion on the market or a particular stock, don’t get easily influenced to change your opinion. There always will be someone with a reasoned opinion different than yours. Don’t listen to him, stick to your opinion. Get used to avoid discussing your opinion with others. Only change your opinion when the market proves you are wrong due to a stop loss hit.

When in doubt, stay aside.

Beginner traders tends to be trading all the time. This leads them to jump in, even when the trade is not very convincing. Successful trader makes money by waiting a proper opportunity. This requires patience and discipline.

Avoid using market orders.

Ensure to follow your trading by using stop orders and limit orders. Market orders is very much like jumping in a trade blindly, you cannot ensure which price you’ll get. Buying with limit orders is the equivalent to say “I will buy this only at this price or better”. Markets order should be used in emergency situations only, when you need to eject a position immediately.

Do pilots before jumping in.

This advice claims that before fully committing with a position, you should do a small pilot before jumping in. Past masters like Livermore and Darvas recommended this technique. As a small trader just beginning, you will do so, due to your capital limitations. You will do the pilot, and that’s it. But as your capital grow, do not jump in with proportionally bigger stakes. As soon as you can do it, first do a pilot (buy/sell a small position), wait to confirm market reaction, then jump in with a larger position.

Never increase to a losing position

The technique is called “averaging down”, and you should never follow it. The reasoning is as follows: You enter to a position, and the market moves against you. You believe strongly in your price prediction, so you justify yourself claiming that this is a temporary pullback, and the stock is now really cheap. Therefore, you decide to add more to your position so the average cost of entering was lower, and therefore, when the price moves in the direction you expect, the profit will be even higher. There is no guarantee that this will ever happen.

The truth is that your are adding to a losing position, and have no confirmation of the market that you are right in your predictions. The market is the boss, and it needs to agree with you before adding more money. Actually, it is your ego scratching your pocket to feel better because the reality is not obeying it. Never hear your ego when trading. See rule 5.

Cut your loses early

When the market moves against you, admit fast your mistake and close your position while the lose is small. It requires strong discipline to not hear your ego or your hopes, and kill your position at the point you planned. For this, we recommend using automatic stop losses. Mental stop-loss are dangerous, as your ego will try to break your decision in a thousand ways.

Let your profit run

When the market moves in his direction, the typical inexperienced trader will immediately will be scared to lose the profit he got, and will close the position. “Nobody broke by taking a profit” is the reasoning, and it is deadly incorrect. Actually, you should try to get the most of the ride. Here is were hope is good. You should expect every day that the price goes in your direction a little bit more. Be sure to lock part of your profits by moving your stop loss as needed. Even when you decide the trend is over, just in case set up a trailing stop with a narrow margin. This will be triggered any moment, but you are always giving the trend a chance to put more money in your pocket.

Digest your loses

Being wrong when trading is unpleasant. Most traders try to forgot a loser trade quickly and concentrate in the next move. You should devote some time to analyze what went wrong, so you don’t do the same mistake again. In some cases, you did all ok, but still the trade didn’t work. This is normal, but still it worth to digest them . When you gain the emotional stability to accept your losses without hurting your pride, you are prepared to win in the market. You must remove the fear of taking a loss.