5 Trading Best Practices and Tips by Professional Traders
At Tradervue, we have a large community of traders of all types who are always striving to learn more about trading. In a recent survey, the number one topic that Tradervue users expressed interest in was trading best practices and processes by professional traders. So in this blog post, I am going to teach you five essential trading best practices and tips that I have been applying throughout my career to trade smartly and profitably. By fully implementing these practices, your trading performance will definitely improve and you will achieve bigger returns.
Let’s start!
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1. Game Planning
The first trading best practice I’m going to discuss is having a game plan: a written document that guides your decision-making.
Trading without a clear game plan is one of the biggest mistakes traders make. When you trade based on emotions, gut feeling, or what others are saying, you are essentially gambling. Do this and you will inevitably suffer losses.
Like any professional trader who is serious about succeeding, I always plan my day. My trading plans typically include:
What trade I want to enter
Why I want to enter that trade
The timeframe for entering the trade
My expectations
My risk-reward ratio
The entry and exit rules
The stop loss
My risk management rules
Your game plan lets you trade in a methodical and non-emotional way. So you should always do your research, write your own game plan and follow it diligently. Your plan won’t always work, but you can always reevaluate and adjust it to adapt to the ever-changing market conditions.
Here are three pointers to determine and follow your game plan:
i. Determine what you will focus on
First, you need to know what you will be focusing on. This means having a watchlist of the securities you are planning to trade, whether that’s stocks, futures, options, etc.
Use your stock screener to find stocks that meet your criteria and then add them to your watchlist to monitor them. Your watchlist keeps you focused on the stocks that matter.
ii. Determine what you plan to execute
Next, you want to determine what you are looking for in order to trade. Specifically, you want to know your:
Your trade setup: the market conditions needed to consider a trade
Trade trigger: the event that tells you the exact moment to go into or out of a trade
Entry points
Exit points for both short and long positions
Once you determine these parameters, you will have a clear plan to follow. And having a clear plan in place is essential to stay focused and not give into the many distractions that appear every trading day.
iii. Remove any temptation to trade outside your plan
Having a plan is essential, but sticking to it is just as important.
All traders must face the temptation to trade outside the plans they made before the market opens. The numbers that come up and charts that move around after the market opens can be very distracting. If you allow yourself to be influenced by every change in the market or idea that pops up in your head, you’ll end up ignoring your plan. And trading outside your plan might work once out of luck, but it will always result in big losses.
It takes a lot of discipline to stick to your plan at all times. In fact, that’s an essential skill you will keep honing throughout your trading career. And the best tool to develop discipline is to keep a journal.
2. Journaling
The second best practice is one that separates amateur traders from professional ones.
All professional traders keep a journal of their trades. Many famous traders have emphasized the importance of journaling one’s activity. For instance, Brett Steenbarder – renowned trading psychologist – once said:
“A trading journal keeps you constructive, keeps you learning, and keeps you working on the things that are most important. It is not a tool for simply rehashing the day; it is a tool for self-development.”
– Brett Steenbarger, Ph.D. and Head of Trader Development at Tudor Investments
Your trading journal helps you:
Go back and review past trades
Identify your strengths and weaknesses
Develop discipline and patience
Develop control over your emotions
Improve your trading plans
Identify patterns and trends
Find your edge in the markets
I can’t see myself trading effectively without my journal. It keeps me organized, consistent, and accountable. By reflecting on the market conditions, my trades, and my own trading psychology, I get the clarity I need to make smart investments. This is why you’ll always see journaling mentioned among the trading best practices and tips.
There are three tips in particular that I strongly recommend you apply when journaling:
I. Track each trade
I can’t stress enough how much tracking trades has helped me improve over the years.
Tracking a trade means recording everything about that trade, from the date and time to the strategy used, the entry and exit prices, the volume traded, notes, results, and grading.
By tracking each trade, I know exactly which strategies worked and which didn’t. I also know at what time I perform best and what I need to work on to increase my profitability.
The best way to track trades is to import your trades from your broker into your online trading journal, which is exactly what Tradervue does. After importing trades, Tradervue calculates key metrics and generates charts and graphs (like daily and cumulative P&L, win percentage, etc.) to visualize your data. You save a lot of time and get the big picture on your performance.
II. Tag each trade
Adding tags to each trade is easy with an online trading journal. You should always tag your trades so you can easily filter them later to find the ones you want to drill down into.
Here is what you should tag:
The setup you’re trading
Each trade with what setup you use
Each trade with whether or not you made a mistake on it
Over time, by tagging each trade, you will learn which setups you trade best and which you trade worst. Tagging trades also shows you which trades to focus on to improve your performance. You will also identify both your most frequent mistakes and your most costly mistakes so that you can avoid both.
III. Write how you feel
Make sure to write down how you feel during each trading day and/or at the end of it.
The reason you should do this is that human memory isn’t too reliable when it comes to negative feelings. Emotions like greed and fear often cause mistakes like keeping a losing trade for too long due to frustration or pulling out too early out of fear. There is also the euphoria you feel after a big win, and which can make you overconfident.
If you don’t write your emotions down, you will forget about them and keep making the same mistakes over and over again every time you feel them.
As humans, we lie to ourselves when going forward. We typically want to remember just the good things and tend to forget the bad ones, so we often don’t realize what feelings led us to make mistakes. So when you rely purely on memory, your mind is biased.
The key to keeping emotions under control is to be aware of them. That’s why you should always write how you feel when trading. By recognizing your own feelings and their consequences, you’ll learn to stay rational.
Many traders use Tradervue to keep a trading journal.
3. Reviewing Your Trades
By using a journal, you will incorporate another best practice of trading: reviewing your trades. This means gathering all the data on your trades and reviewing it to determine how you can improve.
I regularly drill down into my data to find the answers for these three important questions:
I. What setups do you trade best?
The first thing I do when reviewing my trades is to determine what setups I trade best. That way, I know what I should be doing more of and what I should be doing less of.
You should be able to identify patterns for your best trades. What is the industry or sector they come from? What is their size? At what time do you trade best? What setups have proven themselves to be profitable time and again?
These patterns help you find your edge in the markets. And your edge is what keeps you making money profitably. An edge can change over time, so a systematic review of your trades will show you when it’s time to find a new edge.
II. What are your worst trades?
The second part of reviewing your trades is to look at what your worst trades are. Bad trades have different causes, like a setup you thought would work but didn’t, or mistakes that you keep making.
When reviewing bad trades, I ask myself questions such as:
What were the market conditions?
Were my expectations realistic?
What was my state of mind before entering the trade?
Did I ignore my rules?
How could I have anticipated this result?
A systematic and objective review of bad trades will reveal your bad habits, biases, and everything else that affects your performance negatively. When you know what caused a loss, you can prevent the same outcome from repeating itself.
With that said, remember that markets are unpredictable by nature, so sometimes you will lose money even though you did everything right. When that happens, give yourself a pat on the back for sticking to your plan and reevaluate it.
III. What are your most costly mistakes?
Lastly, you need to figure out what your most costly mistakes are. Like I mentioned above, you do this by tagging your trades.
Your most costly trades may not be the most frequent, but their impact is the most significant in terms of P&L. So you need to identify them asap to avoid making the same mistakes again.
Granted, this is not the easiest task. Jesse Livermore, pioneer of day trading and legendary trader, said the following about reviewing mistakes:
“It is emotionally difficult to review your mistakes, since the speculator must wade through his own bad trades and blunders. And these are not just simple blunders; these are blunders that cost money. Anyone who has lost money by investing poorly knows how difficult it is to re-examine what occurred. The examination of a losing trade is tortuous but necessary to ensure that it will not happen again.”
– Jesse Livermore
Again, recording trades in your journal helps you identify and fix your mistakes.
4. Taking Daily Breaks
Professional traders don’t trade from the moment the market opens to the moment it closes. Typically, they will trade for a period of time then take a break before trading for another period of time. Some traders trade only one chunk of time while others trade in separate multiple periods of time.
Research shows that humans can hardly maintain a state of high productivity for longer than 90 minutes. You will find it difficult to focus deeply beyond that point.
Whether consciously or not, many professional traders don’t trade continuously for more than an hour and a half. Typically, they will take a 15-20 minute break before resuming trading – if they do go back to trading at all.
Trading for too long will cause your focus to drop. You also become more open to distractions and start feeling more stressed. In the worst case, you will make costly mistakes, feel burned out, and stop trading for an extended period of time. So it’s important to always take breaks to come back with a cool head and fresh perspective. That makes it one of the trading best practices and tips.
During your daily break, you can do things like:
Go out for a walk
Exercise
Read a book
Spend time with friends and family
Engage in a hobby
So be sure to take regular breaks when your productivity drops and your trading will improve without you having to work more.
5. Risk Management
No resource on trading best practices and tips would be complete without touching on risk management. That’s because it’s one of, if not the most important thing in trading. Your risk management strategy keeps you at bay from devastating losses while you work on improving your performance.
Let’s take a look at three metrics that help you draw the line between where you should keep trading and where you shouldn’t.
I. Determine your Daily Loss Limit using your Average Good Day
The first thing you need to be clear on is your Daily Loss Limit. Many traders aren’t too sure how to determine their DLL, so here’s how I do it.
First of all, you want to determine what an average good day is for you. Think about what your average winning day is and what your best winning day is. Your daily loss limit should be somewhere in between.
Here is the reasoning behind this. You don’t want to lose so much in one day that you feel you need to have multiple winning days to make up for it. Psychologically, it’s much easier to begin trading the next day knowing that you only need one winning day to get back where you were before, as opposed to needing to have an amazing winning day or multiple winning days before getting back where you were.
Following this tip will keep you from falling down a psychological hole that could cause you to make mistakes.
II. Determine your risk per trade
Next, you need to understand how to set your risk per trade in a clear way so that you know when to stop a trade and when to keep going.
Personally, I make my risk per trade a fraction of my DLL.
Essentially, you want 3-4 attempts (or more) a day before you cut yourself off if things aren’t going well. So I recommend dividing your DLL by at least 3 or 4. Going to 5 or 6 is good and potentially even better. That’s how you determine how much dollar risk you take per trade so you can have several attempts before you reach your DLL.
III. Determine your maximum drawdown
Your maximum drawdown is the point where you don’t have enough money left in your account to trade. In other words, it’s the amount of money you’re willing to lose before you stop trading.
In general, you want to be able to lose at least ten trades in a row before you need to stop trading or before you run out of money.
Even the best traders make mistakes. And even the best strategies go through periods where they don’t work as well, so you need to leave yourself with enough cushion to survive these periods of time where you’re making mental mistakes or your strategy is falling out of favor.
Setting ten losses in a row as your max drawdown is the minimum. It’s better to go higher when you can. If it’s just six, for example, then you either need to have less risk per trade or you need to have more money in your account.
If you are hit by a losing streak, you need to reevaluate and ask yourself questions like, “Is it my strategy, or my ability to follow my rules?”. Figure out the reasons behind your loss and change your strategy accordingly.
Trading Best Practices and Tips: In Conclusion
These are the five trading best practices and tips I think every professional trader should follow. Have a clear game plan in place, keep a journal, review your trades, take breaks, and optimize your risk management strategy.
While this list isn’t exhaustive, implementing these practices and tips will be of great help in your journey towards financial freedom.
Like every endeavor in life, there are ups and downs, breakthroughs and setbacks. Whether you’re an athlete, a CEO, or a trader, the key to reaching your goal lies in following a
One way you can implement these best practices starting from today is to sign up for a free Tradervue account. Start using Tradervue to keep your journal, analyze your performance, share notes with your mentor or other traders, and so much more.
Author:
Patricia Buczko
Category:
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