10 Essential Trading Principles Every Trader Needs to Know!

If you’re serious about trading, then trading without a plan isn’t an option. Before you ever enter a trade, you should know exactly where you’re getting in, where you’ll exit if you’re wrong, and where you’ll take profits if you’re right.

Here are the 10 critical elements every solid trading plan needs. Skip any one of these, and you’re back to guessing.

1. Risk Management

Risk management isn’t just a part of the plan—it is the plan. It’s more important than stock selection. If you don’t know how much you’re willing to lose before you get into a trade, you’re not trading. You’re gambling.

Legendary traders like Bernard Baruch and Jesse Livermore believed in cutting losses fast. Even if you’re only right 40% of the time, you can still make money—if you manage your losses.

A few simple rules:

• Never risk more than 1–2% of your capital on a single trade
• Always use stop-loss orders
• Avoid averaging down on losing trades

2. Annual & Quarterly Earnings

The best-performing stocks usually have strong, consistent earnings growth.

Look for companies with:

• At least three years of rising annual earnings
• 25%+ earnings and sales growth in each of the last three quarters

That kind of strength often shows up before a big move.

3. Direction of the Market

Around 75% of stocks follow the general market trend. You can pick the best stock in the world, but if the market is tanking, odds are you’re still going to lose.

Use both data and judgment here. Watch price and volume. But also pay attention to the market’s leadership. Is money flowing into new winners? Or are old leaders breaking down?

A healthy market has broad participation and strong rotation.

4. Emotional and Psychological Capital

This part doesn’t get talked about enough.

Your mindset matters as much as your account balance. If you’re tired, distracted, or emotionally burned out, you’ll make bad decisions.

Things that affect your trading:

• Health (yours and your loved ones’)
• Relationships and stress levels
• Financial pressure outside of trading

Mark Douglas’ Trading in the Zone is a solid read if you struggle with this part.

5. Relative Strength

Buy the strongest stocks in the strongest groups. Period.

Relative strength tells you which stocks are outperforming the rest of the market. One easy way to track this is by using the RS line from Investor’s Business Daily.

Key points:

• The RS line should be trending up
• Ideally, it should hit new highs before the stock price does
• IPOs may lag in RS rating due to lack of data, so evaluate them carefully

6. Liquidity

Liquidity matters more the bigger your trades get.

You want to be able to enter and exit positions without moving the stock too much. Thinly traded stocks might offer upside, but they come with risk. One large sell order can crush the price.

William O’Neil found that most top-performing stocks had fewer than 25 million shares outstanding during their big runs. All else being equal, smaller float wins.

7. Institutional Sponsorship

Big institutions like mutual funds and hedge funds control the bulk of market volume. When they buy, they don’t do it all at once. They build positions over weeks or even months.

Look for signs of accumulation:

• Consistent, high-volume buying
• Strong support at key moving averages
• Breakouts that hold with follow-through

If the big money’s moving in, you want to ride with it—not against it.

8. Optimal Entry

The best trades start with the best entries. Your goal is to buy at the spot where your potential upside far outweighs your risk.

Here’s what to watch for:

• Buy from solid bases or consolidations
• Use pivot points confirmed by volume
• Don’t chase—avoid buying more than 3% past a breakout point
• Adjust buy zones based on market volatility

Being precise with your entry gives you more control over risk.

9. New Leadership

Every bull market has its own batch of leaders. These are often newer companies doing things in new ways. Think Tesla in 2020, Nvidia in 2023, or AI software names in 2024.

Old leaders usually don’t lead new cycles. If a stock led the last bull run, it probably won’t lead the next.

Ask yourself:

• Is this stock part of a growing theme or sector?
• Is it showing early signs of breakout strength?
• Are institutions quietly building positions?

New leadership is what fuels real uptrends.

10. Have a Written Trade Plan

This wraps it all together. Every trade needs a written plan with:

• Exact entry level
• Stop-loss level
• Profit target(s)
• Reason for the trade (both technical and fundamental)

Don’t skip this step. Writing it down gives you structure and reduces emotional decision-making. When the trade’s live, the plan keeps you from second-guessing yourself.

Final Thoughts

You need more than just a hot stock tip to trade successfully. You need structure. These 10 elements work together to give you that structure.

Build your plan before you trade, not after.