These are the 21 rules I have taught myself by failing consistently in the early part of my
trading career. I still make some of these mistakes today.
I am not a gifted trader, I have just tried to learn from my mistakes.
Identify the trend according to the time period that you trade and never open a position against this trend.
It sounds so simple but it is too easy to see a bull trend that you did not manage to buy, because prices did not dip to your entry level or raced away from you
and you did not want to chase it. Next thing you find yourself looking for reasons to go short just only because the market has rallied. Traders do it all the time…
they know they should be long but they think it cannot go any further at this stage and find themselves shorting in to an uptrend only to lose money.
They step back and think how did I get short when my original plan was to buy in to longs?
”Success depends upon previous preparation, and without such preparation there is sure to be failure.” Confucius
2. The professional trader buys BECAUSE prices have rallied.
Buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy and sell higher” or ”sell and buy lower”. Buying a break above a resistance level is a good
trading strategy that works over time but many of us find it hard to do because we think that logic tells us what goes up must come down.
In fact what goes up in financial markets often keeps going up. It is wiser to try to jump on to a moving train and catch a ride than to stand in front of it and hope it stops.
3. Don’t enter a trade until it has been well researched and planned or you will have no confidence in your decision.
Do your own research, never trade on someone else’s hunch. All the work on a trade has to be done before it is entered so you already know where you will exit,
whether the trade goes in to profit or loss. Trading is only stressful when you have not made a proper plan of each stage of the trade as you are forced to make rash decisions
which will be dominated by emotion in a moving market. That is when panic or greed dominates your thought process.
Make a plan and stick to it, do not change your exit plans once in the trade.
‘The general who wins the battle makes many calculations in his temple before the battle is fought.
The general who loses makes but few calculations beforehand.’ Sun Tzu
4. Be patient.
If a trade is missed, wait for a correction to occur before putting the trade on or be ready to buy a break above resistance (or sell on a break of support).
“My first rule is not to lose money. Losing an opportunity is minor in comparison,
because there are always new opportunities around the corner.” Burt Dohmen
5. Be patient.
Once you have entered a trade let the market do the work. Time is not a factor. You have already planned your stop and your ”take profit” level but you do not know
how long it will take for one of these exits to be hit. Watching every trade in the market will only cause you to doubt yourself.
6. Be patient.
Hold on to winning trades until they hit your target. Don’t take a small profit because of your emotions. Stick with the plan you made before entering the trade as
this was when you were calm, unemotional and focused.
“We must remove the emotional element as quickly as possible in trading…
If you can do it before you put on a position, you have a good start.”
7. Never ever move your stop losses further away.
You will diminish your risk/reward which is key to your long term survival. You waste mental capital when you nurse a losing trade for longer than planned. |
You miss out on the next opportunity that could have made a big profit and covered your loss on this trade.
“Experienced traders control risk, inexperienced traders chase gains.” Alan Farley
8. Never, ever under any condition, add to a losing trade.
Do not “average” into a position by adding to it as your losses increase, in the hope prices will turn in your favour.
“The elements of good trading are: 1. Cutting losses, 2. Cutting losses, and 3. Cutting losses.
If you can follow these three rules, you may have a chance.” Ed Seykota
9. Keep a trading journal.
Make notes on what worked and what did not work. What should be repeated and what should never be repeated! Learn from your mistakes and your successes.
Regularly review performance, and improve.
”It’s okay to make mistakes. Mistakes are our teachers – they help us to learn.” John Bradshaw
10. When you suffer a severe loss or even make an abnormal profit take a break and stop trading for several days.
Take a break until the end of the week at least. Your emotions will be running high and this is a bad time to be trading.
The urge “to get the money back” is extreme and leads to poor decisions. After a good run your confidence will be too high and greed sets in.
This is when you are most vulnerable to a big hit. Instead take a break, give yourself a reward and come back down to earth.
”For a man to conquer himself is the first and noblest of all victories.” Plato
11. Do not vary your trading size.
You do not know which trades will work and which ones will get stopped out for a loss (although we all think we do!). If you vary your size depending on your level of
confidence in the trade your risk/reward strategy will not work. Stick to a minimum 1:2 risk v reward. Risk $1 to make $2 and trade the same amount of capital each time.
12. Often no position is the right position.
You do not have to be in a position all the time. You cannot possibly have a good idea of where the market is going all day, every day.
Your job is to identify opportunities and wait to try to enter the market at the levels that you have decided will minimise your risk while maximising your reward.
”He who knows when he can fight and when he cannot, will be victorious.” Sun Tzu
13. Markets form their tops in violence; markets form their lows in quiet conditions.
If a market is reaching major resistance and is becoming very volatile it can signal a top.
14. If you are trading for entertainment, like going to horse racing or the casino, set a monthly budget, risk what you can afford to lose and have fun.
But if you want to make a living, treat it as your business. Trading is simple so use common sense. Make a well thought out plan and execute it.
Ensure you preserve your capital and do not risk losing it all in a short period of time or on a few trades. You cannot make a profit if you do not stay in business.
15. You need to give yourself a goal to attain.
This is true for any “real job”. If you have no goals, you could find yourself trading aimlessly for most of the month, and finding out that you are in the red
because of a few trades which you ran too far the wrong way or perhaps trades you shouldn’t have made. The profit target is a good exercise to help you focus.
You know what you need to achieve and you know when you achieve it, so you know when to stop. Simple!
16. Make your target realistic in relation to your trading capital.
You would not start a business selling a product, invest £20,000 and expect to make £100,000 in the first year. Trading is the same so set a realistic target – £1650 per month or
£420 per week for example provides 100% return per year. You will not find many hedge funds that can do that consistently!! So if you make £100 in a morning
you have had a terrific day and should be very careful not to risk losing it. £100 per day may or may not seem a lot of money to you,
but if it takes 3 hours to make it each day you have a lot of free time.
Imagine if you could average just 1% profit on your account per day. 20% per month! Of course this is much more difficult than it sounds,
but my point is that small wins add up very quickly.
17. Once you decide on a realistic daily target as part of your business plan, you must stop trading when this target is reached.
Do not feel guilty that it is 10am and you have made your target. If you do this every day you can have a life that few can dream of.
If you have reached your profit target, remember, you earned it. You have done the research, found profitable trades and executed them with patience and discipline.
How will you feel at the end of the day if you have lost it all…or worse made a loss on the day? This happens to traders every day…do not let it happen to you.
18. NEVER EVER EVER lose more in a day than your profit target!
Detach yourself from the money and think of it as keeping score. The only way you can judge if you are being successful and making the right decisions is if you are
making consistent profit. Many traders find they are clearer in the morning and do not trade in the afternoon.
19. Trade only when you have a clear head and you are focused.
I know managers of independent trading offices. One of their responsibilities is to risk manager the traders in these offices. If a trader steps outside of his/her agreed risk parameters
by trading too big, running trades too far in to a loss or trading too frequently it is a sign that the trader is not focused and in control. Often the trader is hung over after a night out
or having a difficulty at home, is under financial pressure, but what ever the reason that he/she is distracted, this will usually be manifested negatively in trading results.
If you do not feel in the mood or find your self distracted with issues outside of trading, stay away from the markets or you will make life much harder for yourself by compounding your worries.
20. Do NOT trade when you are very stressed, very tired or drunk!
It is usually wise to avoid late Friday when traders are closing positions for the weekend. Periods of low volume are also often difficult times to trade,
for example Monday mornings and when there is a bank holiday but the market is open, or a holiday in the US when Europe is open.
For the same reason the morning of a big number like Non Farm Payroll can be thin and tricky.
21. Trading is not the same gambling (despite what many will tell you).
One reason being, it is possible to put the odds in your favour. The main reason is that there is no predetermined start and end to the game. If you bet on a horse race, a roll of the dice,
a deal of the cards or a spin of the wheel, there is a clear start and end of the bet and there are only two out comes – win or lose and you already know what you could lose
or what you may win at the end of each race/roll/hand/spin, once you place your bet.
When you trade you decide when the bet starts because that is when you enter the trade. You decide when the game ends as that is when you exit or are forced to exit the trade.
Even when the market is closed the game is still being played if you have a position open. In between the start and the end there are endless potential outcomes because
you can win or lose almost any amount (that is in your trading account) within that time.
No one will stop the game for you unless you run out of margin and lose everything….only you decide.
This is why you need to exercise extreme discipline & self control.
Trading can be a great way to make a living. You do not have rent on an office, shop or warehouse, no stock to manage, no staff to pay,
no security issues, no customers, no invoicing, no cash flow problems (if you make a profit it is in your account instantly).