Trading Rules and Wisdom

The video above outlines a few rules and tenets that can be helpful to traders staying on the right path on a consistent basis. Some of them might seem a little cliché, but clichés come about for a reason, because they hold time-tested truths. For example, having a strong risk management strategy is imperative to successful trading – no one is going to argue that. There is a bit of overlap to some of the concepts below, but that is only because there are specifics to trading that need be highly emphasized.

You can get away with breaking all the rules except those related to Risk Management

You can break nearly every rule in the book and likely survive, but if you aren’t careful with risk management, in time you are almost certain to take yourself out of the game. Stringent risk management parameters are there to allow your trading edge to be profitable and keep you around fight another day; small risk-per-trade, overall account management, sticking to stop losses, etc.

You could have the best trading strategy in the world, but without good risk management eventually things will go awry and it may potentially lead to catastrophic results. Good risk management is sure-fire way to significantly reduce stress trading can cause, and thus allow for more objective decision-making. For more on this topic, you can also check out this webinar on risk management.

Better to trade too small than too big

This is of course an extension of the above, but its importance can’t be overstated. It is best to find a happy medium, where your trading size is ample enough to allow you to make ample profits and keep you engaged in the trading process, but not too big where it starts impeding on your ability to maintain objectivity and discipline, and of course puts you at risk of a catastrophic loss. Remember, everyone has different tolerance for risk – Trade with risk that you are comfortable with.

No position is a position

Often the best place to be is on the sidelines. This one gets lost in the fray as either the temptation to trade becomes too irresistible or it feels as though you are not doing your job as a trader by, you know, trading. However, a disproportionate amount of time should typically spent doing nothing than something.

Good trades find you

Staying focused and doing your research is important, but at the end of the day it shouldn’t be a strain to find opportunities which fit into your game-plan. Good opportunities tend to surface themselves. It’s better to under-trade than over-trade. Forcing the issue leads to unnecessary losses, frustration, and ultimately more mistakes.

Opportunities generally appear in clusters because of volatility cycles, and so you may be busy, then suddenly not busy. Stick to your trading plan and this should take care of itself. If you don’t have a trading plan, get started on one today.

When in doubt, stay out

This is an extension of “no position is a position” and “good trades find you”, but it also applies to managing your emotional states. If you aren’t feeling it, then stay away and come back later. If you are trading apprehensively due to doubt, find out the cause. Often times it is just simply because there isn’t a high quality trading opportunity out there at the moment, but it could be something deeper. Perhaps you are gripped by aversion to losses, or some other emotional state. You will want to get to the bottom of it by doing a little introspection. For example, if you are ‘trigger’ shy’ and avoiding losses, then try trading smaller, with a size that is inconsequential until you are feeling more confident.

Losses are part of the game, get used to it

This one can be really hard for some people to accept. In general, we don’t like to lose. But losing is something that a trader must get really, really comfortable with as you will be doing a lot of it. Remember, profitable trading isn’t about being right all the time, rather it’s about making more money when you are right versus what you lose when wrong. Just know that even the best of the best take a lot of losses during their career, and in fact pride themselves on their ability to take a loss and move on.

Shrink your watchlist

The less experienced you are the more important this is. Watching and participating in too many markets can be overwhelming. Markets don’t all trade the same, so familiarizing yourself with the various nuances of a small group can help aid in spotting opportunities. It’s a good idea to keep your world as small as possible but at the same time not limit yourself. Everyone has their happy medium. I tend to focus on the larger macro markets, but maybe you want to trade stocks, or shrink your focus down to a single asset class like equity indices or FX. Find what is comfortable for you and don’t think you need to watch and trade everything just because it’s available.

Routinely take a step back

Don’t go 100%, 100% of the time. If you do you run the risk of burn-out. Take days off, don’t skip on a vacation out of fear markets will move without you. They will be there when you return. Taking mini-breaks to refresh and periodically review your trading activity. This can go a long way towards staying on track and making improvements. If trading feels difficult, walk away and come back another day.

Trading is mostly stressful because we make it so

Trading is hard, no question, but a lot that has to do with the struggle against ourselves (i.e. maintaining discipline and managing our emotional states). A few things that commonly trigger avoidable stress: Not having a trading plan, taking poor quality set-ups outside (compulsive trading is a killer), taking too much risk when we know we are taking too much risk, monkeying with positions out of fear (often size-related).

It should go without saying, but be mindful and avoid doing the things which make trading more complicated than it needs to be. There is a good chance you already know what I’m talking about. Try to systematize your trading as much as possible and the variables that are subjective but could have some rules added to reduce some of the ‘fuzziness’. A simple example would be if you are a trend trader to use a simple trend filter to keep you from taking trades in a trend-less market or against the trend.

Have a trading plan

Everyone must have some type of plan. You won’t make it far if you are shooting from the hip. You don’t need to create a 50-page business plan, but you should have at least a framework that you can operate within that has a level of detail that answers all the important questions. And of course, risk management is the most important section. Start there. Even beginners with little idea of how to trade can start with a concrete plan for managing risk.

For the full conversation, please see the video above…

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX