DIR Return Create A Forum - Home
---------------------------------------------------------
profxvictory
HTML https://profxvictory.createaforum.com
---------------------------------------------------------
*****************************************************
DIR Return to: General Discussion
*****************************************************
#Post#: 290--------------------------------------------------
10 Golden Rules of Trading
DIR By: fxvictory
Date: January 3, 2015, 6:25 am
---------------------------------------------------------
The 10 Golden Rules of Trading
1 Introduction
In this article we cover the few important rules that should
never be broken in trading. If you can apply these rules
consistently, and with discipline, you will be well on the way
to being a profitable trader.
The rules we cover are:
o Have specific goals and objectives
o Be consistent and disciplined
o Let profits run
o Cut losses short
o Never add to a losing trade
o Don't take too much risk
o Only trade positive expectancy systems
o Minimize all trading business costs
o Be well educated
o Don't trade scared money
Each of the rules will now be discussed.
#Post#: 291--------------------------------------------------
Re: 10 Golden Rules of Trading
DIR By: fxvictory
Date: January 3, 2015, 6:26 am
---------------------------------------------------------
2 The Golden Rules of Trading
The following sections outline a set of rules that can
significantly improve your chances of success if they are
understood, practiced, and implemented consistently in your
trading. These rules have been learned the hard way, by study,
research, trial-and-error, and the inevitable mistakes that
everyone makes when they start a trading business.
We hope that you can learn from the work we have done, and
benefit from our experience. The rules will now be discussed.
2.1 Have specific goals and objectives
Few things are more important to your trading success than
having set (i.e. written) goals and objective for what you are
aiming to achieve. It is amazing to me how often we hit our
targets, meet our objectives, and reach our goals only when we
articulate them and write them down.
For any business to be successful it must have measurable
objectives that are actually achievable. In trading (obviously)
the primary objective is to make money, but it is important to
have other objectives that are not purely cash-related. We must
always remember that reward and risk go hand-in-hand in trading
and that we cannot expect to achieve high returns without
planning for high risk (i.e. draw-downs).
Your objectives and goals will be very specific to you, but they
must have the following characteristics to be useful:
o Be measurable (in completion and timeframe)
o Be achievable
o Be worthwhile
o Be positive
As an example, here are some of our current objectives (this is
only a partial list):
o Develop 2 new positive-expectancy trading systems each year
o Make fewer errors implementing our trading systems each year
o Achieve a return to maximum draw-down ratio of 1.5:1
o Take 2 weeks vacation each year
Note that only one of them is about making money, and that has a
measurable objective that is relative to draw-down, not absolute
(i.e. make 100% per year). If you know what you are trying to
achieve, and when you are trying to achieve it, the whole
business will be focused on meeting
your objectives and help guide you to only pay attention to
things you really want to achieve with your limited time and
resources. This will also give you a way to measure the success
and progress of your trading. Generally traders with
well-defined objectives will be much more successful than those
that do not have pre-defined goals.
2.2 Be consistent and disciplined
In order to realize the full potential of your trading systems
it is critical that you take every trading entry, adjust every
stop, and close out every trade as and when your system says you
should do. This takes extreme confidence in your trading
systems, good robust reliable technology, and the mental
discipline to stick to your trading plan whatever happens
(assuming it is complete).
An underlying assumption about being consistent and disciplined
is that you have a pre-defined plan for every situation you may
face in your trading, so that you know how you are defining what
being consistent is. Your plan needs to include at least the
following items:
o All your trading rules for entering, adding to, and exiting
positions
o What you will do if your trading computer, internet
connection, broker, power, telephone
etc. fails
o What you will do if you are unable to trade
o What you will do if you lose X% of your account
o What you will do if all the markets are closed and you can't
exit your positions
Unless you write the answers down to all these issues, you
cannot be consistent and disciplined in your approach to trading
and if you lose money you will not know whether it is because
you didn't follow your plan, because your plan is incomplete,
because your systems do not work, or simply because you are
going through a losing period. ;D
#Post#: 292--------------------------------------------------
Re: 10 Golden Rules of Trading
DIR By: fxvictory
Date: January 3, 2015, 6:26 am
---------------------------------------------------------
2.3 Let profits run
This simple rule is the key to being a successful trader. It is
three simple words that are very hard to actually implement.
When we get a profitable trade our natural fear of losing the
unrealized cash kicks in and we truly want to close it out now
and take the money. Most trading consists of long periods of
small winners and losers followed by a few huge winners that
make the difference between overall profitability and simply
breaking even or losing due to trading costs(commissions,
spread, and slippage).
It is our ability to let the huge winners become just that -
huge - that determines how we will perform overall during the
year. The key to letting winners run is to have trailing stops
that are outside the daily noise of the market so that they are
not tight enough to get stopped out during 'normal' trading.
This means being prepared to give up a significant portion of a
winning trade's open profit and is the thing that makes this so
hard to implement. In fact, we should be adding to a winner and
widening stops rather than working out how tight our stops can
be to capture maximum profit. The trade has already shown you
that it intends to be a winner, and the chances are it is a
low-risk idea to add to the position now rather than 'strangle
it' with stops that are too tight.
It is very important that your position management rules allow
for large winning trades, and that the rules are pre-defined and
understood before you place the trade. This will allow you (if
you have confidence in your method and discipline) to stick to
your rules when you do get the big
winner.
2.4 Cut losses short
This is the sister rule to the previous one, and is usually just
as difficult to implement (although it
is very easy to define). In the same way that profitability
comes from a few large winning trades, capital preservation
comes from avoiding the few large losers that the market will
toss your way each year. Setting a maximum loss point before you
enter the trade so you know before-hand approximately how much
you are risking on this particular position is relatively
straightforward. You simply need to have a exit price that says
to you 'this trade is a loser and I will exit before it gets any
bigger'. Due to gaps at the open, or limit moves in futures we
can never be 100%
certain that we can get out with our maximum loss, but simply
having the rules, and always sticking to it will save us from
the nasty trades that just keep on going and going against our
position until we have lost more than many winning trades can
make back.
If you have a losing position that is at you maximum loss point,
just get out. Do not hope that it will turn around. Given that
trades are either winners or losers, and this one is shouting
'Loser' at you, the chances that it will turn around and become
a large winner is tiny. Why risk any more money on this losing
trade, when you could simply close it out (accept the loss) and
move on. This will leave you in a much better place financially
and mentally, than holding the position and hoping it will go
back your way. Even if it did do this, the mental energy and
negative feelings from holding the losing position are not worth
it. Always stick to your rules and exit a position if it hits
your stop point.
2.5 Never add to a losing trade
One of the few trade management rules that we can state we never
break is 'Never add to a losing trade'. Trades are split into
winners and losers, and if a trade is a loser, the chances of it
turning right around and becoming a winner are too small to risk
more money on. If indeed it is a winner disguised as a loser,
why not wait until it shows it's true colors (and becomes a
winner)before you add to it.
If you do this you will notice that nearly always the trade ends
up hitting your stop loss and does not look back. Sometimes the
trade turns around before it hits your stop and becomes a winner
and you can count yourself very fortunate. Sometimes the trade
hits your stop loss and then
turns around and becomes a winner and you can count yourself
unlucky. Whatever the result, it is never worth adding to a
loser, hoping that it will become a winner. The odds of success
are just too low to risk more capital in addition to the initial
risk.
2.6 Don't take too much risk
One of the most devastating mistakes any trader can make is
risking too much of their capital on a single trade. One thing
is certain in trading and that is if you lose all your capital
you are out of the game. Why risk so much you could be prevented
from continuing? There is a saying in
poker than going all-in (risking all your chips) works every
time but once. This is true of trading.
If you risk all your account on every trade it only takes one
loser to wipe you out (and no trading method is 100% accurate),
so you will be out of the game at some point - it is only a
question of time.
In general, we only risk 1-3% of the available capital allocated
to a system on any individual trade. This is calculated using
the size and, the difference between our entry price and our
maximum stop price, and the amount of capital allocated to the
system. With the win probability
and ratio of size of winning trades to losing trades we are
almost certain never to lose all of our trading capital. In
fact, the chance of us hitting our maximum drawdown for the year
is tiny.
All trades should be of a size that almost seems insignificant.
If you are worried about the size of a trade then it is too big
and you should reduce the size immediately. Remember that
longevity is the key to making money by trading - slowly over a
long time with minimal risk, is always preferable to rapidly
with too much risk. :D
#Post#: 293--------------------------------------------------
Re: 10 Golden Rules of Trading
DIR By: fxvictory
Date: January 3, 2015, 6:27 am
---------------------------------------------------------
2.7 Only trade positive expectancy systems
If you have a positive expectancy trading system, the only
factors that determine how much money you will make per year are
the number of trades the system generates, how much capital you
allocate to the system, and how accurately you implement the
trading signals. If you do not know whether your trading system
is positive expectancy then why are you trading it? Expectancy
is calculated using the profit or loss on each trade (net of
trading implementation
costs) divided by the initial risk (using your stop loss) and
then taking the average of this number of a series of trades.
Systems that have positive expectancy will make money on average
and those with negative expectancy will lose money.
Successful traders only trade systems where the odds of success
are in their favor (i.e. the system is positive expectancy) so
they know that making money is the result of accurately
implementing the system and not just pure luck.
2.8 Minimize all trading business costs
Some trading systems have only marginal profitability, and
trading implementation costs (commission, spread, and slippage)
can be the difference between profitability and making a loss.
With the easy availability of modern electronic brokers, and
fully-automated trade processing and
execution, it is definitely worthwhile looking for a very low
cost way to implement your trading system. High commission, wide
spreads, and large amount of slippage can be reduced
considerably simply by carefully choosing a broker. This can be
the difference between a system
(especially a high frequency one) being useable or not. Paying
too much for trade implementation is an avoidable way to lose
money.
2.9 Be educated
In order to compete at the highest level in the trading business
and be one of the few truly successful participants you must be
well-educated about what you are doing. This does not mean
having a degree from a well-respected university - the market
doesn't care where you were educated.
Being well-educated means that you have thoroughly researched
and tested your trading ideas and know why your trading system
worked in the past and is continuing to work now. It means
understanding all the technology and applications that your
system needs to perform accurately.
It means understanding your goal and objectives and how trading
will achieve these. It means understanding yourself and how your
personality affects your results. It means understanding the
markets and instruments you trade.
In order to succeed you really need to become an expert in your
own trading business to understand how it all fits together,
when it is broken, and how it can be improved. As with all
worthwhile endeavors, this takes commitment, hard work,
dedication, and more hard work.
2.10 Don't trade scared money
Lastly, no one ever made any money trading when they had to do
it to pay the mortgage at the end of the month. Having a
requirement to make X dollars per month or you will be
financially in trouble is the best way I know to completely mess
up all trading discipline, rules, objectives, and
leads quickly to disaster.
Trading is about taking a reasonable risk in order to achieve a
good reward. The markets and how and when they give up their
profits is not under your control. Do not trade if you need the
money to pay bills. Do not trade if your business and personal
expenses are not covered by
another income stream or cash reserve. This will only lead to
additional unmanageable stress and be very detrimental to your
trading performance.
3 Summary
In this article we have covered the rules that we believe should
never be broken in trading. If you work on never breaking them,
your trading should improve dramatically.
We sincerely hope this information has helped you to improve
your trading performance.
Good luck in your trading.
Paul King is owner and head trader of PMKing Trading LLC, a
Vermont-based proprietary trading company founded in May 2002.
Paul has published a series of eBooks and articles about what he
considers to be the important aspects of trading.
*****************************************************
Page 1 of 1