This post contains the 8 rules that have been developed through the years of continuous losses and stresses. Only when I started applying these rules with discipline was I was able to maintain a level of consistency with trading.
Do not think if you just apply these rules you will become profitable. However, respecting these rules and applying them with brutal discipline, you are most likely to develop into a consistently profitable trader.
These rules have been developed after many losses that I have accumulated in trading. These are the lessons I have learned through my own experiences. I have compiled these rules that will allow new traders to avoid the pitfalls they encounter.
These rules are printed on my wall. It’s taken me 8 years to develop a set of rules that allow me to trade with a carefree state of mind. I will say that with the application of these rules, you will be on the road to succeeding in trading because the mistakes that I have made, all due to me not focusing on my own psychology.
These rules work for me. Why can’t they work for you?
- Always Accept The Concept Of Uncertainty – You will never know how the market will behave. Your job is to never expect something to happen. You are armed with capital that must be used to exploit the changes in market behavior at high probabilistic areas. Applying a mindset of thinking in probabilities will prevent you trading with an irrational, emotionally imbalanced mind. Take the signal at the appropriate area of entry and accept that you have no control over the outcome until you decide when to exit.
- You Will Never Predict The End Of A Move-Take Whatever Is Given To You – Unless you pay yourself for the efforts of dedicating the time to educate yourself in this game, you will never see the true beauty of trading. Trading is a journey. Always Pay Yourself. Aiming for home runs guarantees you will get a strike out. Set a target amount of pips and appreciate it when they are available to be taken.
- Always Determine Your Risk. TRADE SMALL. Remember this, the gambler focuses on how much he can win, the trader knows how much he can lose. If you enter trading with hopes of becoming a millionaire after one deposit and trading for a week then send me over your capital via PayPal, at least it will go to good use and not be given back to the market in losses. Trade small relative to your account size, position sizing can be understood like this: In poker, in order to survive the concept of variance, you must have a certain amount of buy-ins that will provide you with the flexibility to play optimally. This is no different to trading. If you are looking at trading one standard lot, what will it cost you if you were to lose 10 straight trades in a row? Will you be able to handle the drawdown? Trading the correct position size allows the mind to trade with a carefree state of mind. Try it, if you have a balance of $500 and you make a trade with 0.01 micro lot. Can you sleep at night? You probably would forget the position is on because the exposure would be so minimal.
- Be Loyal To Your Stops – By sticking to your stops, you are managing the emotional triggers that lead to imbalances. Maintain a principle of acceptance. Accept that you have no idea how the trade will play out. Embrace the uncertainty. However, accept that you are in control of the risk exposure and accept that if your stop is hit you are in the right mind set to exit. E.g. let’s take poker again, if your buy in is $50, do you, halfway into the game say can I take back my buy in? NO! you wouldn’t…You have accepted the cost of playing the game, so your job is to manage the way you play with your poker chips and exploit weak players. By sticking to your stops you are practicing sound money management and allowing yourself to close losing positions and focus on new entries.
- Aim For Accurate Entries, Not Perfect Ones. – This is something that took me a while to overcome. I always thought my entries must be perfect in order to make money. However, how are you going to accept the concept of uncertainty if you believe that every trade you make is perfect? Do you have the conviction that because it was profitable it was a perfect trade? No trade is perfect. Trying to find a perfect trade will create over analysis, doubt and eventually you will miss out on opportunities because the criteria of perfection is your priority. You see, by focusing on being accurate, you then turn your trading towards a more probabilistic approach. Being accurate prevents the conflicting thoughts of this trade is going to be a perfect run, this move is going to make so much money to a more sincere way of thinking; I have made 20 pips so far, I believe my entry was accurate enough for it to be profitable, I will take whatever is available. Take whatever you can from The Uncertainty Of The Markets.
- Always Protect Your Profits – DO NOT UNDERESTIMATE THIS RULE – Many times I have allowed trades that were profitable to turn into losers because I allowed emotional triggers to steer my attention away from the goal of taking whatever I could from the market. Be cautious, the profit you have in a trade has been provided by the probability of your analysis outcome being positive. Remember, the moment you entered into the trade, you paid attention to how soon your stop would be hit. On the flipside, why do you focus on how much the position can make when it’s in profit and not focus on the event of your stop being hit? This is uncertainty at its best. Manage your profits and your emotions will be managed correctly.
- Never Think You Are Better Than The Market – If you ever have this state of mind, you will be humbled by the market. The market can be as irrational for as long as it desires. You are up against the market makers who have the deepest pockets in the game. Never think you will outsmart the market. Most of the time it will win. Always maintain a level of respect for the market. Remember, your trades that you take will not move the markets, but the markets will move for or against you. Your job is to act decisively and adapt to the flow of the market’s behavior.
- Give Your Methodology The Chance To Succeed – The only way to truly determine an edge in trading, is if you give your methodology the chance to succeed over a sample size of trades. Take 30 – 50 trades, trade small, log the wins and losses, log your emotions and review the effectiveness of the method at specific points in the market. In order to trade with a probabilistic mindset, you have to apply the theory of probability outcome. Do not have a conviction about your method after 3 trades. Remember, you are dealing with random variance of the trades going wrong, so your aim is to apply your method effectively so that when the variance of losses occurs, you understand that it’s a drawdown that you can recover from because your exposure was small and you are trading for the long run.
I hope these rules have given you insight into the pitfalls that I have experienced in my own journey. I kid you not, the above rules took me 8 years to realize and implement in my own trading. I have blown through so many accounts. Over and over again. Trading really tests you. Are you worthy to withstand the highs and lows of trading? I guess it’s really about having the dedication. You have to love the process. It has to be something that you continually think about. Without being persistent and always looking for a better way to improve my trading. I would have simply quit.
Embrace change my friends. This game will reward you for your efforts. If you choose to let it.
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You can also follow Tino on twitter at @Tradersreality.