a principle or regulation governing conduct, action, procedure, arrangement,
etc.: the rules of chess.
We exist in a world governed by rules.
Rules of law, rules of physics, and rules of nature are each example(s)
of parameters imposed on us, or our surrounding environment, either
naturally or unnaturally.
Some rules are more rigid than others.
When or if rules are broken there are typically consequences – mostly
disastrous. Furthermore, even when a rule is broken and the outcome
is favorable, such reward for bad behavior presents just as grave a
hazard; being rewarded for bad behavior will cause more attempts at
what worked better than the "system" or pre-defined
rules until the law of big numbers catches up with you.
The breaking of the
rules is what defines the "discretionary trader", of which
there are two kinds: the ones that have BLOWN UP and the ones on their
way to blowing up. Following the rules is a critical skill to become
a successful trader.
Perhaps the most cerebral game of skill
is chess. Chess has a zero luck factor and your fate, win or lose, is
absolutely pure and sterile. In games that combine both skill and luck,
such as poker or trading, the players who impose on themselves the most
mathematically sound, logical, well planned, and pragmatic sets of
rules invariably rise to the top. Rules exponentially increase your
chance of winning in any game involving skill, luck, or both. I compiled
a list of what I believe to be some very important rules of trading to
set you on a path toward consistently profitable trading.
Prepare to Trade
verb (used without object)
1. To put things or
oneself in readiness; get ready: to prepare for war.
A successful trader is no different
than a great military strategist or a champion tournament poker player.
Their battles are typically won before the first shot is fired or the
first hand dealt.
The rules I have listed below are a
primer for your trading success. These rules will be amended periodically
as market conditions warrant (or “initial conditions” change) but
are a basic foundation for any market environment.
The #1 RULE
is to DEFINE your edge
- If 90% of people lose trading its probably best to not start
trading until you can define your EDGE in writing.
Now answer these questions BEFORE starting
How long will this "campaign"
(or “test”) run (i.e., 30 days, 90 days…)?
How much total risk capital will you
contribute to the total campaign or premise?
Which and how many vehicles will you
What is your "Daily dollar stop
loss" per system ?
What is your "Monthly dollar stop
loss" per system ?
What is your bet sizing plan if things
are going well?
Once the above foundation is set, then
follow the protocol - - also you must make a protocol for changing the
protocol in advance.
Also, when it’s time to trade, I
suggest you arrive 10- 20 minutes ahead of your scheduled trading hours
so as not to charge in the door and start punching buttons.
For me personally, I feel its key to
have the lab cleaned up, clear off my desk, get whatever beverages and
meals prepared, address and clear off all my voicemails/emails/texts,
turn off cell phones, and eliminate as many distractions that
can interrupt the designated trading session.
Inform family and friends and share with them that these designated
hours you are unavailable except for emergencies.
Study the various financial news outlets
such as; CNBC, Reuters, Bloomberg, Forex Factory for any news items
relative to whatever vehicle you are trading, or market conditions in
general. Know the trading calendar(s) for the financial indices, energies,
currencies, or other commodities you plan on trading. Know When Not
to Trade – like 5 minutes before the Fed's interest rate policy
meeting announcement or right into the Oil inventory numbers release
each Wednesday at 10:30 am etc.
If you are trading manually then review
the vehicle(s) you are preparing to trade in terms of: average true
range (ATR), volatility, percentage movements, current trend, and volume
since your last session in the subject vehicle.
Always analyze and review the status
of your current campaign. You should constantly analyze your campaign.
Another suggested tool is a trading journal so you can review both the
good and bad results and document the causality and look for ways to
improve for the next campaign.
Lastly, BEFORE you
leave your trading area, VERIFY that you have NO "open orders",
have a redundant backup process to make sure that you don't wake up
and find yourself in a trade!
Bonus rule: IF you EVER have a "trading
error" close your eyes and cover at "the market"
period ! - - try and NOT make errors! They, besides slippage and commissions
are the destroyers on your monthly P&L...
prepared is an ongoing
effort and process.
Some of the rules listed
above will simply become
part of your routine.
The key is to prepare
and not become lazy or
complacent - - I will
strongly suggest that
when it comes to trading:
you are either getting
better or getting worse
- - Entropy or changes
in "Initial conditions"
are NOT your friends ...
You should begin every
session by running over
you own set of rules much
like a commercial pilot
runs through a pre-flight