There are many different ways in which you can trade. You can day trade, you can swing trade, you can long term trade, you can trade purely off technicals, you can trade purely off fundamentals, you can trade by mixing technicals and fundamentals, you can trade by reacting to news flow… this is starting to feel like that scene in Forest Gump where Baba rattles on for what seems like forever about all the different kinds of shrimp. You get the point. Trading is vast. There are an almost infinite different number of ways in which you can tackle it. There is only really one thing though that you can do in order to make a success out of it. Well, the holy grail then?! Sure yeah ok, that holy grail is having a set of rules – and this is the important part – and STICKING TO THEM.
So yeah ok, each different way of trading requires specific rules to manage risk, determine entries, set stop losses and so on. These are not the rules I am talking about. Those are the technical inputs to your strategy or method that you will pretty much always be working on and improving upon. I am talking about the basic rules that ensure success. And yeah, they are going to be different for everyone as everyone’s personality is different, but to me the overarching rules of whatever kind of trading I am doing are as follows:
Don’t trade before 09:30
09:30 might be an arbitrary time, or might not be at all applicable in the market that you are trading, but it’s more of a concept anyway. I was having too much beer and being to chicken to go and talk to the randoms at the bar, but that’s another story, when I met a guy called John (really) who trades the ALSI. John who trades the ALSI said something to me that resonated… “You can’t see what the trend is if you are the first guy in the market.”. I mean it’s so obvious. So don’t trade before 09:30 basically means that before you get involved in any trade, spend some time just watching and getting a feel for what the market is doing before you get into a position.
If it’s trending in my direction, stay in
It’s really simple too, but so unbelievably difficult. I really struggle here to be honest. A wise and powerful Jedi very recently told me that if you had planned to scalp the trade and you got out and it then trended for the rest of the day, don’t beat yourself up as your plan was never to ride the trend but rather to scalp. In that case you can just keep scalping it. If your plan is to take a daily view and ride then trend, maybe consider a smaller position and a wider stop loss.
Keep tight stops
Almost every time I see my rear end up close is when I allow a trade to go too far against me. Being disciplined about cutting losers quickly is difficult, but supremely important.
Don’t average down, ever
Well, you couldn’t to this if you kept a tight stop now could you? In any case, the temptation to just add some and bring down your average price to get you out quickly has gotten me in trouble almost every single time I’ve done it. If a stop slips, that’s still recoverable. If a stop slips, you add, the new stop slips, you add… eventually you die. Just at your desk. Right there. Death from averaging down. It’s not pretty.
Don’t go tilt
You know that downward spiral of worse and worse trades that get bigger and bigger and goes past so fast you are not even sure what happened, but someone clearly must have just withdrawn all the money from your trading account because it’s all gone and you’re not even sure what your name is anymore? Yeah, don’t do that. They key here is to recognize when you are falling into the trap. It’s like a switch that gets flipped and you just go mental. Learn how to feel when that is starting to happen, and learn how to get up and leave for a while when that is happening. Seriously, go outside, get some air, do some exercise or whatever it is that you need to do in order to completely take your mind off the market. When you feel that pinball machine start to vibrate and see all the little lights start to flash because that bad boy is on tilt… walk away. You can come back later when your head is clear. Over time I think you will learn to control the tilt and avoid it completely, although I think that takes a while to master. Anyway, the key is acknowledging when you are entering into that spiral and stopping it before you can do too much damage.
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