Saturday, April 25, 2015

The 10 Rules of Trading

Rule #1: Never Lie to Anyone.
Never lie to yourself about anything. Or to anyone else, for that matter. When people tell me that they are honest with themselves but can’t be completely honest with others (for whatever reason), I think they’re just complicating the whole problem. There is no difference between lying to yourself and lying to someone else.
If you feel comfortable lying in general, that’s going to catch up with you in the trading world. What happens when you lose a ton of money one day? Are you going to be tempted to hide that from others? From a loved one? If you can’t face up to your greatest weaknesses in life, how are you going to face up to huge losses in trading? And if you don’t face up to those losses, how are you ever going to improve?
Rule #2: Bank Your Gains.
Greed will kill you so fast in this business that you won’t even know what hit you. Traders online or in print brag about
how much they made on one trade. The ones who can make 100 pips on a trade are the ones who post their comments on discussion boards. Those are the visible guys, but you should know that those are the guys who play close to the edge. The harder you play, the harder you fall.
We hear a lot about the rule of expectation and building a system with a 1:1 or a 1:4 ration or whatever. This is all well and good, but all I want to know is whether you are willing to take profit off the table when you’ve got it. Why do we get upset when we take profit but the trade continues to make more money? You should never feel upset about that.
1 pip of profit is always better than any loss. Period. Never forget that.
And don’t forget – until you get the money into your regular checking account (you know, the one you can pay bills out of), the profit is all on paper. Take your gains!
Rule #3: Take Your Time.
Never rush into a trade on emotion. Get up early enough – or stay in front of the charts long enough – to get a feel for the market (see #4 below) before you do anything.
What if you see the most stupendous trade ever, the most amazing opportunity you’ve ever seen in the whole history of the world? Well, unless you’ve been sitting in front of the charts for at least 15 minutes to 1 hour, then you should probably let it go.
Racing into a trade is usually the result of emotion taking over. You never want to trade based on emotion. Usually trades based on emotion lack the kind of analysis that goes into profitable trades.
Remember, that the market comes and goes. There is always another opportunity. You will get another chance. If you enter a trade and it’s one that you entered based on emotion, then you should strongly consider backing out.
Backing out isn’t failure. You don’t want to hold on for a long time to a trade that you know was entered for stupid
reasons. Exiting an emotional trade is a disciplined move
And you know that every victory for discipline brings you closer to trading for a living.
Rule #4: Trust Your Feelings.
Ben Kenobi gave this advice to Luke Skywalker, and all Luke could say is “Well, I can’t see with the blast shield down,” or, in other words, “I can’t read where the markets are going unless I see everything.”
Well, you’re never going to have all the information. You’re always going to be missing some piece of information. You’re never going to get to peek past the far right edge of the charts.
In other words, you’re going to have to stay in touch with your feelings about the market. And you’re going to have to act on them.
If you have been a diligent student of the markets, then you have nothing to worry about. Look at the charts. Check them in different time frames and using all the tools you’ve
learned to use. Check with trusted analysts.
Then ask yourself, “How do I feel about the market today?” You’ll be surprised at how right you can be if you just listen closely.
Rule #5: Successful Trading is Boring.
Learning to trade successfully requires a lot of time reading and in front of the computer. There will be days you don’t trade at all, even though you spent four hours watching the charts.
While making money never gets boring, watching the charts is never much fun. Especially if you have to wait more than a few hours for a good trade.
Learn to pass the time by learning more and more about the charts you’re looking at. Watch them in different time frames simultaneously. Test different tools and indicators that you have never used before. Go back in time and see
how new strategies would work.
You can’t necessarily make the time less boring, but you can certainly use that time to your advantage.
Rule #6: Exits are More Important than Entries.
If you keep modest goals and do your homework before you trade, then where you get in isn’t the big deal.
Where you get out, not where you get in, determines your profit. That seems so easy to understand but many traders don’t think about it.
Most traders are worried about how far the trade goes against them and start to feel quesy as soon as the trade turns unprofitable.
Great traders don’t worry about that. They worry about whether the pair is reaching levels that bring out a stop loss. They also worry about whether they have taken all the profit out of a trade.
You should think more about where to get out rather than where to get in.
Rule #7: How Much You Risk Matters Most.
More than anything else, how much you risk determines how long you can stay in the game. If you’ve ever lost your entire account on one trade (or just a few trades), then you’ve risked too much. You can’t risk so much that a small move against you takes you out of the market.
Many traders get involved in the forex market because they want to make a lot of money quickly. This requires you to either start with a lot of money or risk a lot on each trade.
You should never risk more than 10% on each trade, and you should never use that much equity unless you feel very, very confident about your abilities. The name of the game is survival. You will survive longer if you can whether the big swings in the market.
Rule #8: Keep a Journal.
You should keep a trade journal and it should record, for every trade:
1. Currency pair.
2. Long or short.
3. Entry price.
4. Stop order.
5. Limit order.
6. Why you entered the trade.
7. Exit price.
8. Pips gained.
This information will help you build a history of good trades. You’ll make better trades if you have to keep track of them. You’ll have to convince yourself on paper of every move you make. Don’t worry about whether this will slow you down – you can always fill in parts of the journal after each trade.
Rule #9: Get a Coach.
I’ve said this a zillion times before. But it’s so important to get a coach. You should report to this coach on a regular basis about your progress. You should show your coach your trading journal and be totally honest about your mistakes.
Your coach doesn’t have to be knowledgeable about trading currency, but it will help. Most importantly, this person will help you:
1. Stay committed to a system.
2. Recognize your mistakes.
3. Plan for correcting mistakes.
4. Stay humble even when you are successful.
5. Stay grounded when you lose money.
Rule #10: Never Overtrade.
It’s too easy to make a few good trades and then start entering tons more. It’s also real easy to churn, to get out of trades too early, then back out of those trades and into more and more …
This cycle can only hurt you, and it’s symptomatic of traders who are not satisfied with consistent profits built up over time.
When you are a successful trader, you will occasionally feel the urge to bet the house, or trade a whole bunch, because you’re absolutely sure that you know where the market is going. These are the days that you should enter a regular order just like you always do, and then watch the trade turn profitable, and then get out. Just handle it like any other day.
If you start to overtrade, then talk to your coach. Get yourself back in line!

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