My 5 Rules of Trading
by: Colibri Trader
Nothing is more difficult than consistently and fairly profiting in trading. I don’t know of anything harder- textbooks and past data supply only a theoretical background for backtesting. Into this field, the outsider turns readily for “quick and easy money” and markets are anything but that. For some they might be for a short interval of time, but if you want to be consistently profitable in the long-term, it takes more than just relying solely on anyone’s advice. Knowledge born from the actual trading experience is the answer to why one profits; the lack of this knowledge is often the case of why one losses.
There is no such thing as a final answer to a trading dilemma. You can’t be 100% sure that you are right or wrong. A dozen of traders will come up with 12 different conclusions. It is the market that dictates whether you are right or wrong once you are in a position. The only way to make sure you are on the right side of the market is if your P/L is showing that. And in the end of the trading session, we can see that the normal market course throughout the session has been marked between greed and fear.
The Average Man
The “Average Man in the Street” that is often not really successful within his/her own field thinks that the market is too easy to get. After a few minutes on the phone with a broker or a visit in the office of salesman or after a fee paid for an “advisory service” the average man on the street is readily buying/selling something. In case that a profit is made, he/she believes that a smart decision has been made. Then the “Average Man in the Street” repeats the process… so on ad infinitum or until the trading account is emptied. Naturally people want more and fast losses tend to be neglected by our psychology, which leads to more losses and excessive trading. Equally dangerous is winning, which in most cases might lead to excessive trading. Usually, the “Average Man in the Street” knows close to nothing bout his broker, adviser or dealer. Questions like “how long have they been in business” or “what are their records” are not asked. The average man on the street does only understand a few of the one thousand and one ways they could get churned by their broker/adviser. No matter in what way one looks at it, there is nothing more difficult than succeeding in “Wall Street”.
On the other side, if the “Average Man in the Street” wants to self-educate himself/herself, there are higher chances of getting it right. Although, a certainty of success cannot be guaranteed. Past performance is not a guarantee for future returns. This statement cannot be more true in these circumstances. In my opinion, the primary factor for being successful in trading is sensing the general trend. There are numerous ways to do that, but the simplest and most common might be the best, as well. A sequence of higher lows and higher highs might sound like a cliche, but is probably the best way to figure it out. If that is difficult for some, a longer-time moving average might just do the same job. Therefore, the first thing in deciding which way to take would be deciding the trend and next seeking out the most likely winner. In our case, price action should come to help. In my trading course I have also outlined a trading strategy that I am using on a daily basis, which minimises risk and maximises the profit potential. It just shows my way of understanding the market and how I profit from it while minimising the risk to minimum. Thus, it might be said that it is a system showing how to manage risk properly by reading the market. Even if you don’t follow my trading strategy exposed in my trading course, you should try to use a strategy that is in line with great risk management rules. Sometimes, some rules are too obvious to be followed. Here are my 5 rules of trading that have been with me throughout the years.
1) Don’t risk more than 1-2% on each trade
This is a simple rule, but that is why it is so underestimated. I can’t emphasise enough how important it is to be risk-averse in trading if you want to last for long in this battle for investment survival.
2) Try to add more to your position
Do that only if your P/L shows that you are right. The trading strategy that I am using is based on this rule and it has helped me reach stellar returns on some of my trades in which the risk:reward ration has been over 1:30. In my opinion, the best trades are the ones that you stay for the longest until your P/L is proving that you are right.
3) Trend is my friend
Another cliche sentence, which has helped me stay on the right side of the market. If you think about trading the way I do, it could be a boring business, but at least one that makes money. I am not really interested in quick returns. I am not interested in penny stocks. I am not interested in the most popular trades that everyone is talking about. I like to do my own analysis. The more boring a trade looks, the better for me the trade is.
4) Waiting for correction
I don’t rush to trade immediately or impulsively. I am waiting for a correction or rejection of key levels. I do not trade on a gut feeling. I don’t like gambling and maybe that is what has helped me become consistent with the years. I like to see exactly what I am waiting for. In the majority of cases, that is exactly what happens, but you need to be patient.
5) Don’t talk about it
Although I am sharing most of my trading ideas with my community, I don’t talk about them among friends or other trading buddies. Trading is a lonely endeavour and requires full concentration. I believe that the more you talk about a certain trade, the more you are trying to convince yourself that you are right. This is so wrong. I can’t stand people who are trying to convince me (themselves) that their last trade is going to be such a winner. Instead of that, I prefer not to share any of my trades.
Those five principles might sound like a repetition to you, but they are essential. If you want to be profitable in the “battle for trading survival”, you should learn or at least re-consider them again. Stop for a while and be honest with yourself- how many times have you been neglecting those because a certain trade looks too tempting to take? If you are pondering for too long on this question, re-read this article one more time. It is not the rush that will make you money, but the sitting and the waiting. If you feel like you are missing on some of those trading qualities, please re-read some of my other articles for beginner traders, or if you feel like you are missing the overall picture, check out my professional trading course and if for any reason you are not happy with it- ask for your 30-days money back guaranteed option. Then, at least you can’t blame yourself for not trying.
Check out my recent article on MACD and how to trade with it.