1. You Must Have a Game Plan
2. You Should Follow the Game Plan
3. Always Trade With a Stop Loss
4. Diversify Your Trades
5. Trade the Big Moves While Filtering Out the Small
6. Trade With the Overall Trend
7. Do Not Listen to the News; Only the Market
8. Don’t Listen to Your Broker.
9. Have Money Management Rules
10. Most Important: Have the Discipline to Follow the Rules
Archives of “management rules” tag
rssRisk Management Game
A random person is pulled off the street and given $10,000 to trade. They have no prior experience which, on the bright side, means they have no bad habits, emotional baggage, or preconceived notions. Before trading they go through a five day crash course on market basics (order entry process, chart reading, pattern recognition, etc…). Suppose you are tasked with the responsibility of drafting a set of risk management rules which they are required to abide by. The objective is to make them survive as long as possible in the trading arena so they can learn as much as possible through first-hand experience.
What types of rules would you set?
The ideal approach of course is to structure a set of rules which makes it as difficult as possible to blow up the account while still leaving them open to accumulating profits. The goal isn’t so much helping them capture large gains as much as it is helping them survive. After learning how to survive, then they can modify their approach to being more aggressive and seeking larger gains.
Here are two of my top rules: (more…)
TRADING RULES
The hardest lesson I have had to learn is to “Act in my own best interest”. And to overcome and correct things like:
1) trading without a stop
2) refusing to admit I am wrong and to get out of a losing position
3) trading for the sake of trading
4) chasing entries (going long on the top tick, shorting on the bottom tick)
5) revenge trading (after a series of losses)
6) trading while sick or tired
7) trading without a plan (entry, exit, money management rules)
8) …
Anytime that I am in a position and either don’t know why I am, or what my profit target is, or what my stop loss is, etc. – I am not acting in my own best interest and have always struggled to close out the position immediately.
The times I have without any further hesitation, it turned out to be a wise choice and saved my butt from significant losses (more so than I already incurred).
The bottom line is that you will do much better in this profession if you can answer YES to the question – “Am I acting in my own best interest”?
Over-trading
Today I want to consider the subject of over-trading. This can take two forms:
- Frequency of trading: we over trade when we take trades in breach of our strategy.
- The amount at risk relative to our capital: we over trade when the size of our position threatens risk of ruin.
Frequency of trading assumes that firstly we have some sort of strategy and that you have have developed some rules to implement that strategy. And, secondly, we execute trades in breach of those rules – we take trades not within our rules. (more…)
Confidence, Discipline and Consistency
Consistently profitable trading comes down to just three simple things. The three are the trading psychology, the system, and the risk and money management. Trading psychology means the big 3: discipline, confidence and consistency.
The trading psychology takes precedence because it is needed to make sure that the other two are followed. When they are not followed, a good system and sound risk and money management rules are of limited value. When you have trading psychology that is not achieved through sheer will, you can have the discipline, confidence and consistency that make the most of your rules and system.
Sticking to your system for any length of time is nearly impossible without having confidence in your system. A trader may be able to focus intently on their discipline, and may even be able to stick to it for a time, but often the first handful of losing trades will kill that confidence and with it goes the discipline.
When the sting of a string of losses comes along, especially for a trader that has not established a solid confidence in their system, the temptation to deviate from the system, to second-guess it, is very strong. The natural impulse to avoid the pain is great and only grows with each subsequent loss. Faith in the system drops each time another loss occurs, even if the loss came to be from the deviation from the system. In these circumstances, doubts, fear and anxiety usually run high.
So what is a trader to do to avoid this situation, or to remedy it if this situation has already been encountered?
A great deal of trading psychology comes from expectations and reality. Frustration comes when expectations aren’t met by reality. When a person doesn’t know what to expect, then anxiety set in. When a person knows what to expect and what to do, then confidence is there. Worst case is when the primary point of reference is the recent and painful losses, and only slightly less difficult to be confident when matters feel very uncertain.
Since trading is an activity where losing trades will occur, the best way to establish confidence is to have a way to know what to expect – from the trading system. What is the way to make this happen? The trader can see what can realistically be expected and what can’t through system analysis and looking at the system metrics. The metrics give one a realistic and measured look at the capabilities and limitations of a system, particularly how many losing trades might be encountered during an overall profitable period of time. The primary benefit regarding the trader’s trading psychology is in the way the numbers from the analysis put things in a perspective that fends off the anxiety and doubt and makes for much easier discipline.
Once this is achieved, then the trader should track their metrics to ensure consistency and continuous improvement. It happens quite commonly for traders to experience major breakthroughs once they put in place the habit of analyzing their system and tracking the metrics. Confidence, discipline and consistency are the natural result of this activity, and frequently initiating this practice marks the turning point in the careers of many traders. It is vital as part of trading psychology that one properly analyze the metrics and track their numbers, as backtesting alone will only help to a limited degree.
Overconfidence in Trading
Overconfidence bias is an magnified belief in your competence as a trader. Any trader who finds themselves thinking that they know the business inside-out and that they have nothing more to learn and that profits are theirs for the taking, may well suffer from an overconfidence bias.
Dangers of Overconfidence
Overconfident traders tend to get themselves into trouble by trading too frequently or by placing tremendously large trades with the plan of making a killing. It’s not inevitable, but an overconfident investor invites misfortune.
Are You Overconfident?
If you want to identify whether you have a tendency to be overconfident, ask yourself, “Have I ever delayed or reversed a decision because I couldn’t accept that I was wrong?” Likewise, you could ask yourself, “Have I ever placed more on a trade than what I know is really sensible?”
Overcoming Overconfidence
One way to overcome an overconfidence bias is to stick to a strict set of risk management rules. These rules should limit the number of markets you invest in, the number of Contracts for difference you trade at one time, how much you are willing to risk on any one trade and how much of your account are you willing to lose before you take a break from trading and re-evaluate your trading strategy.
Trading Quotes
| The tape tells the truth, but often there is a lie buried in the human interpretation Jesse Livermore |
| Charts not only tell what was, they tell what is; and a trend from was to is (projected linearly into the will be) contains better percentages than clumsy guessing R. A. Levy |
| The biggest risk in trading is missing major opportunities, most of enormous gains on my accounts came from 5% of trades. Richard Dennis |
| Your human nature prepares you to give up your independence under stress. when you put on a trade, you feel the desire to imitate others and overlook objective trading signals. This is why you need to develop and follow trading systems and money management rules. They represent your rational individual decisions, made before you enter a trade and become a crowd member. A. Elder |
What makes a trader consistently profitable?
There are three things:
1) Having an edge, which is some methodology for determining with reasonable accuracy the relative probability of the market price hitting your profit target before it hits your stop loss price. An edge is provided by a set of trading strategies, and a set of rules for when to use which trading strategies (briefly, when to follow a trend, when to fade a trend, and when to stay out.)
2) The discipline and emotional fortitude to follow the rules of your trading rules flawlessly.
3) Sound risk and money management rules.
Sound money management and risk control are the keys to being a profitable trader. It is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure. (more…)
10 Attributes Exceptional Traders possess
- A persistent unquenchable motivation to compete and achieve personal stock market mastery
- A personally developed hands-on strategy in writing that fits your personality.
- The ability to be brutally honest and objective about your beliefs and weaknesses.
- An inner resiliency to weather all market storms with little emotional scar tissue.
- Well-defined risk management rules and an ability to accept responsibility for losses.
- Unassailable confidence in your system and yourself.
- Discipline to follow your methodology and act decisively.
- A strong ethic for working hard but also working smart.
- Patience and an ability to wait for high probability trades to materialize.
- A willingness to embrace change, to modify your thinking, to rewrite your methodology and transform yourself.
10 Rules for Traders
Never add too a losing trade. In adding to a losing trade you are already wrong but now become more wrong with a bigger trading size. Adding to losers makes you a counter trend trader that usually ends badly.
- Never lose more than 1% to 2% of your trading capital on any one trade. This means use position sizing and stop losses so when you are wrong the loss is not a big deal.
- Never trade anything you do not understand 100%. Stay away from trading futures, forex, or options until you understand the risk and how exactly they work.
- Always trade with the trend in your own time frame.
- Only look for low risk, high reward, high probability setups , when there is nothing to trade, trade nothing.
- Trade the chart and price action, not your own opinions or predictions.
- You have to trade your own way, the trading style that you are comfortable with that fits you.
- If you do not have a full trading plan with rules on entries, exits and risk management stop trading until you create one.
- The size of your wins and losses ultimately determine your trading success regardless of your winning percentage.
Your risk management rules will ultimately determine the success of your technical trading system.
