Trading Rules

If you trade for a while, you will see a lot of rules lists. These are guidelines put together by individuals so they can, bluntly stated, attempt to avoid screwing up like they have in the past.

There is a lot of overlap among rule lists, and most of these lists aren’t worth much, particularly in cases where they comprise dozens of different rules. On reading these, one can conclude the writer of the list has made a glittering variety of errors that he believes he can circumvent if only he has a lengthy-enough document to follow.

I’ve got my own list, but it is short. I ignore some of these rules from time to time, and virtually every time I do, I regret it.

It has cost me a huge amount of money to formulate these “trading laws”, and I offer them up for free, with the hope that it will help some of you. If one day I can follow these rules absolutely consistently, I’ll be a much better trader for it.

  • Stops – a stop price must be in place at all times for all positions, and stops should be set generously enough so as not to exit a position prematurely.
  • Opening Bell – with the sole exception of updating stops, no actions should be taken in the first 30 minutes of any trading session.
  • Freshness – stop prices should be regularly refreshed, particularly when the market has moved in your direction a meaningful amount so that you can lock in some profits with tighter stops.
  • Emotional Awareness – use emotional awareness to your advantage, understanding fear often accompanies reversals in your favor and hubris often accompanies reversals against your positions. Analyze¬†reliable technical cycles (such as the McClellan Oscillator) to augment¬†your emotional awareness of market extremes.
  • Exits – the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes. Remember, a decision to enter a trade should be based on what may be; a decision to exit should be based only on what is. There’s a big difference in mindset.

Following these rules consistently isn’t easy. But every year I get a little better at it. I urge you to consider making these rules an important part of your trading life.