The mantra for successful trading: “Let your winners run and cut your losses.”
It’s about personal discipline and managing your capital account with the goal of minimizing losses. With the Trading Plan you think in terms of probabilities. With your Trading Rules you think in terms of Capital Preservation through psychological self-discipline.
Whereas the Trading Plan is the support line for your trading activities, the Trading Rules is the resistance line.
Just to make sure that you understand the difference between the trading Plan and trading rules, the Trading Plan is a rule-based system on how to select, execute and manage trades. Trading rules, on the other hand, are about minimizing losses – and stress.
They are about discipline and Trading Rules Discipline doesn’t just mean trading related activities. It also includes life-stresses. This means trading the probabilities and not your problems. For instance, if you suddenly need some extra money, don’t go into a trade hoping and praying to make a quick profit. Likewise, don’t stay in a trade based on hope. When looking back to the Trading Rules as a resistance line: the first instance is an overbought condition in your discipline and the other is an oversold condition.
To me, this all comes down to developing detachment. You cannot become emotionally attached to a trade or take a trade for emotional reasons. Sometimes becoming attached to a trade is not just about the price and potential gains, it becomes about the psychological necessity of being right. And sometimes it can just be about all the work put in analyzing the trading – you have a personal investment of time and energy that you want to pay off.
The first step in developing this detachment is realizing there will be losers. The second is having the discipline to let the winners run and cut your losses.
It seems the most difficult aspect of minimizing losses is getting out of losing trades. But there is another aspect of some difficulty: Selecting a reasonable amount for an entry.
The entry amount suggested for novices is the 2% rule. Never have more than 2% of your account on the table. If you are going to have more than one trade open at a time, the risk from all trades should not exceed 2%.
There is, of course, personal tolerance and certain trading method factors. The thing to keep in mind is not so much about how much you’re willing to lose on a trade, but how well you can withstand a catastrophic loss where the stop order is not filled until way passed your setting, or you have several losses in a row.
Overtrading is a concern. If your account is dwindling mostly from commission cost of the spread in forex, you are certainly overtrading. Other signs are trading on a hunch or jumping in to get a rush. Jesse Livermore gets to the point: “I will say this again. I never made my money by trading. I made my money by sitting tight.”
My Trading Rules
I have based this on recommendations I’ve read and trading the Wyckoff Method for long-term swings.
• Never have more than 5% of the account balance on the table. (This may change if I find I can manage more trades at once.)
• Do not trade more than 5% of the account balance on any one trade (don’t overtrade).
• Enter trades at 2% risk.
• Add no more than 1% to new positions on winning trades with no more than three new positions.
• NEVER add to a losing trade.
Trade the System:
• Follow the Trading Plan checklist on each trade.
• Never make an alteration to the Trading Plan during a trade.
Stop trading if:
• If the trading account is drawn down below 35%
• If you have lost five consecutive trades.
• If you are otherwise distracted.
When trading is stopped:
• Set limit orders on winning trades at the most conservative profit objective. And tight stops.
• Close losing trades.
Make regular reviews:
• Review and Journal each closed trade twice: immediately after the close and again within one week.
• Review and update the expectancy ratio, the equity curve, etc. every week. Then review quarterly and yearly results at the end of each period.
• NEVER be without properly positioned stop.
• NEVER back off a stop once set.
• ONLY move a stop forward within the trend if a profit objective phase/section has been reached.
• Always place stops based on the charts and never on hopes or prayers.
The Five Laws of Gold
1: Gold comes gladly and in increasing quantity to any man who will put aside 10% of all he earns to build an estate for his family and future.
2: Gold labours diligently and contentedly for the wise owner who finds it profitable employment.
3: Gold clings to the protection of the cautious owner who invests it under the advice of men wise in its handling.
4: Gold slips away from the man who invests it in businesses that he is not familiar or is not approved by those skilled in its keep.
5: Gold flees the man who would force it to impossible earnings or who follows the advice of tricksters or schemers or who trusts it to his own inexperience and romantic desires in investment.