Trading Rules
Every game has its rules. Unlike chess, trading doesn’t have rules that are written down, but they exist nevertheless. Breaking the unwritten rules of trading will result in a high probability of you losing money. Here are some rules that you should follow when trading:
- Undertrade rather than overtrade – Just because you have a certain amount of capital available doesn’t mean that you should use it all. For example, if you are a futures trader, don’t buy all the contracts you can. Professional traders tend to undertrade, putting perhaps 2% of their trading capital at risk on every trade.
- Don’t trade in too short a timeframe – Online platforms let you get in and out quickly, but beware of commissions. Also, the shorter the timeframe, the more prices will be affected by random noise.
- Always have and use a system. A good trading system will tell you four things – when to enter the market (and the direction), when to exit at a loss and when to exit at a profit. It should have positive expectancy.
- Always carefully backtest your system. Try it out against a variety of historical market conditions.
- Manage risk. Use stop losses. Always have a defined exit point at the time you enter a trade.
- Keep a trading log. Monitor your ongoing profit / loss ratio over time. If you are going through a losing streak, take a break for a while.
Remember to follow these rules when you are trading to increase your chances of winning this game.
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