In this post, we would talk about some very important rules that complement our discussion on Strategy. Incorporating these in your Strategy would be like the icing on the cake.
Never trade with “scared money” I.e. money that you cannot afford to lose. It will impact your ability to take sound trading decisions.
Always place your stops on the system, as that ensures that your are out at a small loss if the market makes a big move against your position suddenly. Always use stops “at market”, not “at limit” as that would ensure an exit even with some slippage. Use trailing stops to protect your profits.
If you are stopped out, you should then re-evaluate the market as it is now a brand new position. Never be in a hurry to enter the markets again as you might get carried away in the emotion to “get your money back” through revenge trading.
Never add to your losing positions with the hope of averaging your entry price. It may work some times, but will straddle you with big losses most of the times. Adding to losing positions has its origin in ego or hope, both of which can and do bring financial ruin in the market.
You should rather add to your winning positions by careful pyramiding. Although you do raise your average price by pyramiding, you are adding to a market that has shown you that you are right
Always trade from a definite plan and strategy. Execute your plan without paying heed to the current emotion of the market. Never form an opinion, and act on it in the heat of the moment or chase momentum.
You have low odds when you try to pick a bottom. Instead of trying to pick the bottom, use a close stop.
The best thing you can do when you're right is NOTHING, except trail your stop and add to your winners.
Take trading breaks. Get away from the markets at regular intervals. This will give you a fresh outlook on and a more objective view of the markets. Trading every day without a break dulls your judgment and lessens your efficiency.
Trade opposite a 90% majority opinion. Avoid following the crowd. If everyone seems to be going in one direction, look for a reason to go in the other direction. When most of the advisory services are going one way, get ready to take a sideline position or to take the opposite position. Consider a market to be overbought when 90% of the analysts are bullish, and oversold when 90% are bearish.
This concludes our series of posts on Strategy, the second pillar of our Trading System. Please click on "Next Post" to delve deep into our method of selecting the best of the trades, objectively - Trade Selection.
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