Trading Plan Step 10 – The 10 Most Important Trading Rules
Only 10 Chris? Obviously, there are many more trading rules, some of them good, some of them pointless catchphrases. These are the 10 that I have found most useful over my journey and that I am happy to share with you because they are impactful. Enjoy.
- PROTECT WHAT YOU HAVE – This is the rule to rule them all. Really, it’s the only rule that matters. You MUST protect what you have. A former trader colleague of mine used to tell me that if you made it to the end of the year and still had what you started with, it was a good year. Anything on top of that was a bonus. I didn’t understand it at the time but there are so many good lessons tied up in it. Firstly, trading is hard. Really hard. It doesn’t come easily so make sure you treat trading – and the market – with respect. If you don’t, it will rob you blind. Secondly, defence before offense. Don’t get carried away with the millions you could make, before you have made them. Even then, you better have a damn fine plan to protect those millions once earned. Ultimately, have some humility and protect your capital the way a mother bird protects her young. And remember, if you lose all your capital, the game is over.
- TRADE WHAT YOU SEE, NOT WHAT YOU THINK – This rule came to me later in my trading journey and it was an epiphany. As I have written about in the newsletter and in this trading series, I went down just about every rabbit hole possible looking for the holy grail. I researched different indicators, studied a million strategies, and even spent time building trading systems – or at least attempting to. Then, this came along and straightened me up. It allowed me to simplify things, to realise that less is more, to understand that there is no holy grail, and to pay attention to the price action and what it is telling me… rather than creating ever sophisticated and elaborate ways to guess what it might or might not do next.
- ALWAYS USE A STOP LOSS – ALWAYS – This one is self-explanatory and really doesn’t require any more explanation. If you’re still not sure, then you haven’t been paying attention. Go back to the start of this Trading Plan series of articles and start again.
- CUT YOUR LOSSES, LET YOUR PROFITS RUN – An oldie but a goodie. You have to know when to hold ‘em, and know when to fold ‘em – god bless you Kenny. I first happened across it in Reminiscences of a Stock Operator, by Edwin Lefevre (if you’re serious about trading, make sure to read that book). A lot of people use it as a sound bite, something seemingly intelligent to say when discussing trading. There is more to it than that. It’s really telling you that you need to have a plan for managing risk. As I’ve said before, any dummy can buy stocks. People who make money have detailed plans for how to maximise their upside, and limit their downside. Get this right – no mean feat – and you’re well on the way to trading profitably.
- NEVER, EVER…EVER ADD TO A LOSING POSITION. EVER – Did I make myself clear? Some investors might like to ‘average down’ – that is, buy more of a stock when it falls so that they have a lower average entry price. They have a long-term view and, even when buying more, the position being added to probably still only represents a small portion of their overall portfolio. Adding to a losing position when trading can see your position size, and therefore potential loss, accelerate quickly. And that would violate rule number 1. So, don’t do it. Just don’t.
- KEEP EXCELLENT RECORDS – Document what you do. Have a trading plan. Log your trades and have a structure that allows you to review what has happened. Your trading outcomes are your data. As we are all becoming increasingly aware, data is very important and super powerful these days. Keeping good data will allow you to look back over what has worked and what hasn’t, and make adjustments to improve your outcomes. If you don’t have good data (or any data at all) from which to draw conclusions, you might as well just throw darts at a dart board.
- DON’T FALL IN LOVE WITH STOCKS – It’s hard not to do. Just as parents secretly have a favourite child, traders will undoubtedly have favourite stocks. But just as you wouldn’t tolerate your favourite child taking your vintage sports car for a joyride (Ferris Bueller style), you should not tolerate a favourite stock costing you money. When behaving badly, a favourite stock needs to be treated like any other and eradicated from your holdings. Do your best to treat stocks as vehicles that will help you to create or lose money. Nothing more. Don’t worry about whether they make buggy whips or sell tangerines (click no the image below to watch the clip – it will make sense). If you can do that, you will maintain the requisite objectivity.
- CONTROL YOUR EMOTIONS – Don’t panic and don’t get too exuberant. The market will test you. You will find yourself with a fistful of stocks, all showing a profit, and then you will wake up to a 10% demolition on US markets. You will have to move quickly. Figure out what you will hold and what you will dump. You will need to find order amongst the chaos. These things can and do happen. I have lived them. They are stressful times. Even more stressful if you don’t have a plan and you can’t control your emotions. The other side of it… don’t punch the air when everything is going well. Stay humble and, more importantly, stay focussed. It will amaze you how many times in your trading career that just as huge profits are mounting, suddenly they are yanked from your grasp – usually when you’re not paying attention because you are too busy punching the air. And finally, don’t worry if you miss a great trade. There will be more… and more… and more. The market isn’t going anywhere (unless capitalism fails and then we’ve all got far bigger problems).
- PAY ATTENTION TO YOUR TRADING COSTS – These can be a killer and so many people don’t pay attention to them at the beginning. They don’t understand the impact of their trade frequency and their trading costs on their account size. They simply trade a lot and think, if I have more winners than losers, I should be making a heap of money. Depending on your account size and how often you trade, transaction costs could be anywhere from 5-50% of your total capital over the course of a year. Imagine having to make a 50% return just to cover your trading costs. Yes, bizarre, but I have seen it happen. Treat trading like a business, be aware of what is coming in AND what is going out.
- DEVELOP A TRADING PLAN – This entire series has been about helping you develop a plan. Have you done it yet? Developing a plan, sticking to it, and refining it for improvement will put you ahead of 80% of your competition. Yes, it’s a lot of work (hopefully made easier by this series) but it is well worth it. If someone told me I could improve the probability of my trade (any trade) being a winner by 80%, I would be all over it. You should be all over this. So, what you are waiting for? Get on with it!
So team, that’s the end of the Trading Plan series. It has been… emotional. In a stroke of majestic timing, I received an email from a member – James – on the morning that I completed the series, some of which said the following;
Just want to say thanks for sharing all your charting and technical knowledge. As a fairly new investor the information (and entertainment) provided by you and the whole MT team is invaluable and has really helped turn my performance around – In particular your trading plan series.
Thank you James, for that amazing feedback to me and the entire team. And thank you so much to everyone who emailed me throughout the series, sharing with me their thoughts, asking for help, and being appreciative of the insights. I’m pretty confident that I speak for the entire team when I say that it is these interactions and the knowledge that we are genuinely helping people, that keeps us going.
Happy trading everyone.
If you are interested in learning more about trading and technical analysis, Chris hosted a webinar explaining how to analysis the ASX 20 using a 3MA strategy. You can access this webinar for free HERE