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Trading Rules

Not so much rules as guidelines, the following points have been compiled over my career and form the philosophical basis for my trades. I keep several of them written on a board above my trading desk. They are presented in no particular order of importance, except for the first three... the ones written on the board.

Follow your system. Everything else is noise.

Market action is designed to cause stress and confusion, play on weak emotions, and knock traders out of valuable positions at just the wrong time. You must know where to place stops to maximize your probabilities. You must be able to ignore all the shakes and wiggles that don't violate your stop.

Manage your emotions as well as your money

A trader who is always riding waves of hope, fear, greed and numerous other weak emotions will eventually find failure at his doorstep. Learn what aspects of your trading induce these weak emotions and eliminate them from your trading routine. By doing so, you enable yourself to trade from a position of strength, and your success rate will skyrocket.

Manage your position size.

If your position size is based on greed rather than reason, you've already allowed a weak emotion into your trade. With that door open, other weak emotions such as fear and nervousness are almost certain to creep in, and weak emotions lead to losses and untimely exits. This skill is really a subset of managing emotions, but it is important enough to list separately.

If you trade every time you have an opinion, you'll go broke.

An opinion is not a system. Trading purely based on opinion is yet another way for weak emotions to creep into a trade because opinions tend to be personalized. Of course, an experienced and successful trader will have a honed instinct, and following instinct is valid from time-to-time.

There is no such thing as risk/reward.

Such a postulation will no doubt rub a few folks the wrong way. Obviously, in any endeavor... including trading... there is risk and there is potential reward. But the statement is more about a method of thought than mathematics. If you have a good system and manage your risk, the reward will take care of itself. I have seen countless losing trades justified because of a close stop and a distant target, but successful trading is about a winning methodology and controlling risk.

Headlines are old news.

With few exceptions, news hitting the headlines has already been priced into the market. What people consider reaction to news is really just the market getting on what it wanted to do in the first place. In other words, the market uses news as an excuse rather than a reason. So, the best times to factor news events into trading occur when the market's reaction to news is a surprise rather than when the news itself is a 'surprise'.

Technical analysis is an inexact science.

Technical analysis is an approximating tool at best. If you find yourself zooming in on charts to judge trend line or pivot violations, you are more likely increasing your odds of getting caught in a head fake than improving your win ratio. Keep your eyes on the big picture.

Technical analysis is a market psychology tool.

The ultimate goal of a trader is to profit from shifts in market psychology or more specifically, from the price changes induced by shifts in psychology. Technical analysis is just one of many methods for judging psychology and so should not be used alone in one's trading. By extension, any technical analysis tool that does not have an easily-definable psychological basis is bound to be invalid.

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