Sure everyone talks about following rules. When I started trading I knew I had to get serious about staying disciplined, following practical risk management techniques to minimize losses.

When I realized it boiled down to having a mindset of being willing to accept being wrong, it became easy to see that rules are all about avoiding the negative, and in trading, anything aside from not making money can arguably be negative.

So I basically decided to adopt twenty-five rules that I read every single morning. Well, I pretty much have them memorized so I simply recite them as I prep for the trading session.

Now this may sound like overkill or amateurish depending on where you stand, but I can tell you after ten years of trading and experiencing great ups, but some pretty bad downs, I don’t play around when it comes to protecting my capital.

The only way I can do that is by making the right decisions regardless of the situation.

So without further ado here are my 25 Rules that I follow every single day. I rewrote them just a little because I am talking to YOU now.

  • Always know your why. Why do you want to trade? Make sure it is for the right reasons and that you are always honest with yourself.
  • You have to have an edge to be successful long term. Having good risk management, and discipline is absolutely necessary, but if you don’t have an edge or don’t know what yours is….get one. Edge means having a method to your trading; technical, fundamental, reading the tape, etc. Make it a part of your overall process and trading plan, it doesn’t matter what you choose, just have one.
  • You must be able to manage risk. You can have the best strategy ever created but if you can’t manage when you are losing (and you most certainly will be in a losing trade at times) then those losses will spiral out of control. Here’s a simple plan for risk:
        • Never risk more than x% of your account, whatever that means for you. Ideally 1-2% never more than 5%
        • Make sure your plan includes what to do in a trade (exits, stops, sizing) and know that before you even take a trade.
        • When you are on a losing streak (x trades in a row, or lose a certain amount of capital, or have a losing week/month), STOP trading, step back, and review what is wrong.
        • Whenever you do feel confidence waning or consecutive losses occur, always, always trade with smaller size, less than 10% of your normal size for a while.
  • Discipline is critical. Let’s admit no one can follow rules 100% of the time, but that is what you strive for. Bad habits will creep in, you must be on top of maintaining your trading plan and its rules, and your risk management process. If you find yourself becoming complacent, recognize and reference your plan/rules, then reset right away.
  • Confidence is important to your long-term success. You have to believe that you are a great trader before you become one. Overconfidence is almost always reflected in breaking your rules, sizing too much, believing you must be right. So keep things in balance but if you don’t have confidence in your plan, in your trades, or in general, trading may not be for you.
  • Be Patient. Especially with your winning trades, be impatient with your losing trades. A lot of traders are the complete opposite. You can be wrong more than 50% of the time and still be profitable, by keeping losses small and letting winning trades run.
  • You will take losses, they are a part of the game. You have to be ok with taking losses, ok with being wrong. You cannot be right all the time. The second you think you have to be, your losses will hurt you big time.
  • Never add to a losing position. If you are scaling into trades as a starter, when they are working for you, add when you are up. If they aren’t going in the direction you planned, get out, get out at your planned stop, don’t add or average in. That is just a dumb idea. If you remind yourself that it is dumb, you will get better at not doing it.
  • Scale into and out of trades. Never take a full-size position as your first entry. You can easily be swiped out of the trade and stopped before the move happens. You could be right but too much size and your emotions will start to creep in. If the trade is working, take some off, but leave a core position on, let it run, keep taking half size off until you see the trend reverse (regardless of whether long or short).
  • Don’t try to find the top (short) or bottom (long) of a move. You have to wait for things to firm up, for support or resistance to be put in, for key levels to hold or break down. It is a game of psychology and if you think a stock can’t keep moving higher, or can’t go any lower, the market will surprise you.
  • Not trading is totally okay. Seriously you do not have to trade every single day, all day. No trades are fine some days. If you don’t see your A+ setups, just be an observer, or go do something else with your life for that day.
  • If you start looking for answers when you are in a trade, get out of the trade because it’s the wrong trade to be in. In other words, if you have to start asking what other people think, something is wrong.
  • Don’t make up for losing trades by trading more. Again losses are part of the business. If you revenge trade, take too big of a loss, and try to make it back on the next trade, you might get lucky once, or even twice, eventually that behavior is a recipe to take an even bigger loss. Just don’t do it.
  • Always be in learning mode. Continue growing your trading knowledge. If you have your favorite trading books, read them at least once a year. Find other traders that you can learn from. Get a lot of screen time in to gain that intuition and knowledge of how stocks move, key levels, support, and resistance, etc.
  • Be realistic. Some people hit the gas and never look back. Most others never succeed. The few consistently profitable traders start small, slow, and steady, growing their accounts, month after month. You can’t expect to make $1 Million your first year trading. Have the right expectations, which comes from having the right frame of mind.
  • Be prepared to change sides. If the market is showing strength, either trade with the strength, or sit it out, don’t try to fight the trend. Conversely, if the market is selling off and is weak, be bearish, or if it’s not your style, sit out and wait for your setups to form. You don’t have to be able to trade long and short. If you prefer one way 99% of the time, but there is nothing out there, then sit on your hands.
  • Keep trading simple. Don’t overcomplicate technical systems, loading your charts with indicators. Test whatever you need to and if you find it works for your plan, but oftentimes, less ends up being more.
  • Don’t trade with bigger size until you have proven success and consistency over a good length of time. Small size may mean smaller profits, but with consistency, they add up and you stay in the game because you didn’t size up and blow your account on a bad trade.
  • Don’t change your plan from one day or week to the next. Stick with one thing and become really great at it. Let yourself find out if you even need to learn another way after your one great methodology is profitable every week, every month.
  • There is no room for hope in trading. If you are “hoping” a trade goes your way, you are in the wrong trade and have likely abandoned your rules and your plan. Get out immediately.
  • Work towards hitting singles everyday. Every now and then you will hit a home run. Home Runs just a couple of days a month, a few days a year can make a majority of your profits for the year. So don’t think you have to hit one everyday.
  • Don’t hesitate or overanalyze. Follow your plan, identify your best setups each day and narrow your watchlist. Trade your plan accordingly. If not you will find yourself procrastinating, or missing opportunities entirely. 
  • Don’t try to trade like someone else. And please don’t try to follow someone else’s trades. Be an individual, learn to make your own decisions.
  • Don’t let winners become losers. Always lock in some profits as you scale out of a winner. Let the rest run, but if it turns, be prepared to get out breakeven. You can always get back in the trade, but don’t hold on believing you have to be right.
  • Focus on making the best trades and trading your plan well, not on making X number of dollars. The money will follow, but never trade because you have to make a certain amount of money.

Did you know?

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