Basic Trading Rules




Never ever day trade or play for the action. Making money is a boring process.

Never ever initiate a trade without adding a stop loss to get out if you are wrong.

Never ever add to a losing position or average down.

Never ever allow a small reasonable loss to become a large catastrophic loss.
Losing money is part of trading, but there is a huge difference between being
wrong and staying wrong.
There will be another day/opportunity. Get out !

Never ever lose more than 10% of your trading capital on a single trade or day.

The vast majority of traders with risk management and a system don’t follow it.
While discipline is not a sufficient condition to win, it is a necessary condition.

Don’t step in front of a freight train. If a market is exploding in a certain
direction, don’t position yourself against it until there is a strong evidence that a
turn has already occurred ( not that it will or should, but that it has ).

Don’t pick tops and bottoms, let them pick themselves. You will always be
wrong at tops and bottoms as will traders who try to pick them. Ignore them and
you will be wrong only once…when the top or bottom finally does happen.

Do you want to be right or do you want to make money ? You are dealing with
high probabilities not absolute certainties. People want attention/excitement/ or to
gamble. Ask yourself why you trade listen carefully to the answer. Know thyself.

Trend following / option selling are about surrendering to the now situation
of the market.
Not about guessing where the stock market will go next. Leave
your cherished opinions, hopes, and egos at the door. We don’t act on what we
think the market will or should be doing, but on what the market is doing.

 

% of money lost                      % needed to break even

 

5                                               5.3
10                                             11.1
15                                            17.6
20                                            25.0
25                                             33.3
30                                             42.9
35                                             53.8
40                                             66.7
45                                             81.8
50                                             100
55                                             122
60                                             150
65                                             186
70                                             233
75                                             300
80                                             400
85                                             567
90                                             900

 

 

Cut Your Losses Short

After the initial loss the percentage of gain necessary to break even increases geometrically.
If you lose 50% you’ll need to make 100% just to break even. Always take the first loss.


July 2011

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