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Thread: 5 Rules to Trade

  1. #1
    Join Date
    May 2007
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    Default 5 Rules to Trade

    1. Determine your character before you begin.

    A simple quiz I pose to new traders is to ask them to point to the market. Most point vaguely in the direction of the nearest financial centre they can think of. However, is this really the seat of the market or is it an aggregation of people facilitating the decisions of myriads of investors or traders. My suggestion is that these physical manifestations are not the market. The market lies between each traders ears deep inside their psyche and their success is determined before they even enter their first trade.

    This why it is important to determine your character before you begin to trade. In an interview in Market Wizards Ed Seyota stated that everyone got what they wanted from the market. This rather cryptic remark points us towards the need to examine why we want to trade and what we hope the markets will bring us. I would even suggest that this analysis forms the first part of your business plan and that it will remain a cornerstone of your trading psychology for as long as you trade.

    Since it is my contention that markets dont really exist in a physical sense your perception of a market will be a gateway to your trading psyche and in turn your trading success. Given the nature of your psyche when you do begin to trade your interactions with your mental market will hold a mirror to your perceptions of yourself. You may believe that you are disciplined, calm and analytical but the reality of your self made market may be quite different.

    As such you will need to determine your character before you begin trading, lest you get a terrible shock when the real you is uncovered in a trading arena.

    2. Plan your engagement

    There are a variety of popular cliches regarding the need for plans in all facets of life from business to physical fitness. Often quoted is Sun Tze who stated that The victorious army wins first and then seeks battle. A wise leader rigorously adheres to method and discipline and thus it is in his power to control success.

    As trades unfold you will be buffeted by a variety of emotions, many of which evolved at a time when we did not face challenges of the style and nature provided by a market. These behaviours will seek to undermine your performance.

    Trading is a very counterintuitive endevour. It forces you to behave in ways that are not natural. Proper risk management forces you to become risk averse when your nature and psychology are telling you to be risk seeking. Others around you will offer you comfort phrases such as good stocks always recover, its safe to average down or its only a loss if you sell.

    Your trading plan will insulate you from these emotions, without it you will be lost

    3. Go with the flow

    Someone once said that acceptance is the fine line between misery and ecstasy. As a trader you need to accept all possible outcomes, all possible defeats. As humans we are preoccupied with only positive outcomes. Why else would we buy lottery outcomes where the odds of winning are in some cases as low as 1 in 58,000,000. This preoccupation can blind traders to that trades can and do go wrong and when they do go wrong it comes as a terrible shock.

    Losses will occur they are inevitable, the market has remarkable synchronicity. There can be no profits without losses. Risk is ever present in what we do; yet without it there may be no reward.

    The opportunities we face are proportional to the risks we incur, in deciding to become traders we have decided to face failure repeated fail. It is the only profession where one can fail their way to success.

    As a trader you need to accept that risk and reward are proportional. Yet not everyone agrees with this notion, slick seminar presenters are constantly selling the notion of the riskless trade. Despite the fact such a thing cannot exist, who would take the other side of a trade that was guaranteed to fail. Yet as traders we will accept that we will fail on the majority of occasions.

  2. #2
    Join Date
    May 2007
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    4. Survive

    If you were to review the rules of a variety of exchanges you would find that there are not that many rules pertaining to individual traders. There are rules for things such as settlement of trades and aspects of market conduct such as short selling but these are in the minority.

    Yet there is one rule that is paramount for traders irrespective of their approach, the markets or even the time frames they trade, it is simply this. Do not lose all your money. If there were a universal rule for trading it would be this, but despite it universal nature it is seldom practiced. It seems much easier to look at charts and pontificate about the future direction of markets rather than attend to the rather mundane housekeeping of risk management.

    5. Resilience

    Taking risks involves the implied assumption that failure is possible but not inevitable. When we face defeat traditionally we encounter grief. This emotion can be handled like other emotions it merely takes appropriate strategies.

    The first stage is to acknowledge that something has gone wrong, if we possess the rationality necessary to be a trader then we cannot hide from what has happened. Denial is not part of our nature. A loss is a loss and no amount of rationalization can distort this fact. If the trade needs a post mortem because there is a flaw in our system then we must undertake this task.

    Denial gives way to anger at almost any inappropriate source. We are angry at our system, the advice we took, the black box sitting on our desk. These are all scapegoats for the true villain. Your mistakes are your own.

    The realization that your behaviours to date in dealing with your losses often leads to guilt, which is generally manifested in the form of self doubt and criticism. The small voice inside us suddenly becomes much louder and begins to chip away at our belief in our ability. It is here that the trader needs to short circuit the voice inside their heads, thoughts are not reality and they cannot be allowed to assume the importance of reality. If not controlled the voice of self doubt can lead to depression and a belief in one own impotence in face of the markets.

    The final stage in grief is acceptance, defeats occur, as traders we will suffer many more

  3. #3
    Join Date
    Sep 2007
    Thanked 0 Times in 0 Posts


    thnks, i think this is valuable rules

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