• Jan

Set of trading rules





1. Never enter into trade, unless you are 100% sure that you are going to win


2. Do not use stop losses on positions, those are for weak traders who are unsure of their trades and need to work on their their confidence. Having stop loss also makes every market maker see where you are positioned.


3. Risking 1% per trade is too conservative, you only live once. Risk 20 or 30% if you value your time. That way you can successfully trade even small account such a 500 USD for living.


4. Do not let other people discredit your idea, they are probably wrong, once you form an idea stick to it.


5. Trade higher time frames only (H1 and above), lower time frames are for gamblers and algos.


6. Find a good trader and use his ideas and then replicate them, this way you will be more loyal to the idea in first place.


7. Equities are full of algos, cryptos are full of prediction callers, Forex is full of big players, do not trade those, go where no-one is looking yet: The binary options.


8. If you make a wrong call, swipe it under rug, nobody wants to see how wrong you were, there is no value to learn from that.


9. Trade only one instrument so that you get to know it inside out.



Yes as you figured it out, all the rules above are sarcastic. There is some truth behind each of them, but mostly they were meant as misleading guide towards trading, which is often promoted in online communities.



Bellow is short brief of each rule extracted in the right manner:



1. Uncertainty





At each individual trade, as trader you have no certainty to know if trade is going to work out or not. In fact, lets get realistic. The word to use is so far from the "certainty" that the certainty should not even be part of the same sentence. Even on A grade setup, trader has no real quantifiable method to prove what exactly are his chances for trade to work out. Historical statistical sample can be pointed out, but for individual case that is still very different, because there are too many un-known factors on each specific case.


For example if one goes to car mechanic, a mechanic can look at your car and use huge sample base of 100s or 1000s of cars with similar conditions to tell how likely it is for your car to perform good or bad, but additionally to that mechanic can also do one more thing. He can look at the whole car in depth and all the components and creating quite accurate picture on how many miles car is likely to still perform good, or if there is certain fault on car he can tell by detailed examination for how long should car still perform decently.

This second step of detailed analysis is what trader cannot do. Because there are too many un-known factors that trader has no control of, and are in full control of market as whole which will impact the flow and direction of trade. Trader can do sample based analysis with statistical expectation (collecting data, first part), but he / she cannot do very detailed individual specific case analysis, especially not short term day trader (second case). Or at least not well enough to be really well detailed, sure you can use Level 2 to help define the case, or orderflow books but that analysis will still be far more un-certain than the example case of car mechanic used above.


Therefore trader needs to accept that at each individual case, there is very real possibility of being wrong and that precisely probabilities are very difficult to measure accurately on each individual case.



2. Risk management first, profits orientation second





For beginners traders, it is common to see that trader completely neglects the risk management or setting the stop loss. Instead trader is fully focused on where he / she will take profits in first place. This is something often seen in Forex markets, where traders are obsessed with setting profit targets and calculating how much they will potentially make from trade, instead of doing it completely the opposite way around, being risk manager in first place and profit oriented second.

Additionally to that too many traders are too loose on their risk control , having too hands off approach to when it comes setting a stop loss. In my view there are two way trader should manage stop losses on each trade. One is to set fixed "emergency" stop loss, with wider distance in markets that have often surprising catalyst (FX or crypto). Both the actual real stop loss should be managed by trader manually, not by setting just stop loss out and putting hands in pockets and let it turn out. Instead trader should be observing details of price behaviour and orderflow to be more hands on with risk management of the actual stop loss (not emergency top loss).


Example of short trade, and use of emergency stop loss, and the use of real "managed" stop loss:



Too much focus on profit side of trade comes often from lack of experience, lack of humility (trader not admitting to his / her mistakes over time). Or simply trader being too sure that trade will work out due to few X factors that are lining up with the thesis.

The first thing that you need to train yourself is to be risk oriented, get fingers on that stop loss first not the take profit. Risk control priority before the profit taking.


Some markets require harsher approach to stop losses and some are fine with looser approach. Markets that have often surprising news should push trader into use of stop losses, to protect the account. For example gold market where the surprising escalation or risk news around the globe can hit the market any time at un-expected timing (war breaking out, major un-expected central bank move, financial crisis...) is market where trader should use emergency stop loss. Whether that is 5% or 10% of whole account that is up to each trader, but in such market trader should use pre-set SL (stop loss) just in case.

And then on other hand, trading low volatile mid cap stock might not require stop losses, since statistical chance of unexpected surprising news to hit during market hours are very low and even if it does happen the move is unlikely to be that strong.


It all depends on the market traded and trader should do the homework on the market to see what to expect.


My general rule is:

-Small cap stocks on Nasdaq (no need for emergency stop losses)

-Forex (depends on currency traded, if currency is under constant active catalysts such as RMB currently then emergency stop should be always placed)

-mid / large cap equities (usually not required to set emergency stop loss)

-crypto (almost always a need to set both emergency and primary stop loss, because of often huge volatile un-expected moves)

-futures (usually not needed to set emergency stop, but primary stop should be used)


Bellow is example for crypto, such heavy drop can happen in crypto market any time, if one i trading on margin / leveraged it is thus very important to use emergency stop losses, otherwise trader might be fully liquidated.



And bellow is the opposite of crypto market example above, such as lower volatile mid cap stock BAC. Such asset is not as much of need to use emergency stop losses, since it is less manipulated and has much lower chance to be hit with surprising news catalyst during market hours.





3. Risk % of account




Risk on trade should be defined trough performance of pattern traded and the traders capital account. It is wrong to just base the % risk on trade based just of how much trader is comfortable risking, which is often the case in trading field. Patterns that perform really well on win rate, can afford higher % risk, and patterns that perform with lower win rate need by default less risk, because one can never know when a streak of several losses comes around.


Lets set example:


If trader would risk 20% of account (very high risk) on pattern that performs with edge 20-80, meaning that only in 20% cases the pattern performs strong move and goes into direction of trader (and lets say that trader make 7 R on average on such play with positive edge), then 20% risk would eventually trigger margin call on traders account. The winning rate of such pattern is too low to be risking that high amount of capital size (20% of account).


Conceptual example of such pattern and using wrong (too big position sizes):




On example above on symmetric pattern win/loss ratio, trader needs to execute 5 trades in order to theoretically catch 1 winning trade. Which technically means that 5x20%=100%, so one might assume that maybe he can just get away with it, by tiny slim margin. The reality of course is no. Why? Because winning and loosing patterns are not distributed evenly. Meaning that in real terms trader will not get 1 winning setup on every 5 taken trades, instead in some cases it will be 0 and in some cases it will be 3 in row. So in the case where it will be 0, trader with 20% risk per trade would eventually hit margin call and get liquidated. Additionally to that just 2 consequtive losses will decrease account size by 40% which will leave trader with that much less margin to trade with and be twice as difficult to just get break even.


This example above is just simple guide on how important it is to shape the risk on each pattern / play based on how the pattern is behaving and on approximate distribution of win / loss patterns over 10-15 samples, rather than just winging and figuring some % risk number on the fly out of the guess.

Above example does not mean that 20% risk in trading is by default bad idea, but it certainly will be for majority of edges, especially if positions are extra large while using extra tight stop losses / R sizing.



Risking between 1-3 % of account per trade is usually best route for beginner, especially if beginner trader does not have enough data collected on the setup traded. But once proper statistical data is gathered, trader should adjust % of risk relative to setups win rate performance and average R ratio on winning trades.



4. Flexibility



As a trader you need flexibility and open mindedness. This means always being able to change your mind or change your opinion, especially if there are active factors pointing towards your initial opinion being wrong. Open mindedness is correlated to always being able to listen to other people who are believable and have more knowledge on the subject you are forming idea on. If as trader you can research and confirm their thesis to be more likely correct than your own, you should always consider casting a doubt into your initial opinion, or potentially completely changing it.

A trader that has come to conclusion that he is finished, completed the learning of markets is trader who has made conscious decision to throw open mindedness out of the window, because trader that is finished no longer needs his / her ideas to be challenged, he / she already knows it all. That is a downfall of a trader. There are always people who know more than you, and there is always a view that you have had or will have that will require flexibility to change it.




5. Opportunity cost and speed of learning





Lower time frames versus higher time frames, which is better? Is it better to swing trade, or day trade and if day-trade which time frame should one focus on?

Those are very common questions in trading circles and there are many pros and cons to list.


One of key components is the speed of learning, the faster the trader learns, the more lessons he / she absorbs, the quicker one can adapt and improve. High frequency is backed by quantitative analysis, low frequency is backed by qualitative analysis, because traders with low frequency of executions do not have data to back their future assumptions on, instead they have to logically assume a lot more.

Quantitative analysis always outperforms qualitative analysis. There have been enormous amount of studies proving this from fields of biology, to business performance to sports etc....


High time frames by default will leave trader stagnate for much longer time with limited amount of executions and historical data. That is why it is not surprise that often long term traders will chew on their H4 chart time frame for days, trying to make sense out of every candle on chart, making up complete theoretical stories that have no stress tests and backing to be proved. This is very very common in high time frame traders, they draw every single line that makes sense on chart, without actually having data based pre-set patterns that they should be looking for. Obviously does not apply to all high time frame traders, because there are some great Weekly TF traders out there, but for large portion of traders that will apply. It is so common to see H4 or D1 trader checking around Youtube videos to what other high time frame traders are posting and copying their setups, instead of rather doing research if that pattern even has edge in first place!


Short term traders (and lower time frame such as 1 Minute for example) are more eager to just dismiss the setup, because they can afford to. There is always something better around the corner, if you do not need to wait too long for it. With shorter time frames one soaks much more lessons in lesser time, progressing quicker, learning different skills such as multitasking, learning about ones emotions quicker, gathering larger sample base of mistakes to learn from,figuring out quicker if one is in right or wrong market etc....


Just to be clear, by no mean am i saying that high time frame trading should be excluded, in fact it should be combined with short term time-frames (M1, M5) for better accuracy. But overall trader should be learning from lower time frame as much as possible, due to all the listed benefits above and bellow.


However it is not all white and black. While following low time frames and short term trading has its benefits in terms of speed of learning, it does come with short term consequences as well:



Advantage and disadvantages of trading from lower time frames:


Pros:


-Faster learning curve, more mistakes are collected in with less time needing to pass. Long term benefits. Faster to learn from mistakes, faster potential improving.


-Faster to find out edge, faster to stress test strategies and patterns that do not work and abandon or expand on them, trader can progress much more quickly hunting for edge.


-Higher selectivity. More ability to discard B grade setups and wait for A grade opportunities, since lower time frames provide by default more order flow opportunities than higher time frames as price develops quicker on lower time frames.




Cons:


-much higher stress . Trading lower time frames by default is more stressful, because trader has to make decisions faster and for someone un-experienced on subject being forced to make quick decisions is something that naturally triggers stress in anyone. This is something that one only gets better at over time with practice.


-Higher time cost. Tracking lower time frames might cost more time behind the screen as price is moving much faster, creating new opportunities relatively quickly.


-Higher commission impact. Trading shorter time frames such as 1 minute will increase the impact of commissions, because the price distances that trader is trying to capitalize on are smaller, thus increasing the impact of commissions on overall equity curve.


-Much more preparation and know-how ahead needed. In short term time frames trader should already know ahead what pattern he / she is waiting for, there is aspect that should be done reactively, but most of it should be already pre-planed. If trader does not have in mind what he / she is looking for, then fast price movements will just add to stress and make whole trading a lot more chaotic. Thus trader needs to do homework historically and be highly research oriented and prepared.



6. Learn from better traders but do not marry the ideas




Learning from better traders is necessary step in trading and using their ideas to build your own, but there is balance between how how much of your own input and strategy approach to entry you need to develop by yourself. Copying trading signals from other traders is never a good approach, since as trader you will always be feeling the void of how to control the risk on such trade. And each traders trading approach should be fit to the personality and the strengths of that individual, copying trading style from some other successful trader might not fit you.


Best approach is to always surround yourself in a few or a group of successful capable traders, or just knowledgeable traders in general and learn from them, but never to copy their strategy. Instead try to understand their thinking approaches, and what variables in market action they are looking at, then construct your own entry approach using the knowledge you have attained from such traders.


Also mind that any trading strategy can be improved, just because you are learning from some capable trader, it does not mean that the way that trader trades is the most optimal way to execute that specific strategy. There should be room to improvement in almost any strategy, thus studying strategy and finding the reasons of entry will allow you to research such trading style on your won, and potentially improve it, relative to how that initial / capable trader is using it.


Having your own opinion on trading asset will always be better than just listening to someone else and using their ideas, often traders who listen only to others will sooner or later get themselves into the "deer in the headlights" situation, freezing as they did not have realistic expectation or any proper plan formed on the trading aspect.


Surround yourself with traders who are better than you, to always keep improving, but always seek your own way to make use of their knowledge. Do not just be a follower.



7. Excuses




In every market traders tend to find excuses for avoiding the market, or blaming their under-performance on those excusing factors. There are generally two groups of traders that one can split the trading industry in, and from my observations as entrepreneur also applies to business in general:


-people who stubbornly press forward and have mission to make it no matter what

-people who constantly seek shortcuts of excuses to blame their under-performance on


Both of those groups of individuals will have negative performance in initial learning phase, could be months, could be years. But the main difference that first group has, is that they spend much more time on just being practical, solving problems and doing best to solve as many problems as possible that are causing their under-performance. Being totally focused on themselves as they realize that under-performance lies within themselves not the market itself. The lack of knowledge and research is what is causing one to under-perform no matter what angle you look at it.


Second group are generally people that are putting a lot more time into other people instead into themselves. They keep reading articles about how central banks manipulate markets, they are watching videos about how potentially some market is manipulated against them (usually without any solid proof provided), they are obsessed with seeing other traders fail as that makes them feel better about their under-performance. Those traders are not problem solving oriented, instead they are excuse oriented, and the time that should be spend on solving problems is spent on un-practical gathering of information that cannot even be used in most cases in trading world.


As trader you need to understand, you running the business, it is your task and no-one elses to solve your problems in trading world. Complaining does zero help. You need to be fully problem solving oriented, with aim in sight that you will crack every piece of code in matrix one by one. It wont be over night, but you have to have an aim on it over time.


My most important rule when it comes to improving in trading or investing is: BE PRACTICAL.


-If you have just read article on how equity markets are run by algos or how central banks keep manipulating currencies, ask yourself: How is this information useful to me as retailer? Because chances are, it might have little or no use to you. Try not to spend hours and hours reading articles online that give you very little practical use, you are not prioritizing your time well. I see so many traders and especially investors making this mistake.


Practice to recognize straight away from the article / video / lecture / book if you are receiving practical data that you can actually start to backtest and see if the knowledge you received can even be put in practical trade execution environment. Because if it cannot be, there might be something more practical that you could be learning instead. Always ask yourself, how is this information useful to me? How can i put it into use? The more one practices this the more efficiently minded you will be (problem solving).


8. Transparency



As famous macro investor Ray Dalio puts it: One of best values that organization can have is radical truth and radical transparency. This as well applies to trading up to a good extent. As Dalio mentions it about one third of people love such environment, 1 third are skeptical about it and struggle to fit in, and the last third simply cannot operate under radical truth and transparency due to certain personal qualities or beliefs. But to give yourself to at least try with it could give you strong benefits later on, even if it might turns out it is not fit for you.


Being transparent in trading is split on two levels:


-personal transparency: Ability to be fully honest with yourself, not swiping the loosing trades under the rug and just forgetting about them. Pulling those trades up to study them. Not just giving yourself a tap on shoulder when good trades are made, but also equally being harsh about the bad trades being made.


-public transparency: Ability to be fully honest with all of your trades, not just showing the winners publicly, but also showing losses. There might be reason to not show loosing trade from time to time due to certain factors, but only highlighting winning trades could be an issue of ego.


Being publicly radically transparent (showing almost everything) is much harder than being personally transparent, due to certain evolutionary reasons.

Try to see the long term picture in the strong transparency. While being transparent on both levels you are not just helping yourself to solve potential issues (personal) but you also help other traders see the better real picture on what to expect (public).


Keep in mind, loosing trades tech you and the others in trading community more than winning trades. Because when things go all right along the plan the micro lessons are much smaller, compared to when trade goes red, bad or very bad those trades leave the most lessons, since many traders will also make same such mistakes and might find value to learn from them. Posting publicly very bad trade is not just damaging your ego, it is potentially providing valuable lessons to other traders.



9. Diversification




Diversification or specialization ? Which route should trader or investor pick? This is very common disagreement within the business communities, which of those is better. This is rather very long answer to get to the middle of it.


As a beginner you need to specialize and diversify at the same time, speaking about complete beginner phase. Reason why, is because you simply do not know what really interest you, what niche fits you best, which niche fits your overall knowledge or previous experience. Thus you need to diversify by trying around as much as possible different strategies and markets, while at the same time specialize slowly into pecific market and strategy.

What do i mean by that is that one keeps checking on very basic level all markets while at the same time picking one specific market that one judges to be interesting and potential best current fit and tart specializing into it. At same time a trader is putting time into specializing on one specific market, while overall diversification testing of other markets is still ongoing. Why is this important? Because as complete beginner you will need some decent time before you will truly be able to judge which market really deserve your priority attention. (capital requirements, difficulty of market for you, leverage, restriction such as PDT or other SEC rules,....)


If you do not use diversification, you might get stuck with market that is not for you (jumping straight into randomly picked market and sticking with it). However if you use too much diversification but you do not input time into specific market specialization then you will never acquire enough knowledge required to trade any market well. Specialization is absolutely a must to trade any market profitably.

Thus in my view it is best to use both methods, but knowing how to balance them well, until you really find your market. And once you find edge in that market, feel free to specialize into another market and start seeking for edge there (to have more edges in different markets).


Advantages of long term diversification in market (developing edge in many markets):

-much higher patience threshold

-there is always something in play (FX, treasuries, bond, stocks, crypto, options....)

-higher gains

-less stress and pressure to make gain only from single market

-ability to see the similarities in how markets operate but also unique aspects of each


Realistically most traders wont go deep enough into rabbit hole to develop edges across many different markets, because that requires a lot of studying. Thus most realistic approach is to just use combination of diversification and specialization as mentioned on article above until you really find one market that suits you, and then fully specialize into that market, inputting all the time into it. Such method would probably be best fit for most individuals.

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