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So today I got smacked. Haha. In a month or two I will forget about the money, but the bruise to my ego and the lessons will stick. So instead of getting all upset about it, I decided to get my money's worth in lessons out of the day. Here are the rules I came up with.
1. Review Price Action
2. Review money management
3. Review buy signals
4. Always have a written plan the night before you invest…before you place the trades
5. When you are placing the trades, include stops with the order. Then, once the order is placed, DO NOT change the stop except to tighten it. Do not loosen the stops for ANY reason. If you cancel
an order and submit a new one the stop on the new order can not be looser than the old stop. The position in general cannot take on more risk than the original order. When you find yourself
taking a bigger bite, STOP. This is where the mistake happens. It’s very subtle. If you don’t stop the larger bite, you will get eaten.
6. Consider target stops for the short term.
7. Force yourself to be diversified. No matter how well a position is doing
8. Make rules. Stick to the rules.
9. It’s better to get stopped out then eaten alive. If you get stopped out, wait for the trend to restart, confirm itself and then buy back in if you must. If it stops out again, take a few days off from
the stock.
10. Live to fight another day. If you’re out of money you cant take the next opportunity. It’s better to miss an opportunity than to get slaughtered.
11. The market will destroy you if you don’t respect it. Never forget that.
12. Try to be more astute and more aware. If it starts looking bad, get out. I’m very grateful that I was able to eventually see that the sellers were in control. It took awhile and I lost a lot of money
but it could have been worse.
13. Be grateful for what you have. This is for a bit of side money. It’s not to get rich and stop working. That’s not going to happen so don’t kid yourself.
14. If you’re going to speculate, at least stick to the above rules.
What rules did you come up with after you got crushed?
The best rule is to simply have rules to trade by.
So many people don't have hard rules, but rather hunches, intuitions, or feelings about things.
To make any money in this game, you have to have a few things figured out. Here are the big ones that I see.
1. Know your edge, or lack thereof.
2. Know the edge of the market. Consider this the house edge. What is the minimum threshold you have to hit to break even considering how the house edge impacts your trading system.
3. Know your expectancy. Through statistical analysis you should know about what your system will hit in terms of overall performance. If you don't know this, you need more time in SIM.
4. Have a money management strategy. When to stop, what is your maximum draw down. This can be daily, weekly, or just "Shut the account down".
5. Have realistic expectations. Be skeptical of any results that perform outside of your normal statistics. Outliers both good and bad show up all the time.
6. Don't be afraid to learn by failure. The only thing that will aid you as a teacher is forced learning through past failure. If it isn't broken, there is no need to learn right? So when things break, stop working, or never worked to begin with, it's back to the drawing board. Some people live in denial in this stage and just try to make silly small tweaks to a terrible system hoping that they stumble onto the holly grail. But if you look at failure honestly, you may need to let a bad system go, and learn from the mistakes of why it failed, and start from scratch with a different approach entirely.
I have a System, and I follow it to the best of my ability.
My rules are all outlined in the trading plan for the particular strategy.
The trading plain is embodied in the pre-trade checklist. If the checklist is properly filled out and followed for trade management, then the rules will be followed.
For a system trader, you will have coded your strategy rules. But for a discretionary trader, I find that rules often will not work well. If you think about it a rule is designed to achieve a goal state or reduce a risk. However, as markets change the rule may or may not produce the desired result.
This is why I came up,with the idea principles over rules. Principles are things that guide decision making and can be applied to new contexts whereas a rule may only apply to specific scenarios.
If you had a risk per trade rule or stop loss rule, for example, you'd have to change it for changing volatility. Instead, look what it looks like formulates as a principle, "My principle is to take the minimum risk per trade while trading within my capabilities".
Let's imagine as a trader, you are only profitable trading the morning session. A rule would state, "Stop trading after the morning session". But, that could be a temporary condition. If you work at it, you might find some trades you could take after the morning session. Defining this is as a principle, "Don't give back significant intraday profits and don't trade during times when I don't have an edge" allows for future changes without a need to feel like you're violating your rules.
The only place where I think rules are appropriate is when it is something that we can know and that we know doesn't change. If you're a day trader, something like a daily loss limit makes sense as a rule.
Another example, a rule might define trading a certain way but the markets may change. A principle might better meet the goal such as, "Only take trades where I have a high confidence and grounding". A principle can also override rules. A principle such as "Protect capital" might override a trade setup or trade when the risk is too high or markets are abnormal.
Some discretionary traders I know would probably take issues with the 'no rules' statement.
As far as volatility goes, you could say, for example, "my stop will always be 2.5 ATR", so that it will be somewhat fixed, but it will also adjust for volatility.
