The top traders in the industry understand
and practice the following trading rules.
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1)
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I establish trades based on my edges.
Making money in the market requires that you have "edges" over the market.
One of the essential edges is that you open and close your trades at areas of either Support or Resistance.
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2)
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I predefine the risk of every trade by establishing a maximum amount that I am willing to lose on it.
Areas of Support and Resistance remove much of the uncertainty about the price at which to buy and sell a stock.
No matter how good a trade looks, however, it's important to remember that it can,
for any number of reasons, turn into a loser.
Predefining the risk of every trade, therefore, is the only way to prevent a small loss from turning into a big one.
One big loss can wipe out the gains of five or more profitable trades.
Making money in the market, therefore, requires that we take small losses.
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3)
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I completely accept the risk or I bypass the trade.
There's a big difference between pre-defining your risk and accepting the pre-defined risk.
The tendency is to hold on to a losing trade because it's painful to lock in a loss.
Making money in the market, however, requires acceptance of the fact that not every trade will be a winner.
If your predefined risk is reached, close the trade and move on.
If, instead, you hesitate, rationalize or hope for things to turn around, then you have not accepted the risk that's unavoidable in the market;
and refusing to accept that which is unavoidable will lead to one crisis after another.
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4)
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I act on my edges without reservation or hesitation.
"Edges" are those aspects of a trading strategy that result in profits over several trades.
You cannot know whether the next trade will be a winner or not.
What you can know, however, is that over the next 10 or 20 trades, you will be profitable because of the "edges" that you employ.
A casino doesn't know who will win the next hand of Blackjack, and so, it doesn't worry about it.
The casino does know, however, that it will be profitable over the next 10 or 20 hands of Blackjack because of its edge.
Making money in the market requires the same approach.
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5)
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I pay myself as the market makes money available to me.
Every winning trade comes to a time when it has played itself out and it's time to exit.
Making money in the market requires that you exit a purchase at Resistance (where sellers are likely to regain control from buyers and press the price back down); and that you exit a short-sale at Support (where buyers are likely to regain control from sellers and push the price back up).
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6)
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I understand the absolute necessity of these Trading Rules to my ability to make money in the market and, therefore, I never violate them.
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