Top Trading Rules

Top Trading Rules

This is my list of Top Trading Rules

There is no innovation in this list. These are time-tested rules.
The rules here come primarily from trading books, repeated in many books, stated by successful traders, trading instructors, experienced forum members (usually ones who joined years ago).
  • Trade with High Quality (this is a creed of this blog and my insight) 
    • take high quality setups only
    • trade only if the trade is in line with your trading system (strategy, rules, method; I am not talking a mechanical algo here, but flexible trading rules, yet they must be met)
    • trade with the right mindset, i.e. the “quality” of your thinking, state of mind, emotional control, etc.
    • manage the risk (more on this below)
  • Have a trading system and follow it
    • have your own trading system
    • find the system that is right for you (consider timeframes, markets, psychological implications of different systems, your skill level)
    • follow the rules of your system
    • “discover” your system in process of learning, backtesting, experimenting
    • your trading system is your edge, a reason for being able to win in the market
    • the trading system tells you when to open the trade (criteria), how to enter it (market, limit, stop, where to place), how much to trade (position size), where the initial stop loss is (e.g. last bar high/low, ATR), how to manage the trade (e.g. close half at first resistance/support and trail stop on the rest, or take profit at 2 times the stop distance, set & forget)
    • with a well-defined trading system, you should have no doubt if the entry setup is present or not. You discretionarily decide whether to trade it or not, and how, but existence of the setup should ideally be clear with no doubt
    • always have a plan on how you will close the trade, before you opened the trade. follow it.

  • Forex trading is a business
    • treat it like a business (read the first post of james16 chart thread on forex factory)
    • do the research (e.g. backtesting, learning, demo trading, microlots trading)
    • have realistic expectations
    • it can be the ‘perfect business’
    • have a ‘business plan’, i.e. a trading plan that describes your system, organization, risk rules, record keeping rules, etc.
    • manage the costs such as books (recommended), training sessions, paid indicators or systems (rather not recommended), and transaction costs – spread and rollovers (costs depend on your broker and how many trades your take)
    • set objectives; ‘make money’ is considered not a good one. Better are ‘learn to trade a system that has an edge’, ‘protect the capital and never lose more than thirty percent of it’, then ‘have a net profit every quarter’.
  • Manage your risk
    • use a stop loss order, at a broker, always. Place a stop based on the market structure (e.g. pattern high/low, volatility, key level) and not based on your risk acceptance (use smaller position size to have the stop in the right place and lose no more than acceptable)  [ I know many people believe otherwise. I respect their point of view and I keep my point of view ]
    • trade the right position size, so that if your stop is hit, the loss is acceptable
    • never lose more money than you are comfortable with losing on a single trade (this can be $50 or hundred times more, it is individual thing, clearly depending on the size of your trading capital (not necessarily the account) and your level (surely a beginner should risk little, even if wealthy)
    • risk per trade so little that even in case of 20 consecutive losing trades, you will still be in the business
    • have an emergency plans in case risks other than stop loss getting hit will materialize
      • power down, computer down, broker bankruptcy, financial system meltdown, bank deposits confiscation
    • for trading use the ‘risk capital’ only, i.e. the money you can afford to lose. Never trade with the money you need for a living or borrowed
    • use a trustworthy broker, preferably in your home country or in a country that is considered rather ‘safe’ vs. exotic islands, pay your taxes
  • Keep the records
    • Have a trading journal, record each trade: market, reason for opening it (e.g. this signal from that system because this and that), chart screenshot on opening the trade, chart screenshot on close (can also add on entry and interim ones if you actively managed the position), trade result in $, trade assessment (high/mid/low quality), your learning from this trade. (high quality trade can be a losing trade if you followed the system)
    • Review your journal every 20 trades, look for repeatable patterns of errors or opportunities. Are your stops to narrow? Are you trading ONLY IF there is a signal that your system tells you to trade? Are you following your plan on how to close the trade? or are you closing the winning trades too soon? are your limit orders getting not filled? Apply the learnings. Repeat.
    • Chart your equity curve, i.e. simply record your account equity every month or week and chart it in a spreadsheet. See its slope.
  • Have a full commitment to become a trader
    • discipline is needed to follow your trading plan
    • perseverance is needed
  • Have a right mindset, also known as trading psychology
    • take full accountability for your results (it is YOUR decisions that create the net profit or loss, not the broker/market/big banks/FED chair, etc.)
    • trust your trading system (after you backtested it and it proves it has an edge)
    • trust in your ability to become a profitable trader (if you believe you will not make it, chances are that you are right)
    • really know your trading system very well before you start trading, so that you know what you are doing and feel comfortable
    • understand this journey takes a lot of time, do not push for a quick success, it usually results in over-trading, taking poor quality trades, and losses
    • be OK with losses, accept that losing trades are a normal cost of doing business and trade right position size and use stops so that losses are always small and acceptable
    • have a focus, determination and passion for the markets – like the trading
  • Accept that time and effort is needed to become a profitable trader
    • 10,000 hours many people believe is needed of practice of anything to become a master. I believe this applies to forex trading, too.
    • keep learning and at some point try to help others, as teaching other helps you internalize the material as well (one of the reasons why I run this blog 🙂
[more will be added]
I believe these are universal principles. I think they are timeless and I think traders, especially leveraged markets traders, should follow these rules to be long term consistently profitable. I focus on ‘long term and consistently profitable’, i.e. profitable over many years, with each month or quarter net positive result.
Of course, you can violate the rules above and maybe double your account in a week. Anyone can, but the method used for this (high leverage, large position, no stop loss), sooner or later, I believe, leads to a margin call and a LOSS of your account or more.
For a long term, sustainable, consistently profitable forex trading, this is what I believe we need to follow. At least that’s my learning. I am happy to discuss.
Feel free to comment if you disagree or believe I missed something important. 
I will be happy to add.

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