Today we’re going to discuss trading rules, so go find that list in your journal. You have everything written down there, right? You don’t? Well, if that’s the case, then you need to keep reading, pay attention to some ideas here, and after you’re done… you need to get to work.
For those of you who do have trading rules, great! But are you honestly respecting those rules? When was the last time you reviewed them?
Here are some examples of what we mean by trading rules:
How to exit a position that is working for you (reasons2sell). There are a number of reasons: the stock hits your price target, the intraday trend is broken, there’s breaking news in the market, and several others. For more on this, here’s an excellent post: Did I Give Back Too Much of My Open Profit?.
A give-back rule. This is when you made money, but you continue trading—and then you start giving back that money. At what point, P&L-wise, do you stop and say to yourself, “That’s enough!”? Here’s a blog post on the give-back rule: Should I Have a Max Give-Back Rule?.
What market conditions are better for your trading system? Do you trade only trend markets or range markets (where in the range) or both? Here are some ideas on this: A Little Thing That Has Made a Big Difference.
This is one of our favorites: do you have a rule on what to do if you’re trading on tilt or after having a series of losing trades? Most traders don’t have one, but if you decide to implement this one, your P&L will thank you at the end of the month. Here’s a post on what you ought to do after taking a series of rips: Do You Need to Take a Walk (Trader)?.
Rule of Risk: Mike mentions this one in his latest book The PlayBook: “Develop a rule of risk that you must take when you spot an A+ setup. For example, we ask our traders to place 30 percent of their intraday stop loss on every A+ setup. After each month of profitability, gradually raise your intraday stop loss and hence your size with A+ setups.”
Here are some other ideas: Adam’s Rules.
And what about your rule on what to do if you break your rule? You need one as well!
What other trading rules do you have? Oh, and by the way, you’ll find an excellent discussion on this subject and lots more in Mike Bellafiore’s recently published book, The PlayBook.
You can be better tomorrow than you are today!
Mike Bellafiore
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