Trading by the Rules

• Posted by TopStepTrader
• on December 29th, 2011

The following Guest Post submission is from Dan Giovannetti, a trader in the TopStepTrader program. For more on their innovative program to cultivate and fund aspiring new traders, check them out at www.topsteptrader.com.

 

Trading by the Rules
By Dan Giovannetti

Most of the things we do and encounter in life often come with a set of rules, laws, instructions or guidelines we must follow. Whether you’re driving a car, playing baseball, assembling a bicycle or even working a corporate job, your actions are limited by the rules, laws or other guidelines imposed by a higher authority for the purpose of order, safety, efficiency or any other number of reasons. However, when it comes to trading, there are almost no rules to follow when putting on a trade (other than qualifying for an account, any margin requirements and any applicable laws.) What I mean to say is that as long as you have the capital, you can trade almost anything, at anytime. The market provides every trader with endless possibilities and unlimited opportunity.

Now, even though trading comes with almost no rules, that doesn’t mean you shouldn’t follow a set of rules in order to be successful. I believe the phrase “Those that fail to plan… plan to fail” applies to everything in life, and trading is definitely no exception. Think about it for a minute. I recently bought my eight year old son a very complicated 600 piece Lego© kit that resembled a semi‐truck when properly assembled. The instruction manual was more than 40 pages long. If the kit did not come with instructions, what do you think the chances are that my son or I could assemble the kit exactly as the manufacturer intended? The answer is slim to none. The same could be said about almost anything out there. Therefore, I believe a trader will only become successful when they follow a set of common sense rules.

Here are some of my rules that I believe are crucial to becoming a successful trader:

• Devise a trading plan and follow it. I believe the best trading strategy is the one you’ve been able to review, back test and fits your trading style and risk tolerance. It is important that you know all vitals of the trade (the entries, possible exit targets, and where your stops may be prior to placing your trade orders.) By having a concrete plan, you assist in removing the emotion out of the equation.
• Use good money management principles. Don’t over leverage your account. I trade futures and Forex and even though the margin on the ES S&P Emini is only $500 per contract with the broker I use, there is no way I would ever max out my position to that level. I like to trade one contract for every $5,000.00 in capital I have in my account. That way, one bad trade will not blow out my account.
• Make sure your risk to reward ratio is solid. If you find you are risking 20 ticks to make 6, you are destined to fail. I believe that your R/R ratio should be between 1:2 and 1:3.
• Stick with the trend! There’s a reason why the cliché “The trend is your friend” exists. It’s because it’s true! Successful traders will always tend to follow the trend when trading. Remember, if you trade with the trend, you have the majority of the market on your side.
• Control your emotions. This by far is the hardest thing for any trader to do. After all, it has been said that emotional control is 90‐95% of trading and the rest is your strategy. Therefore, I can’t say it enough times… Figure out a way to trade without emotions. To help with this matter, I believe it’s vital that you trade only with capital you can afford to lose. If you are using money that you need to pay your bills, you will almost certainly get emotional about every trade you make. In addition, I found that the more confident you are about your trading strategy, the better the chances are that you can trade with little emotional stress.
• Record your trades in a trade journal. When I first started trading, I was a bit lax about this concept. But once I started doing recording my actions, I found that I was able to identify my strengths and weaknesses. I take about 30‐45 minutes each day after I’m finished trading for the day to review my trades and to analyze any disconnect from my original plan. This helps me strengthen my conviction of my plan.
• Never trade unless the signal is clear. There are times when the market can confuse you. For me, confusion is a clear cut signal to keep out of the market. I always want my trades to be high probability signals. My signal has generated a winning percentage of more than 70%. So if I’m uncertain about a signal why would I want to take it, knowing that the chance of it winning is more like a coin toss or less? To me, that is gambling… and I do not consider myself a gambler.
• Never make trades because you are bored. Sitting on the sidelines waiting for your next trade signal to line up can be very unsettling. Many traders have learned that trading out of boredom can blow out your account in a hurry. For me, trading out of boredom while failing to follow your trading signal is gambling.

Remember, the day you decided to start trading was the day you opened your trading business. Everyone wants to have their own business. However, the numbers don’t lie. More than 64% of all small businesses fail within the first two years. That’s a tough number to swallow. But there is good news. It has been found that nearly all successful businesses were started with a written plan and the owner followed that plan. Just goes to show that it pays to have a plan.

Good Luck.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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