Rules often feel restrictive and many people have a negative connotation towards them – for these reasons people tend to avoid them. But in trading, where emotions run high and uncertainty reins, rules are much needed to guide traders. This post explores why rules are essential when it comes to trading. Interested? Please read on.
What are Rules?
Rules are generally established to tell people what to do and what not to do – they are instructions. They can be a statement, a set of written guidelines or some sort of quite cultural agreement.
Words such as governing, regulation, principle and custom are normally associated with rules. It is easy to see why many people view them as negative.
With that said, let’s bring it back to trading.
Why are Rules Important for Traders?
Ultimately, rules are there to manage you, the trader. They can help you with the following:
- Rules instills discipline, keeps you accountable and consistent.
- Rules for risk management can guide you exactly on how much you can risk through stop loss placement, position sizing, the amount of trades you can have on at any one time, etc. Hence, preventing you from blowing up.
- There will always be emotions when it comes to trading, rules can help to reduce those emotions.
- It’s very difficult to make decisions in an uncertain environment, i.e. markets – rules can guide you through uncertainty.
- You can put rules in place to safeguard you against revenge trading, FOMO trading and over trading.
If you follow your rules with a proven system, chances of success increases dramatically. If you break your rules, you know exactly what to work on in order to become successful.
Common Rules Traders Have:
Many will take the following rules for granted, but they are timeless and vital for success, especially for beginners. Feel free to customize and add to them so they fit you and your strategy.
- Only trade when the conditions of your strategy are met. This means you can write a trading plan for the trade you are about to take – entry, stop loss, target.
- Always trade with a stop loss and never widen or remove a stop to stay in a trade.
- Rules to manage a trade when in profit / loss.
- Never risking more than a certain amount / percentage ($100, $150, $500 or 1%, 0.5%, 1.5%) of capital one any on trade. This also goes for the maximum amount of trades to have open at a time.
- Maximum drawdown for a day / week – stopping you from trading after the limit is hit.
- Rules on when and how to journal trades.
In my opinion, rules should be rigid at the beginner stage and can be relaxed / modified as the trader gains more experience.
Finally:
In the end, whether you call it your trading rules, strategy, plan or system, doesn’t matter. What matters is having rules to help you enter trades, exit trades, manage trades and proper risk management protocols – something with and edge which you can execute with consistency.
Thanks so much for reading. I hope you found this post useful. Best of luck with your trading.
Thanks and Regards,
Trading SOS SOS
