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This is a great read by Tim Bourquin over at TradingMarkets and I’m going to give my 2 cents on them…. just because I can. ūüôā Feel free to give yours as well in the comment section below.

1. Agreed, but with a variation. I believe it’s important to know what you’re willing to risk to see if the trade works out and have a set of rules to take profits. Scaling out seems to work best for me because if you go to the next rule….

2. …you cannot pick a top or a bottom(period). Get over that if that’s you because it’s only your ego trying and it will cost you money and mental frustration.

3.  I would say I struggle with holding onto my winners, but at the same time selling fast has saved me a lot of money by protecting gains and cutting losers. So you really have to pick your poison here, as every situation is unique.

4. Agreed for the first 5 years, and then after that I believe you can branch out. It is somewhat important to be diversified and have opportunities in other markets so you’re not trying to force a trade in the one market you’re watching. One concept I’ve often thought that would be cool is to get a¬†mastermind¬†of traders that specialize in different markets (3-5max)¬†that work together to profit from multiple markets.

5. 100% agree with this. Focus on your rules and following them, not your win/loss ratio. With that being said, you have to test your rules and system first to make sure your edge is sufficiently profitable. Then never stray from your system.

1. They plan every single trade. EVERY SINGLE ONE.

Every trader I’ve talked with that makes money consistently knows the following about every single trade they take before they even begin entering a limit order into their trading platform:

a) the highest price they are willing to pay (if they are going long) or the lowest price at which they are willing to sell (if they are going short)
b) their profit target where they will exit if they are “right”
c) their stop loss where they will exit if they are “wrong”
d) the risk/reward ratio of the trade
e) the exact percentage of their account they are risking

Lots of traders do one or two of these things. Few do all of them. In simple terms they know exactly what they want to pay, how much money they anticipate making (or losing) and a very clear idea on the probability of the trade working out.

Although you might think that every great trader uses hard stops that are pre-programmed in, many don’t . However, they are highly disciplined and when their stop loss number comes up they are out. Most traders don’t have that type of hard-core discipline and so a hard stop loss is still their best option.

2. They stopped trying to pick tops and bottoms years ago

Nearly all of the classes, courses and webinars you’ll find on the Internet talk about using support and resistance of some type to find where a market is turning and how to get in before or while it does.

The funny thing is that only a very few successful traders I have ever talked to trade that way. Simply put, 95% of the traders out there that make money are buying higher highs and selling lower lows. They do the exact opposite of nearly everyone out there because they found out long ago that picking tops and bottoms is a sucker’s bet. One trader described it to me by saying that it’s much easier to just participate in what a market is already doing than trying to guess when that behavior will change. Flip-flop your strategy to agree with what the market is doing rather than guessing on when it will change its mind, and you’ll be in a much better position to make money trading.

3. They are patient with winners – and ridiculously impatient with losers.

Most traders have a great deal of patience with their losers but get nervous about locking in gains and sell them to quickly – the exact opposite of what wealthy traders do. Wealthy traders realize that they may actually have more losing trades than winning trades so they quickly get out when they are wrong. It is the only way to ensure that they can give their winners the attention they deserve.

They coddle their winners and kick their losers to the curb without a second thought.

4. They trade one market. ONE

I’ve talked with great traders who can trade futures, forex and stocks at the same time. They are a gifted tiny minority.

The vast majority of successful traders concentrate on one market and become so comfortable with it that they begin to “know” the behavior of that market just watching price and volume. Test yourself – if you aren’t able to get rid of all your charts and simply look at price and volume to trade, you’re probably not concentrating enough on one market in order to know its moods. What we’re really talking about here, of course, is not the mood of the market itself but the moods of the market participants!

Focus on trading one market exceptionally well rather than try to trade whatever’s hot – that’s how wealthy traders do it.

5. Their benchmark for success is anything but money

Money changes everything. It sure does. We’re all in this to make money. The trouble is, when traders use the amount of money they make to judge their own success, something happens to them – to all of us, really – that clouds our decision-making ability.

Wealthy traders have realized this and instead focus on other things to determine if they’ve had a successful day. Whether it be how well they were able to execute on their trading plan (see rule #1), or their overall ability to predict short-term movements in whatever they are trading, they know that if they do those things correctly, the money will follow.

Yes of course the money is important. Any trader who says otherwise is a fool. Why else would we put ourselves through this daily ride. But there is something about making it a secondary focus that allows the best traders to make better decisions. The growing trading account simply becomes a nice result – a side benefit if you will – of making good decisions and reading the market well.

Dennis Gartman is famous for boiling down great trading to one thing: “Do more of what is working and less of what isn’t.” Sure makes a lot of sense to me.

4 Responses to “5 Unique Rules of Trading”

  1. Abdul Rahim Says:

    Thank you for posting (Tim Bourquin). Picking up the top need guts too but picking up the bottom can be rewarding or get constipated. Most value investors prefer the bottom but for great traders, they will always want their money to work for them. Back during the Asia Financial Crisis (1997-1999), I am diversified and invested heavily in the Malaysia stock market. But when suddenly overnight (in September 1998), the Malaysia goverment imposed Capital Control, most of my capital are frozen for almost 2 years there. That was the most dearest lesson I learned that not to diversify into somewhere you are not accustomed to. Now I am more comfortable to concentrate on one market (US Market) and try to understand the market behaviour and culture. I don't mind to diversify to many other sectors and product but doing all in the same market only. Just like a small fish riding the back of a giant blue whale. Once bitten twice shy. Maybe it's just my luck then to get caught there, poor timing man.

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