5 trading rules & tools that work

This week the UK officially added ready-mashed potato to its shopping basket. This is according to Office for National Statistic’s 2018 measure of inflation, and comes 30 years after dried ‘Smash’ potato was dropped from the list.

What surprised me (although it probably shouldn’t) is that Waitrose have reported a 15% growth in sales of ready-mash since the report was released this week – it’s as if the nation was poised to retire their potato mashers, and we were just waiting for the Office for National Statistics to give us permission.

I’m the first to admit to being lazy in the kitchen, but ready-mash isn’t something I’d run to. However, most of us have dozens of ‘labour-saving’ devices around our kitchens, from banana cutters (for when a knife just won’t do!?) to novelty wine bottle holders … in the interests of full disclosure, the Rose family kitchen drawer holds what can only be described as a carrot sharpener. Who knew we needed such a thing?

Of course, the madness doesn’t stop in the kitchen. As traders, there seems to be no end of fancy tools that we can’t do without, whether they are the Holy Grail of indicators … a piece of software that’ll do it all for you …

I’m in no way opposed to tricks and tools that’ll save me time and money. But I object to unnecessary clutter on my charts, and spending hours getting my head around a new trading technique that goes nowhere.

So, let’s clear the surfaces of gadgets and tools … and get to the bottom of what actually works …

1. Trend following

There are many styles of trading … range trading … swing trading … price action trading … And sure, they can all work, if they’re done right. But nothing has the consistent, reliability of following a trend.

The best thing about following a trend, is that it’s the easiest type of trading. As with all methods, it will have periods when it will struggle to make money, as the market isn’t trending all the time. But, if you stick with a trend-following method, you can count on trends resuming, and that’s when you can make serious profits.

2. Act on momentum

Trend trading is about more than just sticking a moving average on your chart and trading off that. We also need to be aware of market momentum – these are the bursts of activity that tell us when to jump, and when to sit tight.

The aim is to enter a trend on a burst of momentum, which means that we can catch the bigger moves, and avoid the times when the market is relatively directionless.

There are hundreds of trading indicators we could use, but the reality is that all you need for a successful signal is a simple trend indicator, and a simple momentum indicator – play around until you have two that work successfully together. Don’t expect them to work perfectly all the time – nothing will be infallible (which is why we have smart exits and good money management to help us when things don’t go to plan …)

3. Smart exits

Exit strategies are the decisions we make about where to take profits, and where to accept losses. This will affect where you position your stop levels and profit targets, but there will probably be other factors that could take you out of a trade – like news coming out, technical indicators, or time-based factors.

Mathematically, the ideal way to trade would be with super-wide stops, and very tight profit targets (I’m NOT suggesting you do this!). That way, we’d ride any losses until they came into profit … and immediately snatch any profits on the table. As long as our funds don’t run out while we’re waiting for our losses to come good, we could almost guarantee that every trade would be a winner.

But, of course, the reality is that most of us would have seen our trading funds wiped out quickly with this style of trading!

So, our exit strategies have to be built around the size of our trading funds, and our own personal capacity to deal with losses along the way. The first factor is practical and measurable, but the second only comes with (often painful) experience.

There are a number of ways we can ‘smarten up’ our exit strategies …

• Look at round numbers and technical levels when positioning stops and targets (avoid asking prices to move through key levels before you take a profit, for example).
• Take partial profits along the way (this is a great way to let your trades run further than you might otherwise be comfortable with, because you know that you’ve already got some profits in your pocket).
• Use the average range of your instrument to judge how far away your stops and targets should be, that way you can make a really good judgement on how far you can expect the market to move in your given timeframe.
• Fibonacci extensions are another good way to judge how far you can expect the market to move.
• Exit as momentum drops (just as we enter on a burst of momentum, signs that this is fading can be a perfect cue to get out of the market).

4. Consistency

Traders often talk about the big wins … but the reality is that there are no ‘big breaks’ in trading. It’s a steady grind.

The comedian Steve Martin talks about how he thought appearing on The Tonight Show would be his big break to fame. But, he recalls, after your first appearance, no one recognizes you. After the third time, people start to think you might look like someone … but can’t figure out who. After the sixth time, they reckon they know you from somewhere … maybe you work at the post office? And after the tenth time … that’s when they start to recognize you as someone who might have been on TV (but they still don’t know who you are).

Keeping going and being consistent are tough.

Often the reason that we fail to be consistent is that we focus too much on the end goal, rather than on the process. We want the ‘big win’ … and when that doesn’t come soon enough (it’ll never be ‘soon enough’!), we become disillusioned.

I’m not saying that the end goal isn’t important, but if that end goal is going to be impressive enough to compel us, then that end goal is likely to require some work over a period of time. And that’s where a focus on the processes becomes vital.

Here are my tips for keeping focused and consistent:

• Get started (it’s obvious, I know, but very often ‘big plans’ never actually get in motion at all)
• Prepare for the dip (these are the challenges – i.e. the losing trades, what will inevitably come along.)
• When you feel completely despondent about your trading process, do it anyway.

Please note that being consistent doesn’t mean just continuing to throw money into a losing run – there are plenty of ways to plan for dips, and to stem losses at times like this (which I cover in my next point). What’s important is that this is planned for, and that the plan is stuck to.

5. Good money management

You can fall down on each of the previous 4 points … but poor money management will guarantee you a short trading career.

Money management doesn’t need to be difficult, but the reason its so often overlooked is that it’s plain dull. But, I can assure you that a spreadsheet that shows your capital growth building and building from year to year, is anything BUT dull to look through (or maybe that’s just me!)

The key points for sound money management involve:

• Correct position sizing: this means knowing exactly what your risk per trade is, and never letting this creep uncomfortably high (1–2% is recommended for most trading methods, but if you’re day trading, then I’d suggest even lower.)
• Strategies to stem losses in a drawdown: we all hate losing money, so know how to stop it when your trading method hits a dry patch (there are simple tricks to do this HERE)
• Keep a trading journal: without tracking your results, you have no way to judge what’s working and what isn’t. It needn’t be anything complicated, and the Trader’s Bulletin spreadsheet is a great place to start (download it here)
• Compounding profits. While there’s a lot to be said for spending your winnings … if you want to build substantial wealth from trading, the only way is by compounding your profits. If you’re happy just spending profits as you go – that’s fine. But you won’t see your monthly and annual growth increase that way. However, if you reinvest your winnings and (this is the crucial component) are patient … that’s how you get rich from trading.

But I can’t finish without reminding you of the PIE trading system – a method that defies the usual rules and constraints of trading. In the 36 months I’ve traded PIE, I’ve enjoyed consistent profits, trading just once a month, and I’ve only had to employ the special ‘trick’ that avoids drawdowns once – and it worked! Click here to get your name down for the next course.

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