If you can’t answer every one of these questions, you need to stop trading now

 

There’s a simple rule that traders should follow: Trade what you see, not what you think.

But what does that actually mean, and how do we apply it to reality of uncertain markets?

Rules-based trading

Winning and losing money can be very emotive events, and both can make us behave in ways that aren’t entirely rational. Human beings are naturally rubbish at risk evaluation – especially when it involves £ signs and big numbers!

That’s why rules-based trading can keep us on the straight and narrow.

Sometimes called ‘mechanical trading’, this will be a strategy that has defined rules for all stages of the trade. The ethos is: clear rules and ruthless consistency.

You are not allowed to deviate from those rules, which will cover:

• entry criteria
• position sizing
• risk levels
• trade management, and
• exit criteria

Rules-based trading systems can grow and grow, as we add and adapt them over time, adding extra nuance here and there. Unless you’re using automated trading software (and even if you are), this can make them difficult to follow accurately and mistakes creep in.

Keep your trading rules to a minimum, but try to cover as many eventualities as you can think of

I know that sounds like contradictory advice, but what we want is a situation in which, whatever the markets throw at us – we have simple guidance we can follow.

Mechanical trading doesn’t need to be complicated, but it should be clear enough that you always know what you should be doing – you won’t have to mull over any decisions. You’ve already done that work when you made the trading rules.

The most often overlooked area of planning is for when things go wrong – understandably, it’s not something most traders like to dwell on. And that’s exactly why things can unravel quickly after a few losses.

I urge you to give this serious consideration. This is exactly when our trading behaviour becomes very emotional, and we make terrible decisions.

Consider what you will do after a drawdown of 10% … 20% … 40% …, etc. I know it’s not something we want to think about, but it does happen, and traders who are prepared can bounce back from it. Those who aren’t prepared, tend to just keep throwing funds into a drawdown, or they give up completely.

The well-prepared trader, in contrast, knows exactly how they will react when a trade is winning … when a trade is losing … to preserve funds in a drawdown … and what they’ll do with their winnings.

Taking random stabs at the market might give you a few winners, but over the long term, you’ll never progress with your trading, and will inevitably lose money. Without mechanical trading rules, you can’t have consistency, risk management or measurable results. And these three things are vital if you want to have a predictable rate of success.

Here’s my checklist of questions that any trader should be able to answer …

If you can’t answer every one of these questions – then you need to stop trading now, and formulate your trading strategy properly.

But don’t worry – I have a trading plan template for you, plus all the information you need to build your rules.

Just click here to access all the info you need (it’s completely free to Trader’s Bulletin members)

A solid trading plan, with clear rules is a wonderfully stress-free way to access the markets. You’ll find that you can instinctively act and react, without having to think too much about it. Instead, you can preserve your mental powers for researching and testing improvements, and to become ever more successful as a trader.

 

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