The 10 Golden Rules of Trading

by: Paul King

1 Introduction  In this article we cover the few important rules that should never be broken in trading. If you can apply these rules consistently, and with discipline, you will be well on the way to being a profitable trader.  The rules we cover are:  • Have specific goals and objectives  • Be consistent and disciplined  • Let profits run  • Cut losses short  • Never add to a losing trade  • Don’t take too much risk  • Only trade positive expectancy systems  • Minimize all trading business costs  • Be well educated  • Don’t trade scared money  Each of the rules will now be discussed.  2 The Golden Rules of Trading  The following sections outline a set of rules that can significantly improve your chances of success if they are understood, practiced, and implemented consistently in your trading. These rules have been learned the hard way, by study, research, trial-and-error, and the inevitable mistakes that everyone makes when they start a trading business.  We hope that you can learn from the work we have done, and benefit from our experience. The rules will now be discussed.  2.1 Have specific goals and objectives  Few things are more important to your trading success than having set (i.e. written) goals and objective for what you are aiming to achieve. It is amazing to me how often we hit our targets, meet our objectives, and reach our goals only when we articulate them and write them down.  For any business to be successful it must have measurable objectives that are actually achievable. In trading (obviously) the primary objective is to make money, but it is important to have other objectives that are not purely cash-related. We must always remember that reward and risk go hand-in-hand in trading and that we cannot expect to achieve high returns without planning for high risk (i.e. draw-downs).  Your objectives and goals will be very specific to you, but they must have the following characteristics to be useful:  • Be measurable (in completion and timeframe)  • Be achievable  • Be worthwhile  • Be positive  As an example, here are some of our current objectives (this is only a partial list):  • Develop 2 new positive-expectancy trading systems each year  • Make fewer errors implementing our trading systems each year  • Achieve a return to maximum draw-down ratio of 1.5:1  • Take 2 weeks vacation each year  Note that only one of them is about making money, and that has a measurable objective that is relative to draw-down, not absolute (i.e. make 100% per year). If you know what you are trying to achieve, and when you are trying to achieve it, the whole business will be focused on meeting  your objectives and help guide you to only pay attention to things you really want to achieve with your limited time and resources. This will also give you a way to measure the success and progress of your trading. Generally traders with well-defined objectives will be much more successful than those that do not have pre-defined goals.  2.2 Be consistent and disciplined  In order to realize the full potential of your trading systems it is critical that you take every trading entry, adjust every stop, and close out every trade as and when your system says you should do. This takes extreme confidence in your trading systems, good robust reliable technology, and the mental discipline to stick to your trading plan whatever happens (assuming it is complete).  An underlying assumption about being consistent and disciplined is that you have a pre-defined plan for every situation you may face in your trading, so that you know how you are defining what being consistent is. Your plan needs to include at least the following items:  • All your trading rules for entering, adding to, and exiting positions  • What you will do if your trading computer, internet connection, broker, power, telephone  etc. fails  • What you will do if you are unable to trade  • What you will do if you lose X% of your account  • What you will do if all the markets are closed and you can’t exit your positions  Unless you write the answers down to all these issues, you cannot be consistent and disciplined in your approach to trading and if you lose money you will not know whether it is because you didn’t follow your plan, because your plan is incomplete, because your systems do not work, or simply because you are going through a losing period.  2.3 Let profits run  This simple rule is the key to being a successful trader. It is three simple words that are very hard to actually implement. When we get a profitable trade our natural fear of losing the unrealized cash kicks in and we truly want to close it out now and take the money. Most trading consists of long periods of small winners and losers followed by a few huge winners that make the difference between overall profitability and simply breaking even or losing due to trading costs(commissions, spread, and slippage).  It is our ability to let the huge winners become just that - huge - that determines how we will perform overall during the year. The key to letting winners run is to have trailing stops that are outside the daily noise of the market so that they are not tight enough to get stopped out during ‘normal’ trading. This means being prepared to give up a significant portion of a winning trade’s open profit and is the thing that makes this so hard to implement. In fact, we should be adding to a winner and widening stops rather than working out how tight our stops can be to capture maximum profit. The trade has already shown you that it intends to be a winner, and the chances are it is a low-risk idea to add to the position now rather than ‘strangle it’ with stops that are too tight.  It is very important that your position management rules allow for large winning trades, and that the rules are pre-defined and understood before you place the trade. This will allow you (if you have confidence in your method and discipline) to stick to your rules when you do get the big  winner.  2.4 Cut losses short  This is the sister rule to the previous one, and is usually just as difficult to implement (although it  is very easy to define). In the same way that profitability comes from a few large winning trades, capital preservation comes from avoiding the few large losers that the market will toss your way each year. Setting a maximum loss point before you enter the trade so you know before-hand approximately how much you are risking on this particular position is relatively straightforward. You simply need to have a exit price that says to you ‘this trade is a loser and I will exit before it gets any bigger’. Due to gaps at the open, or limit moves in futures we can never be 100%  certain that we can get out with our maximum loss, but simply having the rules, and always sticking to it will save us from the nasty trades that just keep on going and going against our position until we have lost more than many winning trades can make back.  If you have a losing position that is at you maximum loss point, just get out. Do not hope that it will turn around. Given that trades are either winners or losers, and this one is shouting ‘Loser’ at you, the chances that it will turn around and become a large winner is tiny. Why risk any more money on this losing trade, when you could simply close it out (accept the loss) and move on. This will leave you in a much better place financially and mentally, than holding the position and hoping it will go back your way. Even if it did do this, the mental energy and negative feelings from holding the losing position are not worth it. Always stick to your rules and exit a position if it hits your stop point.  2.5 Never add to a losing trade  One of the few trade management rules that we can state we never break is ‘Never add to a losing trade’. Trades are split into winners and losers, and if a trade is a loser, the chances of it turning right around and becoming a winner are too small to risk more money on. If indeed it is a winner disguised as a loser, why not wait until it shows it’s true colors (and becomes a winner)before you add to it.  If you do this you will notice that nearly always the trade ends up hitting your stop loss and does not look back. Sometimes the trade turns around before it hits your stop and becomes a winner and you can count yourself very fortunate. Sometimes the trade hits your stop loss and then  turns around and becomes a winner and you can count yourself unlucky. Whatever the result, it is never worth adding to a loser, hoping that it will become a winner. The odds of success are just too low to risk more capital in addition to the initial risk.  2.6 Don’t take too much risk  One of the most devastating mistakes any trader can make is risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game. Why risk so much you could be prevented from continuing? There is a saying in  poker than going all-in (risking all your chips) works every time but once. This is true of trading.  If you risk all your account on every trade it only takes one loser to wipe you out (and no trading method is 100% accurate), so you will be out of the game at some point – it is only a question of time.  In general, we only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop price, and the amount of capital allocated to the system. With the win probability  and ratio of size of winning trades to losing trades we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is tiny. All trades should be of a size that almost seems insignificant. If you are worried about the size of a trade then it is too big and you should reduce the size immediately. Remember that longevity is the key to making money by trading – slowly over a long time with minimal risk, is always preferable to rapidly with too much risk.  2.7 Only trade positive expectancy systems  If you have a positive expectancy trading system, the only factors that determine how much money you will make per year are the number of trades the system generates, how much capital you allocate to the system, and how accurately you implement the trading signals. If you do not know whether your trading system is positive expectancy then why are you trading it? Expectancy is calculated using the profit or loss on each trade (net of trading implementation  costs) divided by the initial risk (using your stop loss) and then taking the average of this number of a series of trades. Systems that have positive expectancy will make money on average and those with negative expectancy will lose money.  Successful traders only trade systems where the odds of success are in their favor (i.e. the system is positive expectancy) so they know that making money is the result of accurately implementing the system and not just pure luck.  2.8 Minimize all trading business costs  Some trading systems have only marginal profitability, and trading implementation costs (commission, spread, and slippage) can be the difference between profitability and making a loss. With the easy availability of modern electronic brokers, and fully-automated trade processing and  execution, it is definitely worthwhile looking for a very low cost way to implement your trading system. High commission, wide spreads, and large amount of slippage can be reduced considerably simply by carefully choosing a broker. This can be the difference between a system  (especially a high frequency one) being useable or not. Paying too much for trade implementation is an avoidable way to lose money.  2.9 Be educated  In order to compete at the highest level in the trading business and be one of the few truly successful participants you must be well-educated about what you are doing. This does not mean having a degree from a well-respected university – the market doesn’t care where you were educated.  Being well-educated means that you have thoroughly researched and tested your trading ideas and know why your trading system worked in the past and is continuing to work now. It means understanding all the technology and applications that your system needs to perform accurately.  It means understanding your goal and objectives and how trading will achieve these. It means understanding yourself and how your personality affects your results. It means understanding the markets and instruments you trade.  In order to succeed you really need to become an expert in your own trading business to understand how it all fits together, when it is broken, and how it can be improved. As with all worthwhile endeavors, this takes commitment, hard work, dedication, and more hard work.  2.10 Don’t trade scared money  Lastly, no one ever made any money trading when they had to do it to pay the mortgage at the end of the month. Having a requirement to make X dollars per month or you will be financially in trouble is the best way I know to completely mess up all trading discipline, rules, objectives, and  leads quickly to disaster.  Trading is about taking a reasonable risk in order to achieve a good reward. The markets and how and when they give up their profits is not under your control. Do not trade if you need the money to pay bills. Do not trade if your business and personal expenses are not covered by  another income stream or cash reserve. This will only lead to additional unmanageable stress and be very detrimental to your trading performance.  3 Summary  In this article we have covered the rules that we believe should never be broken in trading. If you work on never breaking them, your trading should improve dramatically.  We sincerely hope this information has helped you to improve your trading performance.  Good luck in yout trading.  About the author: Paul King is owner and head trader of PMKing Trading LLC, a Vermont-based proprietary trading company founded in May 2002. Paul has published a series of eBooks and articles about what he considers to be the important aspects of trading.

Internet Marketing VS Forex Currency Trading

by: Amin Sadak

Have you ever tried to make money online and failed?  Did you follow your guru's advice and still fail?  Here's an alternative...  Have you noticed that when someone’s trying to sell you something - such as a system for making money - they always make it look far easier than it is?  Let’s look at two Internet businesses, almost as diametrically opposed as it’s possible to be – Internet Marketing and Forex Currency Trading.  You’ve probably heard the old Internet adage – build a better website and they will come. Well it ain’t true!  You could put up a site advertising dollars for a dime and they still wouldn’t come – because they wouldn’t know where to look!  Let’s look at what you need to have in place in order to build a successful Internet marketing business.  First of all, you need a product. If you’ve been reading the recent Internet marketing blurb you’ll know you need a niche product.  Actually, the new thing is sub-niche but whatever they call it, you need a product for which there is high demand but low supply.  Finding a suitable niche is the hardest part of the whole process but let’s say you have a killer product, what else do you need?  The List.  Ask any Internet marketeer and they will say that the most important part of your business is your opt-in list.  For people to join your list you usually have to give them something of value such as a free eBook or report on a subject related to your main product line.  To keep them interested, you need to keep in touch with them offering them additional information, advice and tips.  Website.  To promote your opt-in list you need a website (although there are other ways of promoting your list, too) with features that will encourage people to sign up to your list.  You also need a killer website with killer copy to describe – and sell - your killer product. This may or may not be the same as the one you use for your opt-in list.  Killer copy.  Maybe you’re not a good copywriter. There are many eBooks on the subject that can help you or you can pay someone to write copy for you.  You need a domain name, preferably one with some relation to the product but good domain names are becoming increasing difficult to find.  Ads.  To get people to visit your website in the first place you need to register it with the search engines.  SEO (Search Engine Optimisation) is an art in itself. You can mug up on the subject or pay someone to do the job for you (but be aware that not all experts are!).  You might also want to place ads for your list in newsletters and ezines. The better ones will charge you although you might get a free ad in return for an article.  Autoresponder.  To automate your business you need an autoresponder. These clever devices automatically send emails to everyone on your opt-in list at predetermined intervals, and contain predetermined copy.  For example, you could create a series of emails containing, say, five parts of a free course to be sent one a day over the first five days.  Then emails would be sent once a week advertising a different product each time.  Whenever anyone signs up to your list they automatically start at the beginning so everyone gets the full cycle of marketing material.  We haven’t even looked at affiliate sales and marketing but I’m sure you get the picture.  The basic idea of selling over the Internet sounds good but there’s a lot more to it than most people realise.  Forex Currency Trading  Someone said that trading is the last frontier, the last place where men and women can stand up and pit themselves against the world.  It sounds very Wild Westish but most of it is true! You win or lose entirely by your own efforts and if you win, it’s like having your very own bank.  However, even owning a bank is a business and you still have to work hard to put the money there – and to keep it!  Unlike Internet marketing where all your efforts, in one form or another, are geared towards making people join your list and then selling them stuff,  Currency Trading has no customers. That’s worth repeating – with currency trading, you don’t need customers.  No customers means you don’t need any of the associated accoutrements that go with Internet marketing such as:  Products  Web site  Domain name  Opt-in list  Ads  eBooks and reports  Autoresponder  Any other marketing aids  So far so good, but what do you have to do and what do you need? Well, you need to know what currency prices are doing.  You can get a list of prices at the close of each trading day free from many web sites. If you want to trade during the day – intraday trading,  you can get real-time prices for a nominal fee from several data suppliers.  In the foreign exchange currency market, commonly called forex, you can get this data and charting software free from many web sites.  Okay, that’s the easy bit. In order to trade currencies, you need to analyse the data and determine which way price is heading.  In other words you need a system and this will require study and dedication.  There’s lots of other stuff you have to know, too – trading terminology, margin, leverage, money management, order types, trader psychology and more.  But all of this is available in eBooks and courses and on the Net.  You also need some money upfront to fund your trading account. With forex you can begin with as little as $300-500 although you would be advised to start with more.  So while you don’t have the ongoing quest for new customers, new products and inventive sales techniques,  you do need some sort of education or training before you begin and you need discipline while you’re trading.  For more information on getting started with forex currency trading, go to: www.webkept.com  Making money takes work whether it’s online or off. Make sure you know what’s involved before you start and remember that the more you put into a business, the easier it gets.  About the author: From the author of the hit Forex Currency Trading book - "Mechanical Discretion", Amin Sadak has created another masterpiece for Business Opportunists.  His new teaching manual "The Affluent Desktop Currency Trader" provides an alternative for people looking for online business opportunities.  Amin teaches the method he uses to download $1000+ every week.  For more information, visit http://www.webkept.com

Forex: Benefits of Trading the Forex Market

by: Raul Lopez

Trading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss come differences between the Forex market, the stocks market and the futures market.

Some of the benefits of trading the Forex market are:

Superior liquidity.

Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.

24hr Market.

This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.

Leverage trading.

Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.

Low Transaction costs.

Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

Low minimum investment.

The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.

Specialized trading.

The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.

Trading from anywhere.

If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.

Some of the most important differences between the Forex market and other markets are explained below.

Forex market vs. Equity markets

Liquidity

FX market: Near two trillion dollars of daily volume.

Equity market: Around 200 billion on a daily basis.

Trading hours

FX market: 24hr market, 5.5 days a week.

Equity market: Monday through Friday from 8:30 EST to 5:00 EST.

Profit potential

FX market: In both, rising and falling markets.

Equity market: Most traders/investor profit only from rising markets.

Transaction costs

FX market: Commission free and tight spreads.

Equity market: High Commissions and transaction fees.

Buying power

FX market: Leverage up to 400:1.

Equity market: Leverage from 2:1 to 4:1.

Specialization

FX market: most volume (85%) is made on major currencies (USD, EUR, JPY, GBP, CHF, CAD and AUD.)

Equity market: More than 40,000 stocks to choose from.

Forex market vs. Futures market

Liquidity

FX Market: Near two trillion dollars of daily volume.

Futures market: Around 400 billion dollars on a daily basis.

Transaction costs

FX market: Commission free and tight spreads.

Futures market: High commissions fees.

Margin

FX market: Fixed rate of margin on every position.

Futures market: Different levels of margin on overnight positions than day time positions.

Trade execution

FX market: Instantaneous execution.

Futures market: Inconsistent execution.

All this makes the Forex market very attractive to investors and traders. But I need to make something clear, although the benefits of trading the Forex market are notorious; it is still difficult to make a successful career trading the Forex market. It requires a lot of education, discipline, commitment and patience, as any other market.