In this section we will be covering the few important rules that should never be broken in trading. If you can apply these rules consistently, and with the right amount of discipline, you will be well on the way to being a profitable trader. The following are 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, mostly through trial-and-error, and the inevitable mistakes that everyone makes when they start a trading business.

Set up and Implement specific goals and objectives

Few things are more important to your trading success than having set specific goals and objectives for what you are trying to achieve. It is amazing to me how often we hit our targets, meet our objectives, and reach our goals best when we speak aloud and write them down. For any business to be successful it must have measurable objectives that you are actually able to achievable. In trading, the primary objective is obviously to make money, but it is important to have other objectives that are not strictly cash-related. We must always remember that reward and risk go hand-in-hand in trading and that we can’t expect to achieve high returns without planning and bracing for high risk Your objectives and goals have to be very specific to you, but they must also include the following characteristics if they are going to be useful: • Be measurable in accordance to completion and timeframe involved • Be realistic and achievable • Be worth the time and effort involved • Be positive As an example, here are some actual objectives (Please bear in mind that this is only a partial list): • Create 2 new positive-expectancy trading systems each and every year • Seek to make less errors implementing your trading systems each year • Work to achieve a return to maximum draw-down ratio of 1.5:1 • Take 2 weeks vacation from trading during each year You should also note that only one of them is meant to be about making money, and that has a measurable objective that is very similar to a draw-down, and it is not guaranteed. If you know what you are trying to gain in your trading, and when you are trying to achieve it, the whole of your efforts will be more focused on meeting your objectives. This also helps to guide you to only pay attention to things you really want to achieve with your time and resources that you have available. This will also give you a way that you can effectively measure the success and progress of your trading strategy. Generally traders who have well-defined objectives will be much more successful than those that do not have pre-defined goals.

Consistency and discipline

In order for you to be able to realize the full potential of your trading systems it is very important that you take every trading entry, adjust every stop, and close out every trade when your pre-defined trading system says you should. This takes an extreme amount of confidence in your trading systems, good and reliable technology, and the unwavering discipline to stick to your trading plan no matter what happens. The good thing about have an underlying assumption about being consistent and disciplined is that you have a pre-defined plan for every situation that you may face in your trading, so that you know how you are defining what being consistent really means. Your plan needs to include at least the following items in it if it is going to be successful: • All of your trading rules for entering, adding to, and getting out of your positions • What you are planning to do if your trading computer, internet connection, broker, power, telephone etc. fails to be of any real use or break down • What you will do if for some reason you are unable to trade • What you will do if you lose a certain percentage of your account • What you will do if all the markets are closed and you can’t get out of your current positions Unless you write down the answers to all these scenarios, you cannot be properly consistent and disciplined in your approach to trading and if you lose money you will not know if it is because you didn’t follow your plan, your plan is incomplete, your systems do not work, or if it is because you are simply going through a losing period.

Let your profits run

This rule is undoubtedly the key to being a successful trader. It is in these three simple words however that are easier said than done. When we get a profitable trade going it is our natural fear of losing the unrealized cash starts and we truly want to close it out now and quit while we are ahead. Most trading actually consists of long periods of small winners and losers, that is quickly followed by a few huge winners that make the difference between overall profitability and simply breaking even or even losing thanks to the trading costs(commissions, spread, and slippage). It is our ability to let the huge winners become huge. This is what determines how we will perform overall during the course of the year. The key here is in letting a winning streak run is to have trailing stops that are generally outside the daily noise of the market so that they are not so tight as to get stopped out during ‘normal’ trading process. This means that you need to be prepared to give up a relatively large portion of a winning trade’s open profit and it is also the thing that makes this so hard to implement. In fact, we should be adding to a winner and widening stops rather than trying to figure out how tight our stops can be to capture the largest amount of profit. The trade has already shown you if it intends to be a winner, and the chances are it is a low-risk idea if you were to add to the position now rather than ‘strangle it’ with stops that are too tight. It is very important that your management rules leave room for large winning trades, and that the rules are pre-defined and understood before you place the trade in the first place. This will allow you to stick to your rules when you do get the big winner.

Cut your losses short

This is actually the sister rule to the one mentioned above, and is usually just as difficult to do (even if it is very easy to define). In the same way that profitability comes from a few large winning trades, capital preservation so comes from avoiding the few large losers that the market will see fit to send you each year. Setting a maximum loss point before you enter the trade so you know ahead of time approximately how much you are risking on this position is pretty straight up. You just have to have an exit price that tells you that your trade is a losing one you should exit before it gets any bigger. Because of gaps at the open, or limit moves in futures we can never be 100% sure that we can get out with our maximum loss, but simply having the rules, and always sticking to them will save us from the nasty trades that just keep on 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 your maximum loss point, you should just get out right away. You can’t hope that it will turn around for as it isn’t common sense. Being 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 decidedly small. Why would you want to risk any more money on a trade that has already shown itself to be a loser 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 on to your 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 just not worth it. this is why you should always stick to your rules and exit a position if it hits your stop point.

Never add to a losing trade

One of the few trade management rules that you should 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 for you to want to risk more money on. If it actually is a winner disguised as a loser, why not wait until it shows it is a winner before you add to it. If you do this you will notice that nearly every time the trade ends up hitting your stop loss and does not change direction. Sometimes the trade turns around before it hits your stop and becomes a winner and you can count yourself very lucky if it does. Sometimes the trade hits your stop loss and then turns around and becomes a winner and you can count yourself unlucky. Whatever happens, it is never worth adding to a loser, hoping that it will eventually be a winner. The odds of success are just too low to risk more capital in addition to the initial risk.

Don’t take too much risk

One of the most devastating mistakes that any trader can make is in 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 indefinitely. Why should you risk so much when you could be prevented from continuing? There is a useful saying in poker than going all-in works every time but once. It is the same thing in trading. If you risk all of your account on every trade it only takes one loser to wipe you out, so you will be out of the game at some point as it is only a question of time. In general, you should 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 that is allocated to the system. With these things combined 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 extremely low. All trades that you make should be of a size that almost seems pointless to your future fortune. If you are worried about the size of a trade then it is too big and you should use a lower amount immediately. Remember that longevity in any trading market is the key to making money by trading. You should trade slowly over a long time with minimal risk, is always preferable to rapidly with too much risk.

Only trade positive expectancy systems

If you have a positive expectancy trading system, the only factors that will decide how much money you will make per year are the number of trades the system actually makes, how much capital you allocate to the system, and how accurately you use the trading signals. If you do not know whether your trading system is positive expectancy then it makes no sense for you to be trading it in the first place. Expectancy is calculated using the profit or loss on each trade; divided by the initial risk, and then taking the average of this number of a series of trades. Systems that have positive expectancy will make money most of the time and those with negative expectancy will lose money. Successful traders only trade systems when the odds of success are in their favor so that they know that making money is the final result of accurately implementing the system and not just pure luck.

You will want to minimize all of you trading business costs

Some trading systems can offer you only marginal profitability, and trading implementation costs (commission, spread, and slippage) can be the difference between making a profit and making a loss. With the simple availability of modern electronic brokers, and fully-automated trade processing and execution, it is definitely worth the effort in looking for a very low cost way to implement your trading system. High commission, wide spreads, and large amounts of slippage can be lowered drastically and easily by carefully choosing the right broker. This can be the difference between a system being useable or not. Paying too much for trade implementation is a way to lose money that you can actually avoid. For those just starting out, we recommend Easy Forex as a broker/platform due to their relatively affordable spreads and fee structure.

Educate yourself

In order for you to be able to compete at the highest level in the trading business and be a successful player, you must be well-educated about what you are doing. 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 still working. It means that you understand all the technology and applications that your system needs to perform with accuracy. It means understanding your goal and objectives and how trading will help you achieve them. It means understanding yourself and how your personality will affect your results. In order to succeed as a forex trader, you really need to become an expert in your own trading business to understand how it the dots are all connected, when it is broken, and how it can be improved. This takes commitment, hard work, dedication, and more hard work.

Avoid trading scared money

No one ever made any money trading when they had to do it to pay their bills at the end of the month. Having a requirement to make a certain amount of 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 faster than you’d expect to disaster. Trading is about taking a reasonable amount of risk in order to achieve a good reward. The markets and how and when they give up their profits is nothing that you can control. You should never 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 is how hasty decisions are made.