8 Basic Rules any trader should obey
Did you ever wonder what is the difference between winners and losers in the long term? Like most people you probably think the answer is education. Then, you read a few more books, some articles and thought that was it. Now you’re the man. Well… guess what? It’s not that. Any of us can swallow tons of information and still some will produce better results. Even though you may hear them being called Uber-traders, they actually have one simple thing in common: discipline. Let me elaborate and make it easier for you to understand by giving you some simple rules that any successful trader has to follow.
1. Never get emotionally attached
Traders usually trade a limited number of FX pairs. This is because each pair behaves its own way and it is a very good thing to “get to know your instrument”, understand how it reacts to news, which are the technical indicators that work, and so on. However, this may lead, at a subconscious level, to some sort of feeling of connection and emotional attachment. That is a bad thing. Getting emotionally attached can make you lose focus and start seeing trade signals that are not really there or interpret news in the way you had hoped for instead of facing the reality. By contrast you should stay focused. A specific currency is not like your girlfriend, but more like your employer. Act accordingly.
2. Control your emotions
We are humans, therefore we have feelings, emotions and are all affected by psychological factors. The most important emotions that affect a trader are greed and fear. Greed appears when you are in a winning position that is at the point you expect it to reach (as a result of your analysis). Maybe it’s is overbought or oversold from a technical point of view, but despite that you hang on to that winning position as you can see more gains so you don’t close and risk being caught by a market reversal. By contrast fear occurs when you are afraid to take any risks and you close your orders by making only a few pennies out of a huge opportunity despite your analysis telling you there is an additional profit to come out of that trade.
3. Never insist on a losing position
When you enter a position, you enter because your analysis said so. Still, something may go wrong. Maybe there was a piece of news, maybe it is something that you can’t understand or maybe you were simply wrong. Accept it. Don’t let the pride to overcome and insist in a losing position. Also, don’t stay in a losing position because you “hope” or have “faith” it will reverse. Keep your “hope” for when you’re in hospital and your “faith” for when you’re in church. On the trade floor you only ever want to deal with facts. In a similar way you can run in to several consecutive losses; you enter a trade, it goes the other way, and you exit. After a little while you try again, lose some, then exit. After a short while you give it another try and you’re wrong again. Guess what? You need to stop dude! Face it: you were wrong! Get over it.
4. Take breaks when things get hot
There are times when you enter a position, you lose and get out. Immediately you try something else and you’re still on the wrong side. Change again, and the result is the same. Actually not the same since you have lost some more. Well, there are times when everything goes the other way. Even if it looks like the planets were aligned to hurt you or all the other traders made a coalition against you, it’s not that. It’s just that you’re too stressed and that is when you need to take a break. Go out, get some fresh air, do something else, forget about the trading for half an hour and try again. If you get the same result, call it off for the day. There is always tomorrow.
5. Keep your plan
Before you started trading you have made a plan, did your homework and your research. Or at least you should have. When the opening bell on the trading floor rings, you know what you’re looking for, what you expect and you have at least a Plan A and a Plan B regarding the pairs to follow, trend, maximum leverage, maximum investment in a position, etc. However, during a session things are not that simple: they change a lot. You may make some changes, but do not change your plan fully without having any serious analysis beforehand.
6. Don’t invest heavily in something you don’t know
I’m not trying to sound like Warren Buffet here, so I’m not saying you should only invest in a company that you know what produces or the same thing applied to pairs. However, there are two things for you to keep in mind.
At a fundamental level, don’t invest in currencies you don’t know. Don’t go for the MYR (Malaysian Ringgit) if you don’t know where Kuala Lumpur is. War may break in South-East Asia and you’ll think you have an opportunity to buy the dip. Or don’t invest in BGN (Bulgarian Leva) if you don’t know that it is pegged to the euro. You risk keeping an eye on Bulgarian Central Bank’s web page and look for relevant info that will never come.
At a technical level, you should already know that each pair acts on its own way, as if it had its own life. So, don’t invest in a pair you haven’t researched first. Otherwise, you risk being ripped off without even knowing why.
7. Don’t invest when there is nothing to invest in
Markets do not always go up and down. They are not a rollercoaster every day. There are trends, and there are periods when the markets are calm and seeking direction – in Technical analysis this is called sideways movements. Actually, these are the periods when the only ones who earn money are the brokers. If you are trading on short frames (intraday or less than a week) this is when you go on holiday, watch TV, do whatever else you please. In such periods, as there is no trend, there is very limited space to win. Don’t force a trade (see paragraph 3). Accept there is nothing to invest in and avoid losing money. Remember that just as “winning is better that not trading”, also “not trading is better than losing”.
8. Don’t break the rules
The last and the most important advice: don’t break the rules. Whether you care for the above or you have a different set of rules, do not ever break them. Ever wondered why more and more trading is let for the computers? You need humans, great traders, to set up customized indicators and rules for the computers to trade. But then, after having placed a set of rules, you know that a computer will never break them. And this is why, in most of the times, the computers have a better track record than you.