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Trading Rules Part 1

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Well we have all read "the rules" and there are thousands of these types of things out there, but these are personal to me through my journey the past few years and thought I would put "pen to paper" for a change...Now I'm not perfect, still make wads of mistakes, I'm high risk, go against the heard and the trend, but learning when to hold them and when to fold them is what I've tried hard to learn the past few years....I've taken big losses and recently started making bigger gains, whilst still having the occasional -30% shocker.....this is more about "common sense" than absoloute techncial trading but it's good now and then to remind yourslef of who you are and have you really put into practise what you have learned?......I know I've got progressively better and hope you all have as well....anyway a few bits n bobs of what I've learn't  (there's only so much you learn from a textbook...totally diffeerent when you have your own kelly bo on the line.

Part of this is from a good booklet I received from Faraday Research, but most is my own findings, both good and bad!     

 

Trade with the trend

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Simply put when you trade with the dominant trend of the market you have a much better chance of success

Sure swing trades can trade with the counter trend, but it's easier to make money trading with the trend

What happens a lot of the time if youCENSOREDagainst the wind?...so why do it in trading?

so simply putCENSOREDwith the wind behing you and you will go further, do it against you and you end up with wee on your face!

When the trend finishes bail out quickly! ( so trade with the trend until the bend in the end)

In an uptrend buy the dips to the major moving averages and trend line

In a downtrend sell the rallies to the major moving averages and trend line

Where there is no trend then simpy buy at support and sell at resistance "channel or swing trade" or avoid altogther as you have no edge

 

Avoid the "hot stocks"

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This may seem rich comming from me!, but I'm always amazed how many "traders" put all their money into a few hot stocks

These stocks may get lots of attention in the media as the "mug punters" believe the hype and buy in before looking at debt etc

"Don't believe the hype" is the case for around 80% of these hot stocks...ALWAYS look at debt servicing ability for these types of stocks 

Hot stocks can make you money, but sell the spikes is normally the only way...don't get too greedy, most retrace in spectactular style

Generally the "newbies and the gamblers" will be into these hot stocks and many won't last the year

Only people who have been around more than 3 years are "worthy" of having a look as they understand the risk/reward and are prepared for all outcomes

More people get excited about these stocks than anything else, but this soon turns to delusion and often the spread gets you even if they move 20%!

 

Be Flexible, your ego is not worth your money

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It's human nature to want to be proven right, but remember the saying "I'd rather make money than be correct"

Always look at risk before you get excited about the reward

History has taught me "when it can't go any lower" cue another 30% plunge

Chart patterns and most forms of trading only have a 50% success rate...what do you do with the expected 50% that will be wrong?..trade the plan 

Stops in and emotions out is the only way to trade....focus on the price and not the news (sometimes it's worth buying bad news, sell into good news)

 

Don't Overtrade

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My first two years were "exciting" riding the market roller coaster, but over 30% of my profits were taking up by stamp and trading costs

The trick is to wait for the correct set ups and that can be boring!...however fewer trades and better risk/reward ration improves your profit!

The more you trade, the more you risk...leran how to maximise your profits and not the amount you trade (worked for me this year)

Don't go "all in at once"...takes time to do this but scaling in and out via tranches reduces risk considerably

 

Be patient

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Again this was my worst area of trading the first few years...taking profits too early just to be proven correct! (silly ego costs you money)

Looking at too many stocks and changing from one to another and not really making any money

Learn by sepcialising in one stock, feel the rhythm and then learn the sector..most stocks move in tandem and you can proift by that if you wait for the signal

Give your trade time to work....sue if you get lucky take the good fortune...if not trades can take several months to pan out

It's not the trading that makes you the money "IT'S THE WAITING"..yip that boring part where you do nowt, is where you make the money (so true!)

 

Cut your losses

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Give yourself a pat on the back when you take a small loss..get the good feeling of doing this and you may be around a while

Don't take a small loss and it can grow and grow till it's soo big that it can wipe you out

My view is that ftse 100 3-5% loss, ftse 250 7-12% loss and with Aim you must be ready for immediate 30-50% loss

Profits give us immense pleasure as we are proven correct, but if 50% of trades fail then get pleasure from being correct with small loss, quick exit

They say never average a loser!.....scale in and out at different pivotal point is completely different from gambling by averaging down "rude not to!"

Again it's back to your ego....why can't you admit you were wrong?....if you can't be honest with yourself you have no chance in the long term 

The pain of taking a big loss effects the rest of your friends, family etc...why would you let that happen? (does your partner really know your P+L?)

 

Let your profits run

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I actually found this the most difficult part of trading the first few years...when you sell stuff too early it can be very painfull

I sold rkh around 55p, sxx in the 4-6p ranges, hovered over gkp at 12p and many others go on to make spectactular gains as I banked 7-15%!

Now a profit is always good to take, but if you learn to stick with the trend the profits can be substancial (remember scale in and out)

You can be wrong 80% of the time with tight stops and successful 20% of the time (trailing stops etc) and still be a winner!

What other profession could you be wrong 50-80% of the time and still keep your job and make money! (it's not the volume, it's the value that counts)

I'm currently up 23% this year, but would be down significantly if it wasn't for staying in one or two stocks (my biggest lesson this year by far)

Remember if your down 33%...you are really looking at a 50% gain to get to "break even"...you need big profits to cover your bum trades

Succcess is doing the same thing over and over again to get a good result  (repeat what works until it doesn't)

Insantiy is doing the same thing over and over again and expecting a different result (change what doesn't work, till you find something that does)

I've found plotting my P+L on a graph has helped me big time....don't know why but pie charts and pictures improve performance

Apart from banking money is their really a reason why the trade should stop working in your favour?

 

Plan the trade and then trade the plan

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It astounds me how many people takes days and weeks studying data, checking references, doing research before buying a new car at £10,000, but will spend no time researching a company, or their trading patterns, company announcements, balance sheet etc before  handing over £10K on a bulletin board tip!...why is that?...well the truth is that most want something for nothing and are too lazy to learn the tricks of the trade

You need to learn the areas to buy a stock, could be major moving avearegs, fib retracements areas, but buying at support is the number one priority

You then need to ensure your stops are a few % below this and where you want to exit before you do the trade

I posted on my trading plan the other day about my 1-5 trade numbering system and that works really well for me..grade your trades by trading the plan

Sometimes gut felling does complicate your trading plan...but if you follow your plan you will be around for years to come....be discplined as greed and hope destruct!

 

So what if it's a loser?

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If your expectations are set correct in the first place then statistically you can expect many losers...as you deal with that your win/lose improves considerably

Generally you "gain" more from your losing trades than your biggest winners...most of the "BIG WINS"  lucky due to takeover etc?

When you lose, don't lose the lesson.......why have I lost my last 5 trades?...going against the trend, never bought at support, death cross etc?..learn from them

Most people give up on their trading plan and long term goals because they can't deal with being a so-called loser....winners never quit is my slogan  

Make your trading automated and ONLY move the stop up.....one of th most difficult things to learn, but great when you master it

Having stops inplay keeps the transaction "mechanical" and not personal.....having a small loss can be very successful so learn to accept them

 

 

    

 

 

 

  

 

    

 

 

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Comments

  • remo
    remo Saturday, 03 November 2012

    Great post mate.
    Can i put this in the learning section as it deserves to be in there????. Also in the best post section.
    well done mate.
    A must read for all newbees
    remo

  • remo
    remo Saturday, 03 November 2012

    just spotted the part one bit..
    ohhh so looking forward to part 2....lol

  • Tradesmarter
    Tradesmarter Saturday, 03 November 2012

    You know my view Sir...people can use any of my stuff for educational or commedy value!....I'll get part 2 done mid week

    Need to re-read it myself sometimes!
    T/s

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