Forex Trading Tips: Rules of the Trade?

Rules of the Trade?

Joe Ross posted this clip on Elite Trader as the markets closed on Friday and I thought it was interesting enough to deconstruct. My responses are in italics.

1. Focus on markets, trading vehicles (i.e., equities, futures, options, spreads), strategies, and time frames that are comfortable for you and that suit your personality. The trades you make have to be “yours,” not mine or those of anyone else. Even when you purchase a method or system, it is vital that you study that method or system to the point that you thoroughly digest and understand the rules. That way you make it your own.

That’s actually very true. Trading is an extraordinarily personal endeavor. It is in fact an expression of your financial creativity and just like a good cook adapts a recipe to his own palate, you must adjust any system to fit your personality otherwise you will never make any money from it no matter how much edge it has. Kathy and I have developed dozens of trading strategies over the years, most of which we never use, but we often get emails of praise from traders around the world who modified those idea s to suit their personalities and have been far more successful than us at trading them.

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2. Identify non-random price behavior, while recognizing that markets are random most of the time. Look for repetitive price patterns and setups, but realize that once you begin trading them, they may become short-lived. If or when they stop working, be patient. Most of the time they will begin working again. When we released Andy’s E-mini bar, it stopped working for awhile, but those who stuck with it send us glowing letters telling us they are satisfied with the results. When you have a provable method, give it a chance to work. When you see an overall one-year equity curve showing that the method earned $7,400 trading one contract at a $10 commission, work your way up to a 10 lot and you will be making in excess of $70,000/year. Then collect more than one method or setup so you can make considerably more.

This is MUCH harder than it sounds. One o f my favorite threads on ET is called 3 Years of Testing and 3 Days to Blow Up highlighting the pitfalls of back testing. The only provable method I know is one that trades with real money in real time. There is just no substitute for empirical feedback. That why whenever I have an idea I always trade it with real money (enough to feel the pain, but not enough to damage my net worth) That is the only way I learn and adapt to market conditions.

3. Absolutely convince yourself that what you have found is statistically valid and tradable in the way you like to trade. Not all statistically valid situations will be comfortable for you, nor will they fit your management style.

True to an extent, but you have to realize that NOTHING is statistically valid in the market because the market is not a static environment and the law of large numbers will always fail to produce the type of smooth Gaussian distributions we are all so used to. The key element of surprise in financial markets is volatility. Once volatility spikes all statistical models blow up along with your profits.

4. Set up trading rules; but remember, rules may have to change.

5. Follow the rules, but never to the point of destruction. You created the rule. If it stops working, change the rule, or throw it out entirely.

True. Note how we constantly make adjustments in BK while at the same time trying to preserve the integrity of our model.

6. Learn to trade for fewer ticks but with more contracts. Most people do it exactly the opposite way.

This is a very interesting insight for those who like to trade short term. Increase your profits by increasing your size- but do it very carefully. The rule of thumb is never to EXCEED 10:1 and preferably always trade at no more than 5:1 lever factor if you want to stay in the game for more than a month.

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