Set your rules out first
An Overview
So, you want to make big bucks trading the markets? We've heard all the stories of how fortunes were made in the time it takes to say, "where's the keys to my Porsche?" But can it be done? Well - maybe. And you want a piece of the action, yes? And I don't blame you. Trading for a living, for me, is the best occupation there is. No boss, no overheads to speak of, work when you want, anywhere you want, freedom; just you, the computer, and your plan. Plan? What plan?
Of course, 'plan'. Anything in life worth doing must have a plan of sorts. Trading is no different. In fact trading without a plan is asking for trouble of the most serious kind, financially speaking. You must have a plan. Read on.
The content of this very modest document has been the subject of many books, has been studied in depth by the very best of us, and will be debated for years to come. My aim here is to plant a seed that hopefully will steer you in the right direction thus saving you countless dollars, not to mention heartache and ruin.
Before you start to lay your hard-earned money on the line, there are many, MANY, things that need to be taken into consideration. The very first lesson to learn quickly is that the guys and gals who trade the markets for a living, the professionals, are not going to think twice about taking that money from you. They know all the tricks in the book, and a few more to boot. The idea is to act and think like those professionals and eventually become one. The profits will then begin to flow.
If you have no idea what you are doing, then you may as well just mail a cheque to those above-mentioned professionals and leave it at that, saving a lot of time.
On the other hand, after losing 'quite a bit' in the markets, I copied them and you could do the same. Learn their tricks. In short, study, study some more, then continue studying. As they say, 'knowledge is a powerful thing'.
Everything will then fall into place.
Where do I start?
Trading is very, very easy. Making a consistent profit is not - unless you have the plan we talked about earlier; a master plan. You need to learn, and sustain, some good habits. The primary weapon in your arsenal in fighting your opponents is getting the odds in your favour. Gaining an EDGE. Just like the casinos. Take a look at the house edge in the casino and how small it is. Something like 2.5%, this is enough to make them a fortune over time! It's just the same with trading the forex markets, get yourself an 'edge'.
Let's stay with the casino example for a moment. They often have losing days when a punter will win big, but at the final reckoning; those boys will be in the money. And that is because of the 'edge'. Your edge starts here. It's not one item to concentrate on but your whole approach to trading. Sound complicated? Not really, when you break it down into its component parts. We'll do this now with headings and sub-headings. There really is no point in doing this exercise if you only pay lip service to it. You must follow your rules because they will get you into the money, no argument.
Rules
There's no point in having trading rules if you don't follow them, which very nicely brings us to our only golden rule.
FOLLOW YOUR DEFINED RULES RIGIDLY
This rule may sound silly but think about it, how often do you break minor rules in some other pursuit such as driving, sport, work? Sometimes it can be costly, in forex it can be very expensive indeed, account-wise.
My forex rules are split into three sections, you may wish to do the same:
a) General - similar to laws
b) Trading - similar to regulations
c) System - well, rules when actually trading your system
Remember, this is a very short article on the ways that I have tackled the problem of gaining an edge in my trading, and in trying to emulate the professionals. This is by no means the only way, so you will need to address your trading traits in a similar manner to extract those profits from the market that we all aspire to. Let's look at the general rules.
The reason you are reading this is because you want to make money. I have been in your shoes doing exactly the same thing, but at the wrong end of an 8,000 account. Yes, all gone! It wasn't the first account that I had delivered to 'the professionals' so something HAD to be done. I made rules and divided them into sections, analysing them yet further. Here are my general rules that you may want to consider:
a) General rules
Work/study hard continuously, knowledge is essential, but
Strike a balance, have a life. Trading at all times will make you stale
Take responsibility for every decision that affects your trading
Self-belief in your aim, in what you are trying to achieve
Do you want to trade full time or part time, how many hours per day?
What IS your aim, what do you want to get out of it, know yourself?
The only place where success comes before work is in the dictionary
Treat trading as a business and organise it as such
A whole book could be devoted to just the above section, this article cannot delve too deeply into what only you can answer for yourself. Please take the time to write down your rules and how you will address them. Your trading will evolve for the better I assure you.
b) Trading rules
What type of trader am I, do I want action, stress etc?
Have a system that fits your trading style
Become good at one style, tweak it to suit you
Keep an open mind for each and every trade
Do not form opinions on the market, let it tell you where it's going
Do not listen to the opinions of others
The words 'hope' and 'wish' are not in your trading vocabulary
Trade with money that is not indispensable, can you afford to lose it?
Learn to take losses as part of the business, learn from them
Take regular breaks from trading
Don't over commit yourself, not too many open positions
Stand aside if you are not sure about a trade
Do not add to losing positions
Keep the dollar signs away, try to score points
Without fail, have a trading plan and trade that plan
That last point in the list brings us to our final section in honing our trading skills, and making a living from trading the currency markets.
c) System rules
Most aspiring traders hope to win on every trade. This is just not possible and there will be losing trades. It is a fact of trading life. It should not be taken as a failing of your rules or system when these occur. Rather, it highlights how good your rules are in dealing with those losses. The aim is to win more than you lose by utilizing the 'edge' described in the previous paragraphs. This 'edge' is gained by following your rules religiously, coupled with a trading system that suits your style. I have managed to do this after almost ten years of trading and using many differing systems, styles, and techniques. We will add to your edge in this section. As a minimum your system should include:
What time frame you will be trading
The times not to trade
Clear and unambiguous means of entry into the trade
The reasons for entering and exiting the trade
What your means of exiting the trade will be
What size your stop loss should be
Will you use trailing stops
What position size will you use
Dealing with news announcements?
Will you scale out of the position etc. etc.
Each system has its own merits (or lack of) on dealing with the problems presented by the markets on a daily basis. Another example that I will mention is my own unwritten rule that I never trade on the first Friday of every month, this is when the NFP report is released and the markets tend to be a little too volatile for me. This is a lesson that I have learned the hard way (and I've paid for that lesson handsomely).
You can see, then, that your rules can evolve as your trading experience grows. You will also see that you will become more confident in your trading as you add rules to your overall trading system. Sometimes though these rules will be added after experiencing some drawback, or even a minor disaster, but this is all part of the learning process. You can bet your bottom dollar that the top traders amongst us have suffered a disaster or two along the way. The idea is to learn from those mistakes.
The trouble is that it's difficult to learn a lesson by the written word alone. Some form of interaction is best in order to firmly plant that lesson in our brain. This is where experience comes in. But, I firmly believe that these pages will get you started on the right path. My own system has very clear rules on the items mentioned above, plus many more, keeping me out of trouble when my money is on the line. Before I even pulled up a chart onto my computer, I started by asking myself what I actually wanted my new system to address by making a list. I already had most of the General, and Trading rules in place, in fact I have added to them fairly recently, but I wanted a whole new set of System rules. These are the items on my list that enabled me to build a new, easy to use, profitable system:
First and foremost it must trade with the trend
Must be good for all currency pairs
Must be good for all time frames
Must try to get me into the big moves of the day
Must be user friendly
Must be simple
Must utilize more than one of my strategies on the same chart
Must keep losses to a minimum
Must enable decision-making at a glance
I must be able to use aggressive/non-aggressive tactics
Must have a higher time frame and trend confirmation
Must have clear and unambiguous accurate entry signals
Must also give clear re-entry signals into trends
Must tell me when to exit
Must have multi-timeframe trading on one chart
Must give an audio alarm when signals are generated (important)
Must stop me from overtrading (important)
Must stop me from fishing for tops and bottoms (important)
Don't take any part of this set-up lightly, as it will definitely pay dividends at a later stage of the whole process. The last two items on the list had cost me dearly in the past. The audio alarm is to call me to the computer when a trade presents itself, this way I do not need to stare at the screen all day. No more missed opportunities. Perfect.
The biggest task was to convert those 'must haves' into a working system that enabled me to trade for a (profitable) living. This has been achieved after no small amount of work, blood, sweat, and tears! In some small way, I hope that I have given you a base on which to build your own trading strategy.
The Black Dog Trading Strategy goes from strength to strength. I wish you all the luck in your trading endeavors.
If you prefer to by-pass that final stage and use a system that has been created from the points listed above, then please drop by my website to view for yourself.
http://blackdogsystem.co.uk
The website has plenty of free downloads. Don't miss out.
Dave Atkinson May 2008
Dave has been trading US stocks, UK stocks, e-minis and forex for almost 11 years and has finally found time to start his own site at http://blackdogsystem.co.uk
The Black Dog is currently slaying the markets, see the Black Dog System for high-probability trades.
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