Tim Bourquin has an article at TradingMarkets in which he discusses what he calls 5 Uncommon Rules of Wealthy Traders. The rules were commented upon by zentrader.ca in his 5 Unique Rules of Trading post, and I thought I’d toss in my own two bits to the discussion. Here are the rules as Tim outlined them.
1. They plan every single trade. EVERY SINGLE ONE.
2. They stopped trying to pick tops and bottoms years ago
3. They are patient with winners – and ridiculously impatient with losers.
4. They trade one market. ONE
5. Their benchmark for success is anything but money
The first observation is a very simple restatement of “plan your trade and trade your plan”. If you don’t have a specific plan going into a trade you are gambling. We traders are not in the business of gambling. We are attempting to apply a methodology with a statistical edge over a large number of trades to allow that edge to create a positive return. That takes planning and consistency.
Tim’s second observation is a reflection of the fact that no one can know what the market is going to do for sure. Even if you are right about the market making a turn, shifting out of one trend and into another, the chances are you won’t get the timing exactly right. You have to realize that and account for it in your risk management.
The third item is basically “cut your losses and let your winners run” stated in another way. I definitely won’t argue the cutting of losses quickly side of things. If the market doesn’t act like you anticipated and you don’t get out of the trade, then you’re hoping it turns around. Hope is not something you want involved in your trading at all. Remember, you can always get back in. As for the letting the winners run, that depends on your system. Some systems have specific profit targets and not abiding by them could be problematic.
I’m not sure I can totally agree with the fourth item, trading only one market. If you are a short-term trader, then that certainly makes a lot of sense. As you get out the time span curve, though, adding in additional markets may make sense. For example, the Turtles traded numerous markets because that was the only way they could ensure a sufficient number of trades to make their system worthwhile. That’s really the key – the number of trading opportunities. You need them to be sufficiently large in quantity to allow the probabilities to work in your favor.
As for the final observations, I agree wholeheartedly. The money focus trap is a big one for new, low-capitalization traders especially. It leads them to take on more risk than they should. After all, when you only have $1000 in your account your gains or losses are only going to be so big in nominal terms. It’s hard to get excited about a $100 gain, maybe. If you focus on other metrics, such as % return, however, things become much more meaningful. That $100 gain becomes a 10% gain, which tells you something much more important. Also, a $10,000 gain is much less impressive on a $1,000,000 account, for example, than on a $25,000 account.