Module 17 – Trading Principles
As this is the last module, and contracts for difference and spread betting are in any case available on virtually any financial instrument, it’s appropriate to go over the overriding principles that cover all types of trading and markets and that you must keep in mind to make a long-lasting career out of trading.
Take an Overall View of the Market
While it’s obvious, it needs saying. If you’re trading in a bullish market, then the majority of your trades should be long. If the market bearish then most trades you take should be short. If the market is not trending, then make sure that any strategy taken is appropriate, such as buying at support and selling at resistance. Above all, realize that you do not have to be in the market most of the time, and if the market is not the right type for your trading strategy, then you should stay away or develop an alternate strategy for the market conditions.
Before Trading, Know Your Maximum Loss
Never take a trade without figuring out in advance an acceptable level of loss. I suggest 2% of your trading account, but some traders are more conservative than this. In a famous saying by a top American trader, he compared people who risked losing 3% on a trade to ‘gunslingers’.
Know When You Are Wrong
So in conjunction with the above principle, you must know exactly when you are wrong, if the trade goes against you. You can only be objective before you enter the trade, so you must write this down and stick to it. You also have to realize that a number of trades will go against you even though they were good trades, and should have been taken. The good trade is one where you followed your tested trading plan, cutting your losses if necessary, or achieving a good profit.
A losing trade doesn’t mean you did anything wrong, only it is wrong because of the way the markets unfolded. Similarly a winning trade doesn’t always mean you did things right, because sometimes markets forgive a bad action. Relying on that is not a trading strategy!
Know Your Expected Profit
Based on technical analysis you should be able to determine the minimum expected move, and hence a profit potential of a trade. Some trades just don’t have a good enough potential compared to the downside, and shouldn’t be taken. Stack the odds in your favor by looking for at least a 2 to 1 reward to risk ratio, and preferably a 3 to 1 ratio.
Conserve Your Capital
Above all, remember that your aim is to still be trading next year, when your experience will make you a better trader. The only way to get there is to protect your capital from any major setbacks. This is much more important than aiming for a profit, which will come automatically if you trade correctly.
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