The primary objective of my trading and game plan revolves around the preservation of my valuable capital, and every decision in my trading activities is centered on this crucial goal. To achieve this, I establish stringent rules dictating the extent to which I am willing to incur losses or engage in trades at any given point.
I maintain a steadfast commitment to never risking more than 5 percent of my capital on a single trade, with a preference to cap it at 2 percent. Additionally, I ensure that neither more than 50 percent of my capital is at risk simultaneously nor more than 20 percent in a single trade. To prevent overleveraging, I refrain from overmargining, even if I haven’t reached my risk limit, by staying at least 20 percent below total margin requirements.
Maintaining a disciplined approach to the number of positions, I limit myself to a maximum of six trades at any given time. There exists a single exception to this rule, allowing me to consider three related markets or stocks as one position, with a proportional reduction in the number of shares traded in each.
As a strict practice, I abstain from adding to a losing position unless it was predetermined in my game plan that I would be accumulating shares on the way down to build a position. I avoid the common pitfall of adding to a losing trade solely to obtain a more favorable price.
However, a new signal in an existing position, following thorough investigation, may lead me to consider adding to a losing position, especially when employing multiple trading systems or systems operating in different time frames that generate diverse trading signals.
While articulating these rules, I recognize the challenge of segregating them into a trading plan and game plan, as they intricately intertwine. The list of rules serves as the foundational framework for creating a trading plan, indispensable for crafting a game plan or adhering to an existing one.
The process of daily game planning inherently involves applying these rules, such as ensuring the risk does not exceed 20 percent of the capital and refraining from trading more than six positions concurrently. Over time, as experience accumulates, these rules become ingrained, diminishing the need for explicit documentation.
However, they remain the core principles of my monitoring system, emphasizing that adherence is paramount, whether committed to memory or explicitly written down.
ENTRY RULES IN MONEY MANAGEMENT
I don’t have specific trading signal rules outlined in my concise rule set; however, I adhere to specific sets of signals and patterns that form an integral part of my trading decisions. While I won’t disclose the actual signals here, it’s assumed that they are incorporated into my comprehensive trading plan.
What I aim to illustrate is the process of translating my trading rules into a well-thought-out strategy, subsequently becoming a crucial component of my trading plan and serving as a tool for plan monitoring. While I wouldn’t document these details explicitly, they play a prominent role in shaping every decision I make.
Prior to executing a trade, I ensure there’s a clear rationale behind it. The overarching reason is that it aligns with one of my established trading criteria, and I meticulously evaluate the trade. I determine both entry and exit points, regardless of whether I’m on the winning or losing side of the trade.
Chart analysis is a pivotal part of my decision-making process, extending across various time frames such as 5 minutes, 30 minutes, 60 minutes, daily, and weekly charts to confirm the trade’s viability. Different time frames aid in setting stops and targets, enabling me to assess the trade’s reward-to-risk ratio. If a trade lacks a reasonable reward-to-risk ratio, I refrain from entering it.
Once a favorable opportunity is identified, I use multiple time frames to identify optimal entry levels. If indicators suggest the possibility of obtaining a better price by waiting, I exercise patience before executing the trade.
When a market experiences a breakout, I resist the impulse to immediately enter a trade. Instead, I analyze it on a smaller time frame to explore the potential for a better entry point, either through buying on a dip or selling on a rally. This strategic approach is also applicable when trading the news. While I rely on news as an alert, the actual trade execution is grounded in chart analysis.
In evaluating potential trades, I consider a blend of indicators and patterns, encompassing stochastics, RSI, volume, MACD, and Fibonacci retracements. While I predominantly trade in the direction of the major trend, seeking opportunities during dips and rallies, I also explore reversal patterns and systems.
If a robust signal emerges near a support or resistance level, I am inclined to initiate a trade with the objective of capturing a reversal in the market.
EXIT RULES IN MONEY MANAGEMENT
Now, let’s look into the exit strategy within my thought process. Upon reviewing my rules, it’s evident that my primary concern lies in minimizing losses, with only a couple focusing on securing profits. This emphasis might stem from a period when the majority of my trades resulted in losses.
To address this, I need to underscore a crucial point from my entry rules – ensuring I know my exit points before entering a trade. Attempting to determine exit points after the fact can be challenging, especially when influenced by the emotions of a successful or disappointing trade.
Therefore, it’s essential to establish exit points in advance and document them clearly. Without predetermined stops, evaluating the risk and rewards of a trade becomes inherently challenging.
Once a predetermined stop is in place, serving as a safety net, my priority shifts to exiting a trade before it reaches that stop. I aim to avoid wasting time on trades that aren’t performing as intended. If a trade is not aligning with its expected behavior or if I’m engaged in day trading and the trade remains negative after 45 minutes, I won’t hesitate to move away.
In scenarios demanding the unloading of trades due to margin calls or unfavorable market conditions, my practice is to exit losing trades first. While there may be a natural inclination to lock in profits and hope for a turnaround with losing trades, it’s not the recommended approach.
It’s crucial to recognize that a stop is a worst-case scenario exit, and it’s acceptable to incur a loss if a trade isn’t functioning as intended. Opting for a small loss is always preferable to allowing it to escalate into a significant one. Embracing losses as an integral part of trading is essential, and there should be no hesitation in acknowledging mistakes.
Additionally, concerns about commissions should not overshadow the broader perspective; a nominal commission on a single trade is insignificant in the long run. The paramount consideration is to avoid turning a modest loss into a substantial one in a misguided attempt to recover the commission.
When a trade is profitable, several key principles come into focus. Firstly, if the trade has achieved its objectives, it’s imperative to exit. Succumbing to greed or attempting to extract more than the trade offers can lead to overstaying in a position, potentially turning profits into losses.
It’s crucial to resist the temptation to linger in a trade beyond its natural conclusion. It’s unrealistic to expect to exit at the peak of a move or trade, as the actual peak becomes apparent much later, often after the market has sold off.
When the market hits a predetermined level and retraces, insisting on reaching the previous best level may not be practical, and waiting for it can result in the trade turning negative. Therefore, the prudent approach is to exit when the trade is concluded.
Similar to the entry phase, timing is essential in planning the exit to secure the best possible price. However, if the exit is missed due to attempts to time a more favorable moment, a reassessment is necessary. A new plan should be formulated to exit the trade promptly, prioritizing the preservation of gains and preventing potential losses.
DISCIPLINE RULES IN MONEY MANAGEMENT
Now, we enter the most crucial section of my guidelines, focusing on discipline. Discipline, in this context, can be dissected into two fundamental aspects: the discipline required to make sound decisions as a trader and the discipline needed to adhere unwaveringly to the rules, systems, and plans meticulously laid out.
Primarily, adopting a professional mindset is imperative. Continually questioning whether I am making prudent decisions or merely engaging in impulsive trading is a cornerstone of this approach. As emphasized earlier, having a valid reason for each trade marks the initiation of trading like a seasoned professional. Any trade or decision misaligned with the established plans is indicative of amateurish behavior, diminishing the prospects of success.
A critical step in avoiding amateurish pitfalls involves steering clear of imprudent, low-probability trades, akin to the risks associated with gambling. Sustaining a pro mindset entails, for instance, refraining from chasing the market after a trend line break, only to be filled at an unfavorable level during subsequent hours due to a sell-off – a mistake characteristic of novice traders. Additionally, maintaining discipline involves executing fewer and more selective trades, aligning with the approach of a seasoned professional.
Discipline remains paramount in handling losing trades. Initiating prompt measures to limit losses before they escalate is essential, and once losses are incurred, they should be regarded as part of the trading history. The temptation to re-enter the market to recover losses should be resisted. After a trade concludes, discipline dictates walking away from it, avoiding lingering attachments. Similarly, during tumultuous market conditions, it is acceptable to incur small losses, but when the situation becomes excessively stressful, a brief break to regroup is a disciplined practice.
A rule integral to my trading plan is the avoidance of markets that have historically proven detrimental to my performance. Specifically, refraining from trading gold, silver, and certain stocks, irrespective of their allure, reflects the discipline needed to sidestep potential pitfalls. While not explicitly stated in my trading plan, during the formulation of my game plan, a deliberate limitation to the few assets I actively trade is imposed, with little consideration given to venturing into unfamiliar territories.
In conclusion, the discipline to rigorously follow my game plan and rules on a daily basis, with every trade executed, is non-negotiable. Failure to adhere to these principles diminishes their efficacy, rendering them futile. Until the next chapter unfolds, this steadfast discipline remains my guiding force in the dynamic realm of trading.
