A couple weeks ago Tim Bourquin posted 5 Uncommon Rules of Wealthy Traders at TradingMarkets. The rules were commented upon by zentrader in his 5 Unique Rules of Trading post, which is how I came to find them. I wouldn't really call these rules so much as observations, but they are still worth addressing. So, without further ado, here are Tim's "rules" with my thoughts about them, specifically as they related to Forex traders.
1. They plan every single trade. EVERY SINGLE ONE.
This is a very simple restatement of "plan your trade and trade your plan". If you don't have a specific strategy defined going into a trade, one based on your larger trading plan, 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.
2. They stopped trying to pick tops and bottoms years ago.
Here we have a reflection of the fact that no one can know for sure what the market is going to do at any given point. Even if you are right about the market making a turn, shifting out of one trend and into another, chances are you won't get the timing exactly right. You have to realize that and account for it in your risk management. By that I mean if you're strategy relies on catch market turns you probably need to either play with wider stops or be prepared to take a few small losses before that turn actually comes.
3. They are patient with winners - and ridiculously impatient with losers.
This third observation 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, just as in systems which relying on letting the market run it would be counter-productive to have a pre-defined exit point. Regardless which way your systems works, make sure you don't suddenly decide to change path in mid-trade. That goes back to #1 above.
4. They trade one market. ONE.
I'm not sure I can totally agree with trading only one market. If you are a short-term trader, then that certainly makes a lot of sense. And in the case of Forex trading, it might even be down to trading just one pair. Generally speaking, the greater the focus you need on the price action in real-time the fewer pairs you want to be trading.
As you get out the time span curve, though, adding in additional pairs and/or 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. For example, a swing Forex trader may want to track a several pairs (probably with different characteristics) in order to make sure they get a fair number of trade signals. How many depends on the demands of your system and the potential for having multiple positions on at one time. If you are a position trader, you may not only want to watch all the major pairs and crosses, but perhaps also equities and bonds.
5. Their benchmark for success is anything but money.
As for this final observation, I agree wholeheartedly. The money focus trap is a big one for new, low-capitalization traders especially (a large portion of the retail Forex community). 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. It's about not getting caught up with nominal amounts but with the performance of your trading according to the metrics which make the most sense.
Well, that's what I think of these five rules/observations. What are your thoughts? Anything not included here that you think should be in the top five?
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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