What Rules do the highest-earning traders use in their system?

...finding rules which fit your personality and sticking to them.

7 minute read

Whether you like it or not, to become successful in the financial markets you will need to follow a set of rules, and follow them to the letter. The rules you follow will vary for each individual trader, according to your own trading system or strategy, which means you will have to formulate them yourself. It could be that one of your rules is to stop trading for an entire week if you lose four consecutive trades in a row, or it could be that you only allow yourself to trade the same instrument twice within any given day; whatever your rules are, they should form part of a structured trading plan which has been designed to maximize profits and minimize losses (time to get your smart head on!).

Trading Rules
Taking a fluid approach to the way in which a trader responds and reacts to price action is crucial in order to get ‘in tune’ with the markets. To be a profitable trader you will also require rules to follow to ensure you avoid taking any unnecessary losses.

It can take a lot of trial and error to develop a set of rules which will work for your trading personality; if you are someone who is more patient and tends to hold positions for longer durations then it is likely you will need completely different guidelines to someone who is swing trading for shorter time-spans. Developing a system which enables you to profit more than you lose is effectively what it means to achieve professional trading status. A common mistake that newbies get sucked into is persisting to use rules which have already shown not to improve performance (they flog a dead horse until it is no longer recognizable as a horse!).


You should most definitely have a flexible approach in order to determine which rules you want to incorporate into your trading strategy, if you are too rigid in this regard it can be detrimental in achieving a system which works. It has been mentioned previously that the markets are a fluid entity, and you should mirror this with your trading. Bringing rules into the equation somewhat contradicts this, but at the same time, you do require a basic skeleton-like structure of guidance in order that you are able to maximize your chances of making higher profits than losses.


There are individuals who brag that they have a super strict set of rules with a predetermined profit ratio, only ever opening positions which have a so-called golden 6:1 return level (which is a not a strategy I subscribe to, limiting your profits in this way is a recipe for disaster). Some of these systems will work for some people, some of the time. The issue is that the systems they are using have effectively turned into a trading algorithm, and it is more than likely that one of the quants at the big banks or financial institutions have come up with a better one, one that has been specifically designed to take money from the very system these traders are trying to use.


Consistently profitable traders have the perfect mix of rules and fluidity within the markets. If a successful trader suddenly switched to exclusively using a 6:1 profit versus stop loss ratio, and only allowed themselves to trade in the AM, then it is almost certain that this trader’s performance would drop to a level where they were losing money. The key thing why I say this is that the rules you come up with for your own personal trading plan need to be your own, not something someone said they did on an Online forum, you watched in a YouTube video, or (god forbid) heard in a $10k Van Tharp seminar.

"It will likely be more beneficial if you try to think outside the box with the framework of guidelines you develop for your trading practices. Blue sky thinkers rejoice."

Only trading up when there has been two or more consecutive green days is a very obvious idea to come up with, and certainly nothing which hasn’t been tried before. Instead, try to think of how your rules can help your own trading personality, you might want a rule that says you are only allowed to trade after you have drunk a coffee in the morning and have assessed a situation fully, or you might require a rule that bans you from placing a trade on your smart phone and enforces positions to be opened or closed exclusively on a desktop or laptop so that you can see the big picture. Being able to specifically identify your weaknesses will really help with formulating a measured guide book.


People in general, don’t take well to following rules which they have made for themselves, and they tend to find it incredibly difficult to stick to them. If you are working in an organization and there is a rule not wear shorts into the office, you’ll usually keep to that rule because there are consequences if you don’t, namely that you will get a warning and if you persist then it’s likely you’ll get fired. If you are out in public you know there is a rule not to steal items from a shop, you will tend not to do this as there is a possibility you could be put in jail for breaking this particular rule.


When you make rules for yourself you find it much harder to stick to them because the ramifications are simply not as bad. You can give yourself a rule to not curse in public, but what happens if you fail to do that? You might give yourself a mental ticking off and that’s really about as bad as it gets. To trade professionally it is vital that you have some rules and guidelines to your trading practices, but following them can be far easier said than done. This is again, an area where institutional traders working for large financials will have an edge over the retail trader, they have to stick to their rules, or it’s extremely likely that they will be out of a job.


There’s no easy answer in terms of advice that will help traders stick to their own trading rules, and this is perhaps an area which contributes into identifying individuals that are seemingly naturally gifted traders, one of their major assets is that they are extremely well disciplined. In theory, it doesn’t sound like too much of a challenge to simply figure out a set of guidelines which will prevent you making any glaring errors and throwing money to the markets, but in reality, human emotions are far more powerful than people give them credit for.


You left school and with it, all of the rules you had to follow in that environment, only to likely go on and work for a company who had another set of rules. The idea of going self-employed and trading the stock markets can seem appealing in that you won’t have to follow anymore rules, especially those barked at you by your obnoxious, control-freak line manager or CEO; but in reality the task you face in following the rules you create for yourself will be insurmountably more challenging. Take a professional approach to the markets and try to imagine you are working for a large financial institution when you are trading (role-play if you have to); just make sure that you stick to the rules you create for yourself. This will at least put you in the right mindset and give you a solid platform from which to profit consistently.


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