When you want to follow the rules of a consistent trading which are listed below, you must have not only the self-discipline and discipline, but also the faith in yourself. This may seem like an empty phrase and cliché. But I swear that I would sign under these 10 golden rules with my blood. It is because I know how difficult it is to observe them. Yet every day I spare no effort to follow all of them. I know that if I breach any of them, the consequences may be worse than it may seem at first sight. Consider yourself whether you want to observe these rules. As for me, I know that it is thanks to them that I’m still «in the game» of trading. So which the golden rules of a consistent trading are?
1. Never trade with a borrowed capital
The biggest mistake a novice trader may make is that he borrows the capital for trading from a bank or a private entity. Such an entity may be, for example, a person with extremely good persuasive skills. For example, one of my friends who was honestly preparing for trading for several years was unfortunately unable to earn a large enough capital for trading futures on stock indices. Due his impatience he now faces a lawsuit because his creditor already lost patience. You can imagine what will follow. Thus do not make the same mistake and start trading with your own capital. If you are not able to earn at least $10,000, which it is deemed reasonable, or the minimum amount for trading futures on stock indices via one automatic trading system (ATS), then you should really consider whether trading is the right thing for you that can bring you decent profits.
2. At the beginning, keep your main income and perceive trading just as a potential extra income
As traders you can have a big problem, if you perceive trading as your potentially main source of income right from the beginning. In other words: Even though you might not admit it now, it is really not easy to experience drawdowns which can easily last for several months. Moreover from what financial resources do you think you will live in the first year of your trading if you do not have reserves? Your trading account must always be sufficiently capitalised! If you have income from your other business or employment, you have a great chance to mentally cope with the inevitable drawdown periods. That is a fact. Most consistent traders with whom I have met so far started to trade Full-Time after three to five years. And in my opinion, this is absolutely right. Do you know any top athlete or a lawyer who became a leader in their field after one year? Remember that trading is a profession like any other. Everything has its time and you must be prepared for a tough journey. The more you will appreciate the free time which the amazing career of a professional trader will bring you when exchange trading becomes your main profession.
3. Be sure that you are going to trade a trading system that has been successfully validated by robustness tests and papertrading (simulated trading)
This is perhaps the most important aspect that can never be underestimated if you are serious about trading. You need to have a robust trading system that will guarantee you a long and consistent trading. If you’re not sure whether you have such a trading system, there is nothing easier than signing up for our group or individual course Buildings and optimisation of robust automated trading systems. Here you will learn which robustness tests are necessary and you will also get acquainted with my trading systems which I have been successfully using in live trading for a long time.
4. Always have your trading account sufficiently capitalised, be very conservative at the beginning and trade with moderation
In English-speaking countries they say «No risk, no fun». I agree, but only to a certain extent. In trading, an uncontrolled risk is the road to hell. It is unbelievable how many novice traders repeat the same mistake. At the beginning of their live trading they often experience a period in which their trades go extremely well. What happens then? Their ego grows to gargantuan proportions and they start with an aggressive Position Sizing in the form of a disproportionate increasing of their trading positions. And what usually follows? Margin Call (i.e. empty trading account) within a few weeks. If you use a fixed stop-loss, try to risk at most 1-2% of your trading account. If you use variable stop-loss, count with an average loss per trade (Average Loss) as a baseline for determining the maximum risk percentage for your trading account. Also here, the maximum reasonable level is 1- 2%.
5. Evaluate your trading results quarterly, semi-annually, or yearly (which is the best choice). Decide about the period on the basis of your trading style
If you trade intraday and you open and close several positions within one day and thus you may execute more than a hundred trades per month, you should check your results (and ideally be in black numbers) every month. It is because you execute large amounts of trades and you get a statistically relevant indication of your trading system´s profitability after just a few weeks. But if you, for example, trade intraday and your system opens and closes a position on average 3 times a week, it is obvious that you can make relevant conclusions half-yearly, or ideally yearly. It can be difficult to follow this rule, but if you judged the success of your trading system prematurely on the basis of several losing weeks in a row, your psyche gets quickly disrupted which makes you more prone to premature conclusions that could negatively affect your trading plan. Then you start to trade a completely different trading system than the one you have backtested and a big problem appears because all the robustness tests lose their significance.
6. Do not get discouraged by short-term losing periods
Do not listen to your wife, husband, girlfriend, friend, family member, or friends when a short series of losing trades comes and your system gets into a drawdown. Is it you or your relatives or friends who has been honestly studying trading for many months or years? You have to keep in mind that they know very little about trading compared to you. Many novice traders (and believe me that I wasn´t different) make the fundamental mistake that they speak about trading with the people around them. If they are successful, these traders talk about trading with a great passion. But when a drawdown comes they are suddenly very silent. When their partners of friends ask about their trading after some time and they say that they are in a drawdown, the people who know nothing about the natural behaviour of trading systems in the market can really prey the traders´ mind. They begin to get on a wrong way and ask themselves a lot of unnecessary questions like: «Can I really make money by trading?» Yet a correctly asked question at that point should rather be: «Despite the current drawdown, does my trading system behave in accordance with my backtests and robustness tests?» Believe me that nobody around you will ask you such a question. Therefore, keep your temporary successes for yourselves and speak only about your account´s annual appreciations. Your trading psychology will only strengthen because only you are the expert who can rightly assess the success or failure of your trading system.
7. Keep in mind that your worst drawdown is still ahead
«Your worst drawdown is yet to come.» This wise saying which may sound cruel is a harsh reality in trading to which we must be prepared. The point is that the worst drawdown you experienced within backtesting can be much worse in live trading. Fortunately, there are many modern tools based on the Monte Carlo analysis thanks to which you can find out which is the worst drawdown that you can expect in the future. The Monte Carlo analysis is part of, for example, an excellent analytic software Market System Analyzer. Many traders fund their trading accounts with double or triple amounts compared to the maximum drawdown calculated by the Monte Carlo analysis. This principle is explained in detail together with its specific procedure in my course of algorithmic trading
8. Continuously monitor performance of your trading system in live trading
Keep in mind that we do not evaluate a trading system´s performance only in relation to its maximum historical drawdown. For example, I myself regularly monitor performance of my trading systems according to clearly defined rules trade after trade. Such a continuous monitoring can be performed via various tools of statistical analysis or regression analysis. I prefer the methods of statistical process control which were originally implemented mainly in manufacturing processes in companies in order to control the quality of products. These processes monitor process variability and thus help us to identify whether there are some striking variations that may mean that the trading system ceases to be functional. Thanks to this we can often discover that our trading system ceases to be functional before the worst expected drawdown comes. Again, you can learn more about these methods in my algorithmic trading course.
9. Educate yourself, be in the picture
Trading is constantly evolving at a rapid pace, like every other field in today’s dynamic world. Many traders completely underestimate such important aspects as regular reading of literature, articles etc. from the area of trading. So be shrewd and keep learning. Even if you have a trading strategy that may work very well in current market conditions, you cannot be sure that this method will be still profitable after a few months or years. Do not underestimate this aspect since it is your self-education that can keep you in the game in the long term.
10. Create a community of traders with whom you will cooperate closely
The fact that will never cease to surprise us in trading is that traders are often «independently functioning units». It is probably due to the nature of this business where traders think that they do not have to be in daily contact with people. The problem is that they oftentimes turn inward. One of the amazing things which brought me the creation of the AOStrading.cz website is a huge number of new contacts with professional traders. Now we can enrich each other and share our know-how. A mutual inspiration is the best motivation that moves all of us forward.
Only few people are able to fully observe these rules. The natural human qualities are greed, craving, desire to be perfect, infallible, and … surely you can add more. We love to boast about or successes but we are rarely willing to speak about our failures. Yet in a trading we cannot afford this because such a behaviour and the resulting lay opinions of people around us can undermine our trading system´s robustness. Some internal defence mechanism commands us to believe that there will be no worse drawdown than the one we experienced within backtesting. But the inevitable law of the market tells us clearly that such a drawdown will come. So do you still believe that trading is easy? Therefore, avoid confrontation with your own ego and think in probabilities. Only then will you become long-term winners in trading.
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