May 21, 2017

Personal Trading Rules Going Into Second Half of 2017

Rules are meant to be broken. At least that's what a common saying states. Well, in trading, following that saying can end your trading career abruptly. My past few losses have made reflect on the importance of adhering to personal trading rules.

Repetition is the mother of all learning. Another saying. For this reason I feel the necessity to express some rules I need to abide by during the coming months. I will follow them as long as they work. If I feel that some of them are not beneficial I will modify them by writing out new ones. I will not be flexible with the rules during my actual trading, rather, they will be adjusted after market hours if necessary. Here we go..

Let's start off by combatting FOMO. Fear of missing out has led me to short heavily during premarket. This makes me end up with a horrible average on my short entries. 90% of the time I do end up profiting, but that 10% that the price never comes back down....I end up losing BIG! Even when I do profit I'm losing out on much better profits if only I were more patient on my entries. For this reason I have decided that I will no longer short during premarket. I rather lose out on a potential profit than lose out on my trading career. I will focus on much better entries once market opens instead of having to endure a short squeeze due to heavy shorting during the premarket. I've been making myself vulnerable way too much. This ends now.

With size comes responsibility. The past few weeks I have become addicted to aggressively shorting with big size. Using big size is great if you have great entries. Unfortunately, since my entries have been horrendous, my profits have not been as stellar as they should be with  per say 15k shares short. For this reason I have decided to use no more than 75% of my buying power.  For example, if I were to have $100,000 buying power, I will trade as if I had only $75,000 buying power. I will not be afraid to use big size but I won't use all of it. If I see significant improvement in my entries I will consider raising my buying power percentage when and if new rules are written.

Losing is an essential part of trading. That's right! In trading one must learn how to lose. When I'm planning my trade I NEVER plan what I would do if the trade went against me. This has cost me dearly twice this month alone. This weekend I thought of a simple yet effective way to help me prevent big losses. I will cut my losses at no more than half the amount of the previous day's profit amount. What if I'm trading the day after a loss? In that case, I will cut my losses at half the amount of the previous day's loss.  For example, let's say I profit $2000 on a Monday. On Tuesday if a trade is going against me I will stop out at a $1000 loss. On Wednesday the max loss I would allow would be half that amount, $500. Some simple math shows how this can be effective. 2000-1000-500=500. That's right, following these simple rules I would end up with a $500 profit despite two consecutive losing days. This will help me avoid big losses.

For now these are the rules that I feel will help me become a better trader. They all share one common principle: protecting capital. My profit streaks have made me trade recklessly with little attention to rules. These rules will help me lose small when the time to lose is due. If I follow these rules closely, big losses will be a thing of the past!