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Single most important rule of trading
Started:February 27th, 2013 (01:21 AM) by Big Mike Views / Replies:3,654 / 51
Last Reply:October 4th, 2015 (04:51 PM) Attachments:0

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Single most important rule of trading

Old February 27th, 2013, 06:58 AM   #11 (permalink)
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The Most Important, according to me

The Most Important thing, according to me, is MANAGE YOUR RISK BEFORE MANAGING YOUR POTENTIAL.

Why? (and what does the above mean?)

Let us splice the statement into its component parts to derive the meaning:

Manage your risk. This risk is separate from market risk, some of which can be volatility risk, price risk and information risk.

I did not include those risks as part of the statements. The statement talks about your risk. Your risk is the risk to you (external risk) and the risk from you (internal risk).

Let's examine this further:

External risk is something happening beyond your control - . There are only two ways to manage these risks which is
1. when in a trade, always have a stop loss
2. when entering a trade, use the correct position size as a function of your risk (i.e. the risk to your equity)

Internal risk is (and newbie traders may not realize that there is something like this) is the risk that is caused within you by you, and is not related to the market.
Some examples:
1. not preparing a what-if analysis, thus increasing risk of impulsive decisions that are non-corroborated by your knowledge / system / true intuition
2. having a plan but throwing it out of the window when confronted by down ticks, up ticks and in the face of uncertainty
3. moving your stop and holding on to (and/or averaging a losing trade by increasing position size)
4. not recognizing potential flaws and emotional states that may sabotage your trading and/or not doing anything when being aware of self-sabotage

And the potential part?

Managing your potential.

Note that this comes after the risk is managed.

Examples include, but are not limited to:

1. Exiting a position too early because
a. You were influenced by a recent loser that makes holding on difficult and you see a false shadow that lurks in the dark to snatch your profits (when it does not for the precise reason that you have now managed risk and the shadow is simply a shadow of self-doubt and does not take probability into account.)
b. You are succumbed by the need for instant gratification and do not adhere to your principles.

Note again that this is about your potential, since trading is one of the few fields where upside potential is unlimited (and if I may add - if unmanaged, downside risk is unlimited)

I think I can expand this further but it is a long post already. Phew, and thanks for reading. :-)

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Old February 27th, 2013, 07:03 AM   #12 (permalink)
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Big Mike View Post
Two part question:

- What is the single most important rule of trading?

- Why?

If you are going to reply with something along the lines of "trend is your friend", I expect you to be detailed in the 'why' part of the answer.

Extra credit:

- Prove it.


Mike this question is in the same league as the search for the holy grail. There is no single most important rule. They are all as important. You are looking at it as a programmer looks at things. I would tend to believe in trading like in life the whole is greater than the sum of its parts.

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Old February 27th, 2013, 07:35 AM   #13 (permalink)
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1. Trade small(er)!

2. Smaller risk, more clear thinking, better sleep, lets you stay longer in a trade, lets you stay longer in the game overall, hence, more time to understand, etc. etc....

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Old February 27th, 2013, 08:17 AM   #14 (permalink)
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1. trade the market/time frame that suits your personality. we are technically not 'trading the markets' but trading our individual hope/fear/ needs/wants

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Old February 27th, 2013, 09:33 AM   #16 (permalink)
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Never dig a hole so big that you can't get out.

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Old February 27th, 2013, 10:29 AM   #17 (permalink)
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baldwin NY USA
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Risk only a small % of your account on each position .

Why - risking and losing 50% of capital needs a 100% gain to get back to square one . Risk 25% of capital and you need only a 33% gain to get back to sqare one , and so on .

This keeps you able to stay in the game and keep playing and being available to capture gains .

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Old February 27th, 2013, 11:42 AM   #18 (permalink)
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Most important rule of trading: Don't trade, get a job.

Why?: You will make more money.

Proof: Traders' statistics...

What did win?

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Old February 27th, 2013, 11:48 AM   #19 (permalink)
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Don't lie to yourself.

Psychology & discipline play a large part in trading. It is very easy to fool ones self, but that will not lead one to look inside to see what that person has to do to be a better trader.

Math. A gateway drug to reality.
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Old February 27th, 2013, 12:33 PM   #20 (permalink)
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To always remember your capital is your inventory without it you have no business.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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