It’s kind of strange in a world with no rules (like trading) that it’s so important to have a specific set of rules that you follow religiously.  I mean let’s be honest, trading really doesn’t have any rules.  You can get in whenever you want.  You can get out whenever you want.  You can add and subtract to your existing position, and you can obviously decide simply not to trade. The only thing that could prevent you from participating is the lack of required money to trade. Other than that, you get to decide what you want to do and when you want to do it.

There are not to many other businesses that allow for that much freedom.  Because there really aren’t any set rules, you’ll need to make your own.  Otherwise, you’ll most likely be overwhelmed with all the different possibilities in the market.

If you decide to trade without any rules, I promise you will not be successful.  Freedom is good, but you need to have what I call a “structured freedom.”  Basically, that means you should be able to trade when you want to, but the trades you do need to fall under your set rules.  Rules will help you be more consistent with your trading.  They’ll help you avoid mental mistakes that can drain your account.

About once every six months I write a new set of trading rules for myself.  These rules help me to be structured with my trading.  And you know, it’s the strangest thing, when I have a bad day, it’s because I didn’t follow one or more of my rules.  And, of course, the opposite is usually true.  If I’ve had a good day trading, it’s because I did follow my rules.

No matter what type of trading you’re doing (swing trading, day trading, long-term trading), you’ll need to come up with your own set of rules to keep your trading structured.  The problem is most people don’t want to make up their own rules, because if they did they would have to take responsibility for their results.  And, as we all know, most people don’t want to take responsibility for their action.  But, as we all know, the only way to be successful in trading is to take 100% responsibility and act in our own best interest.

For those that don’t know, I day trade the S&P 500 Futures almost exclusively.  I updated my rules in July of 1998.  I thought it might help you to see what my rules look like, and I’ll try to give an ex planation of each rule as it applies to my trading.  These are exactly how my rules look taped up to the side of my computer in my office:

1) Always use a stop order.  (I never put on a trade without a stop order.)

2) After 3 losing trades in one day, Stop Trading!  (I want to avoid digging myself in a huge hole.)

3) If I get 100 points + profit in a trade, I will move my stop to break-even. (If I get decent money in a trade, I will not allow myself to lose money on that trade.)

4) Only use a signal to get into the market.  Don’t just take a shot.  (I usually get myself in trouble if I have a feeling about the market and act on it.  I’m much more successful when I use a chart formation or a technical reason to get into the market.)

5) Use The Secrets of Floor Traders Rules.  They work!!!  (This is the course I’ve putt together for day trading the S&P’s.  It includes all the techniques that I use to trade.)

6) Do not trade on holiday type volume.  Too slow bad opportunities.  Go outside, watch a movie, whatever!  (In almost every case, when I trade in these types of markets, my winning trades are much smaller, and my losers are much bigger.  It’s not worth it.)

7) Always act with your best interest in mind.  (This is something I try and do with each and every trade I put on.  I realize that only I’m responsible for my results.)

8) Consistently trade on long side above value and the short side below value.  (I use the Value Area to help stay on the right side of the market.)

9) Always look for single ticks to help you execute your trades.  (This is a Market Profile technique that I use to help me find support and resistance areas.)

10) Relax with your trades.  If it’s not fun and enjoyable, it’s not worth doing. (This is self-explanatory.  If you don’t enjoy it, you won’t be successful.)

11) You don’t have to trade everyday.  (Sometimes I’ll just leave the market alone and forget about it for a day.  It usually refreshes me.)

12) Waiting till the market shows you whether it is one-time framing or not is an excellent way to be patient waiting to f ind an opportunity to trade.  (One-Time Framing is a trend following technique that I watch for constantly.)

Those are the exact rules that I use each and everyday, and it’s almost automatic.  After a bad day trading, I will look at my rules and see that I did not follow them like I should have.  And again, the opposite is true.  After a good day, I’ll look at them and see that I followed them very well.

I really believe my ability to follow those exact rules is a direct reflection of how much money I will make with my trading.  The more I follow them, the better I trade.

I’m quite sure the same thing will happen for you.  Although I would say you’ll want to come up with your own set of rules.  You can certainly use mine as a guide, but the important thing is you must be comfortable with the rules you come up with.  I know that I’m very comfortable with my rules.  You’ll need to do that with your rules.  If you’re not comfortable, they will be very difficult for you to follow and the odds of you being profitable will be very low.

One thing that is common in trading is the temptation to not follow your rules just this one time.  This comes from the very real possibility of the exciting results that are possible.  This is the trap that many new traders (and some experienced ones too) fall into.  This trap is easy to fall into because many people have a terrible fear of missing out on a big move.  A good example would be when you see the Dow Jones up 250 points and you feel as though you must find a way to get long the S&P market even if it breaks many of your rules to do so.

Avoid at all costs getting caught in that trap.  Doing a trade because you’re afraid of missing out on a big move is not acting in your best interest.  I’ve got news for you, there are big moves almost everyday.

Besides, most people do not think about missing those big moves in a realistic way. When you’ve missed an opportunity, you have a tendency to think about it unrealistically.  You see the bottom and the top of the big move and think to yourself that you would have been able to capture the entire move.  I think we all know that isn’t likely to happen.  But our mind plays tricks on us and says we shouldn’t have missed out.

Again, the market doesn’t stop moving.  If you weren’t able to get into the previous opportunity, look for the next one.  Don’t let your mind play tricks on you.

The more you follow your rules, the more you’ll trust yourself and the better your results will be.  Remember, only you are responsible for your trading results, good or bad.  Having a set of rules will help you get more good than bad.

LEARNING TO LOVE TO TAKE A LOSS

I realized early on in my trading career that one of the most common characteristics in almost all successful traders I’d met was they are all very goal-oriented.

In fact, I’m not sure if you realize it or not, but that’s when people are at their best. People perform at their best when they have a goal clearly in their mind. That is the way the human mind works.  When we have a goal clearly in our minds, our subconscious works very hard at helping us to achieve that goal. It does it quite automatically without having to fight using willpower. (This is something you’ll learn much more about when you start learning more about psycho-cybernetics.)

But there is one big catch.  You may have a goal clearly in mind, but it must have three important characteristics:

1)  Your goal must be realistic.
2)  Your goal must be attainable.
3)  Your goal must be measurable.

Your goal must be realistic.  This means that your goal has to be something that is within your capabilities.  Sure, it may be possible to make a million dollars your first year trading, but it’s probably not very realistic because it isn’t within your capabilities yet. Your goal must be attainable.  This is similar to a goal being realistic.  Again, your goal must be within your capabilities.  So, an example might be if you are trying to average $250-$500 a day with your trading from off-the-floor.  You have a much better chance of being able to reach that goal versus the goal to make a million dollars this year.  Don’t get me wrong, if you are doing very well with your current goal, there’s no reason you can’t raise it somewhat. But you must start with a goal that is attainable and then you can build on it.  I highly suggest starting with a small goal and moving up from there.

Your goal must be measurable. This is one I see people making a mistake about all the time.  Everybody wants to get rich or make a fortune in the market. That seems to be everybody’s goal.  But you know what, that isn’t really a goal. A goal must be measurable. You must be able to know when you’re far away, close, and when you’ve achieved your particular goal.  If it’s not measurable, you won’t know when you’re there, and even worse, you won’t know how close you are to reaching your goal.

When I first started working on the trading floor, I spent lots of time talking to different traders about how they were able to make money in the markets. It seemed liked the more I talked to different traders, the more their answers all sounded the same.  Realistic, measurable goal-setting is extremely important to being successful in trading.  In fact, just trying to make money each day (without a goal) is a road to failure.

The more successful the trader I talked to, the more they would stress how important setting goals was to their success.  But you even need to take it a step further.  Not only do you need realistic, measurable goals, but you need to visualize yourself reaching those goals on a daily basis. I remember some advice I’d gotten from a very successful off-the-floor trader who’s since past away, “Just as important as setting specific goals, you must visualize yourself successfully reaching those goals each and everyday. If you can’t see yourself in your mind’s eye as a success, there is no chance you will become successful. It just won’t happen!”

We will talk more about visualization techniques in a little while. But I hope you understand how important it is to have specific goals so you can see how your progress is going and quickly determine if things need to be changed. I will tell you from first hand experience that when I’m trading well and making good money, it’s definitely because I’m totally focused on my specific goals.  And, on the other hand, when I’m trading poorly, it’s because I’ve lost sight of my goal and I’m not seeing it clearly like I should be.

And you know what?  It definitely shows up in my trading results every time. The more you practice realistic goal-setting, the easier it will get for you to do on a consistent basis. As a side note, I happen to know someone who teaches people to day trade the S&P Futures.  One of the lessons he teaches his students is to make $250 a day for 20 straight days in a row. You might say $250 is not a lot of money to make in a single day in the S&P futures, but the whole point is for these students to learn to have realistic, attainable goals that they can reach. Once they reach the attainable goal, they can strive to have a somewhat larger goal. Just like anything, you’ll want to start small and slowly make your goal larger.

By the way, most of his students are successful at getting through the 20 days of making $250 each day.  Once they’ve gotten that goal, they are ready to move up to a slightly larger goal, of course, as long as it’s still measurable and realistic.  Just like anything, it gets easier with repetition and practice.

This is something you’ll hear successful floor traders say all the time.  If you’re going to be a successful trader, either on or off-the-floor, you will have to learn to love taking a loss. Basically, what that means is it does not bother you to have a losing trade. Don’t get me wrong, you’re not going to be happy to have a losing trade, but you should be happy to be out of the market when the trade no longer represents a profitable opportunity.

Most people who learn this do it the hard way.  They end up losing all their money before they realize how important it is to love taking a loss. Instead of ignoring the fact that they have a losing trade (like most people do), successful traders confront the possibility of being wrong, and thus, when the time comes to take a loss, they do it without hesitation. I think the reason that so many people have trouble getting out of their losing trades is because they think the losing trade is a reflection of themself. Nothing could be further from the truth. Your losing trades do not diminish you as a person. You are not your losing trades. You are also not your winning trades either. They are simply by-products of the business that you’re in.

Losing trades are part of trading.  The most successful traders in the world have losing trades each and every day. They do not get caught up in thinking that the losing trade is part of them. They realize it’s just part of trading, and the sooner they get rid of the losing trade, the faster they can look for the next opportunity to find a winning trade.  This is easier said than done, but nevertheless, it’s still the reality of how to make money trading.

I have a friend who’s been an S&P floor trader for over 15 years. He is probably one of the 5 best traders in the S&P pit. He’s also probably one of the 25 best floor traders in the world. The house he lives in has 14 bedrooms and a 6-car garage. So, obviously, he does pretty well with his trading.

He has literally thousands and thousand of dollars in losing trades almost each day. He probably has more money in losing trades each day than most people make in a month. Obviously, he has many thousands of dollars in winning trades also. The point is he has learned to realize that having losing trades is part of the game, and he knows the quicker he can get rid of the losing trades, the sooner he can find some winning trades. It will be the same for you, but only on a smaller scale.
One thing you’ll need to learn is why it’s so important to confront the possibility of a losing trade. If you don’t, you will generate fear and end of up with the very situation you are trying to avoid. When you can learn to understand this concept, only then can you prevent your losing trades from becoming unmanageable and, quite possibly, from wiping out your entire account.

Realistic Goals

Mark Douglas, author of The Disciplined Trader states, “Execute your losing trades immediately upon perception that they exist.  When losses are predefined and executed without hesitation, there is nothing to consider, weigh, or judge and consequently nothing to tempt yourself with. There will be no threat of allowing yourself the possibility of ultimate disaster. If you find yourself considering, weighing, or judging, then you are either not predefining what a loss is or you are not executing them immediately upon perception, in which case, if you don’t and it turns out to be profitable, you are reinforcing an inappropriate behavior that will inevitably lead to disaster. Or, if you don’t and the loss worsens, you will create a negative cycle of pain, that once started will be difficult to stop.”

He goes on to say, “Keep in mind that fear is really the only thing that keeps us from learning anything new. You can’t learn anything new about the nature of the market’s behavior if you are afraid of what you may do or can’t do that is not in your best interests. By predefining and cutting your losses short, you are making yourself available to learn the best possible way to let your profits grow.”

If you can change what these losses mean to you and realize that getting out of a losing trade as soon as you define it as such, you will be able to release yourself from the stress that those losing trades probably cause you now.  This is why learning to love taking a loss is so important. It puts you in a much better position to take the winning trades.