Amol’s 10 Commandments of Trader Discipline
Whether you’ve just begun your journey as a trader, or you’re already on the path of making this a career, one thing is sure: You need principles. Every successful trader has guidelines for keeping their trades clean and their mentality fresh. They are prepared to take whatever punches or high-fives the market throws at them.
I want to give you ten rules, my ten commandments of trader discipline, which have helped me to become a consistently successful trader.
No one will squeeze your arm, but these are the pacts I have made with myself, take it or leave it. I’ve seen great success in following these rules, and I am confident these ten rules will also be of great benefit to my readers.
But why should you listen to me? Let me humanize myself a bit. No one wants the opinions of a robot, after all. Don’t worry; I’ve kept it short.
Who am I?
My name’s Amol. I’m the head analyst of Alpha Trades. You’ll be able to read more about me in a future piece, but for now, here are the stats:
Trading career: 11 years.
Graduate: Purdue University
Degree: Computer Information Technology degree and a minor in Finance and Economics.
I first learned how to trade stocks when I was around 17 or 18. And this was right before the financial crisis happened in the US. So right around 2007 – 2008. I found my dad’s stock account one day and decided to start trading with it behind his back.
Long story short, I had some wins at the start, but then I lost a good deal of my pop’s money. It was a painful and costly lesson. With a heavy heart, I decided to fix my mistakes and repay my dad. A few months later, after I turned 18 in the US, I opened a personal brokerage account.
Sometimes I got lucky in those early trades, but I was losing money more often than not. I didn’t know what I was doing. As time went on, I would go to libraries, scour the web for articles and videos, and whatever else that was available that would teach me how to trade.
Over the last 13 years of trading, I spent a lot of time in forex, gold, and oil. In 2016, I made my first foray into cryptocurrencies. Back then, there weren’t that many exchanges that offered derivatives. Bitcoin and Ethereum were everyone’s go-to trades.
The first thing I understood about trading was this: Know your market.
Pick a sector and learn it well. Back then, I understood the tech sector the most. I didn’t understand healthcare, so that was my weakest sector, and I would always lose money there. Understanding my weaknesses and strengths was a significant first step towards a successful trading career.
Rule 1 – Risk management and position sizing
You need to understand how much cash you have in your account and what you’re willing to risk per trade. The rule of thumb is to risk no more than 2 or 3% of your account on any given trade.
For example, let’s say you have a $100,000 account. With an account of that size, you shouldn’t be trading with more than $2,000 per trade. In other words, if you get “stopped out,” you should not be losing more than $2,000 on that trade.
Most new traders will not understand how to size correctly, meaning they do not know or follow the 2 to 3% rule, as mentioned. When they win, they will probably size up. When they lose, they’ll likely size up even more.
The psychology is that when you lose a couple of trades, you feel the need to make back the money that you lost, leading you to size up heavier. That’s the number one trading method for losing money.
The same principle applies to a streak of winning trades. When you become a bit confident or cocky, you may find the market turning on you. Suddenly the significant positions you’re in will start eating into your profit margins, and ultimately your initial capital. That is why position sizing is crucial.
Understanding how position size and setting proper stops affect potential risk-reward is crucial. This principle comes first. Understanding how much risk to take must precede every single trade.
Use the 2 to 3% rule, and that will help you preserve capital and profits going forward.
Rule 2 – Use a stop loss. Just do it. For your mother’s sake, use a stop loss.
Trading the markets without stop losses is a massive mistake. A majority of people enter the market thinking once they enter a trade, it will eventually have to go in their preferred direction, whether they’re short or long. No matter how confident you may be with a position, regardless of what the technicals tell you, you’ll never know for sure what the market is going to do next.
Don’t use tight stops on large trades.
Another thing most people try to do is use tight stops. Because they’re sizing too heavy, they need tight stops. Because they have tight stops, they’re unable to capitalize on the price movement’s breadth for any given asset. Since they have tight stops and their position is too heavy, they likely get kicked out of the trade due to random noise. Beware of becoming too greedy; size down, and keep a deeper stop. Then, you won’t be as panicky or fidgety once the market starts moving.
Rule 3 – Respect your profit-taking targets
Most new traders will get into a trade, set their stops correctly, and then fail to close on their first predetermined target.
They’ll think, “The trade’s doing well, chances are high it’ll keep going my way.” They see good volume, affirmative price action, their favorite Twitter influencers are hyping the trade; the stars have aligned.
Then, the market starts to shift in the opposite direction of their trade, and they lose the target. What a bummer, the trader may have to close the position at break-even or worse, a loss.
Naturally, the market will often turn right around and hit their previous target without them.
Rule 4 – Identify a trend, and don’t fight it.
Most traders don’t have a game plan before they enter a trade. Understanding risk management and sticking to your take-profit levels is crucial. Still, you also need to understand the direction the market is going.
Typically, you want to be a buyer in up-trending markets and a seller in down-trending markets. It’s intuitive, right? Don’t try counter-trend trading if you’re a beginner. Let’s look at an example.
The chart you can find in this video (timestamp: 8:26) is for WTI Crude Oil (USOIL).
For the last month and a half, the market has been in a downtrend. If you were looking for a position in USOIL in this range, it would not be wise to try and “catch the bottom” by buying into a downtrend. The safest trade in a market that’s been selling off is to sell short. If the market retraces, you could short with a target of the previous low or lower lows (recall Rule 3 and set take-profit areas).
When you start your foray into technical analysis, identifying the trend is one of the most critical steps.
Rule 5 – Patience
Know when to fold ’em
Brand new traders often want to get rich quick. Typically, they’re afraid to cut losing trades because they start overthinking. They psyche themselves out, “It can’t go this way any further!” The market doesn’t care about your convictions. Mitigate your risk by placing stops, and if you think the position is not going your way, cut it and walk away.
Take a breather. Watch an episode of PewDiePie, eat some vegan cupcakes, or whatever calms you down.
The most successful traders I know cut their losers when the market isn’t going their way.
When you enter a trade, you should already have enough conviction with the technicals and fundamentals. Suppose the position is behaving suspiciously. You have a hunch that something is wrong, or the overall market is becoming shaky. In that case, it’s best to start trimming your position. The goal is to keep your losers small.
In the game of patience, there are three lessons:
- Know when to cut a trade when the market is turning on you.
- Keep your losers small.
- Never, ever add to a losing position.
Returning to the USOIL chart in the video (timestamp: 11:56), let’s say you enter long on the belief that the asset has bottomed out. The price moves sideways for some time without placing lower lows. You may think, “I’ll buy some more each time price dips.” You have just averaged into a losing position. Instead of cutting the losing trade, you’ve tripled your position size. If the asset starts breaking down, you’re in trouble.
Averaging down into a losing position can destroy your account, don’t do it. Take small losses. They’re healthy, a bit like exercise reps.
The final part of Rule 5 is to check your impatience if the market shows strength in your favor, but not reaching your targets at an ideal speed.
For example, looking at the Bitcoin (BTCUSD) chart in the video (timestamp: 13:21), two targets I’ve set are $10,500 and $11,800. It seems like BTC’s going up, but the market will weed out impatient traders who expect the market to shoot straight to $12,000. Professionals and algo-bots have ample time and money to drive the market in both directions on the way to those price points.
Self-control is critical when the market is moving your way. It’ll help you allow enough time for your trade to play out. Maximum patience, max gains. Let your winners run.
As your winners hit target profits level by level, leave a small bag just in case the price goes parabolic for some unforeseen reason. This way, you’re happy that you took profits, but you also make enough space across multiple trades to catch those extreme moves.
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Rule 6 – Trade with a game plan
As soon as you get in front of the market, identify the trend on higher time frames, whether it’s the four-hour, daily, weekly, monthly, etc.
Think of the optimal entry you’re looking for, whether it’ll be long or short. Ask yourself: where are the key resistance and support levels? Where are the high-volume nodes?
Assess the risk for each trade, use technicals to identify the best level to place a stop loss. Finding a stop loss that’s manageable against your potential take-profit points is the barebones structure of a good risk-reward trade. Amateurs will take some of these steps long after they’ve already entered a position, or they fail to do any of it.
Don’t be an amateur; take steps to protect and grow your capital. Without a game plan, you’re merely gambling.
Rule 7 – Train your psychology
This rule may be a bit redundant, but it’s worth reiterating the importance of managing your emotions. Whether you’re winning or losing trades, whether you have a bad or good day, you need to have the emotional stability to be in this game for the long haul. Being at peace internally must be developed long before you enter or exit trades.
We’ve all been in the position where we’ve lost a handful of trades in a row.
Over time, the losses begin to weigh on your psyche. That’s natural, and it’s human.
You may wonder, “Am I meant for this? Should I just quit?” Just remember that when the market is about to break you in those pivotal moments, it is crucial to have a contingency plan to realign your mindset.
What I like to do is take a break away from the market. I may exercise, do yoga, meditate, or practice positive affirmations. That helps me to re-enter a healthy mindset and increases the odds of my next winning trade.
Trading is nothing but a numbers game. You win some, and you lose some. Learn to take it in stride, and if you’ve followed Rules 1 – 6, you’re already on the right track.
But what does it mean to manage risk, when you’re facing a string of losing trades?
For example, let’s say you started with $20,000, and you use 2% on each trade. You get stopped out on the first trade, lose $400, and now you’ve got $19,600.
Then you lose two more trades back-to-back, still only risking 2% on each attempt. Those three losses leave you with $18,824.
Now compare that to risking 10% on each trade. After three losing trades, you’re down to $14,580 for a 27.1% loss.
This example reveals the dark magic of compounding, but there’s also a light side. Say you’ve lost three trades as listed before, leaving you with $18,824. Thank goodness, you only risked 2% on each position! You’ve taken a walk, hugged a few trees, you’re ready to give this another shot.
Voila, you have a winning trade for a 2% gain. Within four attempts averaging a 2% gain, you’ve broken even from your string of previous losses. What’s more, you’ve also grown your account to about $20,375.
Explore the magic compounding for yourself:
Risking 2% vs. 10% Per Trade by Babypips.com
Compounding Calculator by Forex21.com
Rule 8 – Find out what works for you
For those of you who are creative, who like to utilize different technicals or indicators, know this: What works for me may not work for you, vice versa.
I typically trade with raw price action, pure technicals like support-resistance levels, volume analysis, and level three data. You may look at different indicators such as RSI, MACD, and so on.
Rule 9 – Manage your bias and ego
Leave your bias at the door when entering the market. I’ll repeat, the market does not care about your convictions.
Take this quote and get a tattoo of it: “The market will stay irrational longer than you can remain solvent.” – John Maynard Keynes
To keep your bias in check, base your decisions off technicals and confirmation signals, manage your risk correctly, and at the end of the day, you will come out on top. Missed a good trade? Fine, there’s always tomorrow, wait for a pullback, but do not FOMO.
Fear of missing out (FOMO) is the easiest way to lose money (YOLO probably coming a close second). Do neither of those. Instead, use proper stops, follow these guidelines, and that way, you’ll preserve capital to trade another day.
Rule 10 – Use profits to enhance your life
This rule is one of the most overlooked by many traders, even some traders that I respect. Let’s say a trader enjoys a bundle of profitable days. Their portfolio is growing, and they keep those profits in the market. They’re still in heavy positions, or perhaps they’ve at least walked some of that capital back into their target currency like USD.
However, they’re not moving that money anywhere to use it in their lives, other than trading. What they’re likely thinking is, “I have this money, I made a lot of profit, maybe I can make more profit with the difference!”
Naturally, they want to make more money with new money. But those who violate Rule 10 haven’t realized profits in their life outside trading. Their success is just a bunch of numbers on a screen until they put the money toward tangible, positive life changes.
I take profit weekly, which means I’m moving the money off of exchanges and into my bank account. I don’t care if I can make money tomorrow on the profits of today. That kind of forecasting doesn’t mean anything to me, because I cannot feed myself tomorrow with unrealized gains. You can’t eat a “future” sandwich. Sandwiches are super Zen; they only exist in the present moment, ya dig?
Rule 10.5 – Balance your life versus trading
I can’t stress this enough. You need to understand how to trade without spending hours staring at charts. What I typically do is set alerts on different assets, and on separate timeframes. Then I wait for one or any of the signals to trigger. Think of it like fishing. Sometimes you have to step away from the pond to visit the cooler. Otherwise, you’ll run out of beer, and fishing is incredibly dull without beer.
I use the alerts to set entry and exit positions that are mostly hands-free; there’s no need for me to babysit.
Trust me when I say this: no trader has become a millionaire by watching five-minute charts for 14 hours a day. Most successful traders stick to higher time frames. Everything else is noise, the realm of algo-bots. Five-minute time frames are no place for humans, or the mentally fit.
If you spend ungodly hours sitting in front of a screen, you’ll either burn out or lose your mind, whichever comes first.
Understand when to take a break, remember to breathe. Schedule some TLC for yourself. Spend time with your friends, family, or even alone to get your head on straight.
Mindset is everything, and you must work at it indefinitely. Work on your psychology long before you approach the market. Forget the losers of yesterday. Follow these Ten Commandments of Trading For a Living, and you’ll become a successful chart-slinger in no time.
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