Setting your trading rules

Working on a set of trading rules has been one of the best things I have done to help my progress as a daytrader.
This article will guide you through the process and you can even download a printable version of my own set of rules.

 

When I started using trading rules

For a long time, I had a looser set of rules in my head when trading. My risk management was going well, with maybe a few small areas for improvement. I was having some impressive streaks of really great profits and got kind of hyped of how awesome I was. But then things turned bad and I would have weeks where I just consistently got stopped out again, and again and again. 

 

I had a loose idea of when I should stop trading for the day, and I didn't lose more than 1% of my account size for every time my stop loss got hit, so everything was fine - right? 

 

In reality, my trading account started bleeding. It wasn't bleeding badly more like a small leak that just wouldn't stop. I kept having great weeks, but then I got into trouble and lost my profits again. And my account was just bleeding slowly again. 

 

But I already have a trading plan!

I wasn't sure what was happening really? All my backtesting showed that my edge in the market was great. I had this detailed trading plan, and I was following it to the letter.

Somehow I just couldn't execute it properly in live trading in some weeks, while on other weeks I was making great profits.

 

It took a lot of tweaking, testing, and trying things in practice to finally get my edge working in live trading consistently. This article will not cover the process of setting up a trading plan - I will cover this in a separate article. But what struck me deep into this process was, that my trading plan was not the culprit of my consistency problems. 

 

The rules I had in my head probably were too loose and in some areas non-existent. I needed a systematic approach to rules and rule-setting to make consistent profits in my trading account. 

And first and foremost: I had to write my rules down! 

 

In the end, it was mainly written rules related to trading psychology that turned things around for me. But who knows, you might be limiting yourself without knowing it in different areas!

 

These days I have taken things a bit further: I have laminated my set of trading rules and use them as a mouse-mat at my trading desk.

What is the difference between trading rules and a trading plan

To be fair: You will find a ton of slightly different definitions on the terms: Trading plan, trading strategy, and trading rules, and the terms might be used somewhat interchangeably. 

How I like to work with a trading plan and trading rules, is to develop a trading plan that is leaning against a well-documented strategy. In praxis, the plan is a researched and well-written document that outlines how I pick my trade-setups and how I analyze the market to support my trading decisions.

 

The rules are meant to help me stick to the plan and make sure I stay on the right track at all times. I like to keep the rules quite simple and limited, otherwise, I simply do not stick to them if they get too complicated. 

Don't get me wrong: The groundwork and analysis that gets me to the rules can easily be quite comprehensive - But in the end, all the work has to get boiled down to some easy to follow rules. 

In other words: I like one piece of paper that outlines the rules I need to follow!

3 steps to success in day trading

My approach to trading rules is divided into 3 separate focus-areas:

  • Risk-management
  • Analysis and documentation
  • Trading psychology

I know a lot of new traders will focus a lot on the technical aspects of trading, and sound risk management plus great documentation is undoubtedly needed to succeed. 

But as you dig deeper and start getting profitable, most traders will find that to succeed you also need to be aware of your mental state, learn to manage your emotions, and be equipped with a psychological skill set that is tailored to your unique psyche. 

 

Like many other daytraders before me, I am primarily drawn to the world of trading due to my analytical skills. So having to work on emotions and getting to know my psyche was undoubtedly a bit intimidating and a downright daunting task at first. But setting some rules that evolved around trading psychology and getting on top of my emotions ended up as a great move for me. After that, I started getting on top of things and things turned for the better surprisingly fast.

So my advice is to work on trading psychology just as focussed as you do on your technical analysis and risk management. This can potentially make a huge difference in your overall performance as a trader!

Risk management

Risk management is a really important part of any trading strategy. Even the best strategy with razor-sharp execution won't work without really solid risk management.

Set some solid and well-tested rules that work for you! 

 

There are many things to consider, but this list of question might get you started thinking about how to handle risk optimally:

  • How much can you risk on each trade?
  • Do you need to trail your stop-loss during trading?
  • Should you move your stop-loss to break-even - and when?
  • Are you allowed to compound several entries?
  • Should you take partial profits - and when?
  • What is your maximal allowed drawdown on a daily- and weekly basis?

For me personally making profits consistently isn't the hardest part: Limiting losses if/when things start to go bad can be a challenge. This is why I have some really strict rules about limiting my risk to 0.5% percent per trades in weeks after a realized loss. 

This way I dial things down a bit and go slow for a while until I have made up for my loss. This way I may be a bit slower to get going again, but I have found this a really effective way to prevent me from ending up in a negative spiral where I keep losing trades and bleeding money from my account.

Analysis and documentation

If you want to improve your trading, you need to know what you are doing today. And how will you know what you do today if you do not document your trades? 

Furthermore, you need an edge in the market to make money. This sounds so basic, but when did you last backtest your strategy in the market? 

Do you have setups that only work on some days or under certain conditions? Analysis and documentation may not why you fell in love with trading, but to really get consistently profitable you need to dig in there and do your homework!

Trading psychology

This one is probably the focus area that needs to be custom-fitted the most according to your own personality. However, if we take a more generalized approach on how to set rules in this category, they should probably all be centered around limiting the impact of this list of feelings when you trade:  

  • greed
  • panic
  • fear
  • euphoria
  • anxiety
  • anger

Let's get back to my own personal struggle and how I got back on the right track. I noticed a pattern. After getting stopped out and in particular, after making a profit in the market, I had an urge to get back into a trade. It wasn't like I would just randomly enter, these were genuine setups that I might be able to justify according to my plan. But a lot of times the trades were of lower probability and my bias and feelings would have to high an impact.

 

So, what really was going on here, was that I was revenge-trading when getting stopped out and euphoria would make me trade again after making profits.

After trying different things I simply made one rule that really turned things around for me, once I got to implement it properly:

 

Stop out & taking profit

Both profits and losses can give you an urge to get back in the market as fast as possible. Take at least 10 min. away from all screens to prevent emotional trading and to get a fresh view of the market.

 

I simply need a breather away from the screens for 10 minutes whenever I take profits or get stopped out. Sounds so simple right? 

Well, in reality, it took some failed attempts to really do this consistently, but now I live and breathe by this rule: It really is something I need to do to make money consistently in the forex market!

So, how to get started yourself?

Well, first off: We are all different, and even though my rules are thoroughly prepared they might not be appropriate for you!

 

Setting rules might sound complicated, but it really is a matter of identifying problem areas in your trading and finding a solution to prevent them from happening or limit the extend. 

I found an analytical approach especially helpful when working with trading psychology, but at first, it required me to hide my ego and be really honest with myself. 

 

Most new traders will find it easier to blame the market or errors in the technical analysis when they fail to make profits. In reality, the real culprit is often lack of emotional awareness. 

If you do find it hard to get started with trading psychology and implementing psychological rules in your trading, why not start off by writing down when you have experienced these feelings in your own trading as a starting point: "Greed, panic, fear, euphoria, anxiety, anger".

Rules only work if you follow them!

This might sound trivial, but trading rules are only effective if you implement them and use them. In praxis, this means that you need to evaluate your rules and if you actually followed them! 

I also found it important to have the rules visually present when I trade. This is why I started using my rules poster as a mouse-matt. This way it is always in the back of my mind, and it helps me adhere to the rules at all times! 

Get the free Trader Rookie Trading rules poster

So, time to get your hands dirty! Start working on a set of trading rules today, to take your day-trading to the next level. 

 

Download the Trader Rookie trading rules poster. This is the exact printable PDF A4 poster I use in my day-trading, and will give you some great rules to work with:

 

Direct download:

Trader Rookie trading rules poster

  

Rookie's hand pointing left

 

The poster is primarily meant as an inspiration for you to get started working on some trading rules that are tailored to your own trading style and personality!

So, do you have anything to share about trading rules and how/if you use them in trading?


Or maybe a funny story from your own trading where the lack of rules caused an unexpected outcome?


Leave a comment down below to share your thoughts!