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Chad Butler writes about the 13 Golden Rules for Successful Trading. Today's article is titled "The Golden Rules of Trading"
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Trader Savvy Newsletter


August 16, 2006

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The Golden Rules of Trading

Name: Chad Butler

Company: RJO Futures

Learn More About Today's Author
Years Trading: 16

Favorite Movie
: Glengarry Glen Ross

The Golden Rules of Trading

It is a generally accepted fact that 90% of futures traders lose money. The majority of those are newcomers who either haven’t taken the time to educate themselves, or are not shown how to educate themselves. But successful trading, like any other successful venture, has a set of rules to live by.  I have assembled a list of these “Golden Rules,” the purpose of which is to help you discover some of the principals that professional traders inherently live by. The list in by no means exhaustive and is presented in no particular order, as every one is significant.  There are 13 total rules, five of which we will discuss here (to receive the entire list of 13 Golden Rules for Successful Trading, click here).

HAVE A TRADING PLAN

One of the most common things written in books and articles on trading (whether stocks or futures) is to have a plan and to stay disciplined to that plan. That means know the following BEFORE a trade is put on:

  • Where is the entry point and why?
  • Where is the protective stop going to placed?
  • Where will you begin to take profits?

Knowing the answer to all 3 of those questions BEFORE you enter a trade will prevent you from having to make tough decisions as the market is moving. You will already know what to do when the market moves. Nothing is worse than having your broker call you up and tell you bad news AND him expecting a decision immediately on what to do.

KNOW YOUR RISK

This goes hand-in-hand with having a trading plan. Knowing how much you are willing to risk on any one particular trade is just as important as knowing how much you are willing to risk on trading in general. An account should always be opened with risk capital, monies that you can walk away from if lost without any hardship. That amount of money is up to the trader. Your broker should be made aware of that amount as well. As far as individual trades, know where you’re wrong, i.e. have stops in place so a market can’t get away from you. Also, be aware that options can be used as a hedge against a futures position. Most new traders are unaware of how that can be done, but it is a vital component of professional trading. Ask your broker how that works.

TAKE PROFITS

Most new traders seem to have an aversion to profits. That seems like a ludicrous statement but it is nevertheless true. Many traders seem to have the habit of thinking that the market will always go their way, it will never reverse. So Mr. Greed tells them to stay with the trade forever. Well, that simply never happens. You have to exit a trade to turn that position into cash. Settle yourself to this fact.

You will never sell the exact top of a market or buy the exact bottom of a market. Professional traders don’t even attempt to do that. So why put that type of pressure on yourself as a newer trader. If it happens it is generally luck. If you have profits - TAKE THEM! You will always be able to renter a new position. Tomorrow is another day. There are always other trades. The markets have been around for hundreds of years and they’re not going anywhere. So that one trade that is making a lot of money IS NOT the only trade you will ever make.

NEVER LET A WINNER TURN INTO A LOSER:

Too many times beginning traders find themselves in the enviable situation of having a nice winner on the books. Sometimes those winners can be 50-75 % of a particular account's value. While traders always want to get the most out of a market's move, many newer traders let greed and ignorance get in their way. They think that the market will continue in their way forever. Well, the truth of the matter is that markets don’t go straight up or straight down. They fluctuate all the time, sometimes with a tremendous amount of volatility. If you have a winner on the books protect it. Don’t let it turn into a loser. There is nothing more demoralizing to a newer trader than to have a 10K winner turn into a 20K loser. And don’t think it won’t happen to you, it happens to every one.

BE AWARE OF YOUR EMOTIONS

Trading is an extremely emotional exercise. In fact, 85% of trading is knowing how to handle the psychology of trading. The rest is actual “book smarts”. It is emotions that move markets; the emotions of fear and greed being the most prominent. Fear generally makes a market move lower, and greed generally makes a market move higher. Learn to divorce yourself from your fear and greed when making trading decisions. Decisions based on emotion almost always are the wrong decisions.

John Templeton, founder of Templeton Funds, was once asked how to know when to buy or sell a market. His response was simple yet very complex. “I buy markets when everyone else wants to get out of them, and I sell markets when everyone else wants to get into them”. Meaning, mass thought process played an important role in his decision making process. When everyone else is scared to death to be in a particular market, he would like to buy. When everyone else thinks a market is the next big killing, he wants to sell. The Templeton Funds were one of the most successful groups of funds on Wall Street.

Money is one of the most important factors in a person’s emotional well being. That may not be the right way to live but it is a fact of life. Money can cause divorce, suicide, litigation, exuberance, and joy. In the long run, it is just money. Don’t let your emotional attachment to it cloud your decision making process.

As I stated at the beginning, this list is by no means exhaustive.  In fact, we have only had time to discuss five of the list of 13.  This should get you started in the process of evaluating your trading plan, but I would encourage you to further your study with the entire list.  (You can get the entire list here.) 

TRADING FUTURES AND OPTIONS INVOLVES SIGNIFICANT RISK OF LOSS.

About Today's Author

Chad Butler is a 16-year veteran of the markets. He began as an equities and options trader, but quickly moved into the commodity markets in the mid 1990s.

Mr. Butler's past experience includes trading Dow and S&P option spreads as well as gold futures and options, developing a number of short-term index arbitrage programs, and publishing numerous articles on various derivatives. Some of his work is included in McGraw-Hill's Complete Guide to Single Stock Futures and he currently writes for various commodities newsletters, including RJOFutures MarketNews. He has also been a featured seminar speaker teaching his various trading techniques to audiences large and small.
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