1. Trading can be straightforward, but at the same time, it still requires discipline. Leave your gambling instincts behind and stick to your rules.

Although the above passage makes absolute logical sense, you’d be amazed by the number of traders who struggle to remain disciplined. Many years ago, Charlie mentored an airline pilot and his 17 year old son. Although they were taught a comprehensive trading plan, the pilot found himself getting bored if there were no trades setting up in the short time he would have available in front of his computer. He ended up making trades based on what T.V. pundits were saying and risking 20% per trade!

As you can guess, the pilot ended up losing his entire trading account. Fortunately it was ‘only’ £10,000 but that’s still a lot of money for anyone to lose. His son however was trading well and ended up not talking to his father because of his lack of trading discipline. When Charlie found out, he had a straight talk with the pilot; “if you can’t maintain discipline, you may as well stop trading right now” Charlie stated.

There was a happy ending to this story. The airline pilot realised he was simply too busy and too much of a gambler to be a trader (Charlie later discovered he previously had a gambling problem!); but his son was a different story. Charlie stayed in touch with him throughout going to University and he joined a major investment bank on their trading floor after graduation.

2. Novice traders turn into professional traders when they stop looking for the holy grail and focus on controlling risk.

Novice traders have a propensity to jump from one trading method to another as soon as they think they are onto something better. Now obviously there will be times when what they have found is indeed better but to use the word ‘fickle’ to describe a novice trader would be an understatement sometimes!

You could have the best system in the world giving you a success rate of 90% but if your risk management is poor, you could still lose. It has been proven that you can flip a coin and still make money from the markets provided your risk and trade management are good.

If traders can learn to place trades within usual risk limits, they will find they have less emotion involved, manage the trade better and have a steadier equity curve.

A trader once got in touch with us when he had got himself into trouble. He was trading with a specific strategy that had given him 11 winners out of 11 trades over the previous two months. After seeing the success he was having, he decided to increase his position size by 5 times his usual stake. Then to top it off, he was so confident in his ‘amazing’ strategy that he decided not to use a stop loss!

Yes, you’ve guessed it, Mr Market decided to teach him a lesson and the market he was trading fell 500 points overnight. Needless to say, he learnt the hard way from ignoring risk when he thought he had found the holy grail. There was nothing wrong with the strategy, provided stop loss protection and normal risk limits were observed!
There’s an old saying in the trading community; ‘novice traders look at how much money they could make whereas professional traders look at how much money they want to risk’.

3. Be optimistic when your gut is pessimistic and pessimistic when your gut is over excited.

How many times have you jumped out of a trade because it didn’t look like it was going to move in your direction, only for you to realise it was the wrong choice? Not only did the trade you panicked out of move in the right way, it would have become a very big winner.

The inverse of this is also true. Sometimes when you should have booked a profit, your greed has taken over as you were so sure your trade was going to carry on going. As a result you gave back all of your gains.
This greed and fear mentality can have a huge impact on a traders profitability if they don’t keep their emotions in check. Once you are in a trade, stick to your preset plan. If you don’t have one, you shouldn’t be in the trade in the first place…..

4. Don’t overtrade. Be like a surfer waiting for the right wave to come along. Patience is one of the greatest strengths a trader can have.

Many novice traders think that professionals are in and out of trades all day long. This simply isn’t true. The majority of professional traders will take a maximum of a handful of trades each day and many will only look to make one or perhaps two trades.

Rather than trying to be in every move you see, wait for the right setup to come along that meets your trade plan. This way, you will find you execute better and you won’t tire yourself from doing too much.
Even with only a couple of trades a day, you can be extremely successful.

5. Focus on the setups, not the money. Losers think about how much they can win, winners think about how much they could lose. Focus on the setups and the profits will take care of themselves.

All too often, traders will have their account P&L showing while they are in a trade. Now although Charlie does this on his Friday live trading videos, it’s purely to show people every aspect of his trade.
We don’t advocate looking at your P&L whilst trading as it can affect your decision making. Too often a trader can be watching their account balance moving and make a split second decision based on that. Better to keep the P&L hidden and make decisions based on the charts, not account balances!

6. Stay in winning trades as long as you can.

Something of an obvious statement we know but you’d be amazed how many traders jump out of trades as soon as they are into profit. This brings us back to having a trade plan. If you have a plan, you know how long you should stay in your trade for.

Some methods thrive on having a risk:reward ratio of 1:1 but have a high win rate whereas others have a risk:reward of 1:3. Whatever your style of trading, try to ensure you run the profitable trades as much as is logically viable. It’s by running your winning trades that pays for the losing trades when they come along. If you don’t run them, the losers will quickly eat into the small gains you had previously made.

One easy way to run a trade is to take profits at a logical point but leave a small stake left to see if it can run further. You’d be amazed how this can add to your bottom line.

7. Use of correct money management is the key to success. Without it, even the best system is likely to fail.

We were once contacted by a school teacher who was into trading and thought he had found the holy grail that predicted future prices of the stock markets. He was so convinced that the S&P was going to go up by a big amount at the time that he re-mortgaged his house in order to put a large capital injection into his trading account.

He used his entire account funds (around £60,000) to place the trade and yes you’ve guessed it, his prediction was wrong and he lost the lot. He got in touch with us as he needed to find a way to trade it all back quickly before his wife found out about the re-mortgage!

You can be pretty sure that the trades you take that you over-leverage on will become losers so stick to your money management and stay well within normal risk limits….

8. Don’t be a fear based trader or a greed based trader.

Fear based traders are so fearful of taking a loss, the often miss out of great trades and even when they do get into a trade, they are more likely to take profits too soon. One good aspect of a fear based trader is that they’ll always stay within risk rules!

Greed based traders are a much more dangerous breed. They are much more likely to ignore risk rules and also likely to stay in trades too long, ignoring exit signs because they want to make more money from the trade, only to see it eventually turn back on them.

Be somewhere in between, having the confidence to hit the trigger when you need to but also with the discipline to stay within money management rules.

9. Never add to a losing position.

As tempting as it can be to average down after a trade isn’t going your way, be very careful. This is destructive behaviour and can only end badly. Sure, sometimes it could work out for you and get you back into profit but all that does is install a bad habit and at some point you’ll do it again and it won’t work out. That’s when you realise that instead of risking 1% on your trade, you’ve ended up losing 10% or 20%!

Charlie knows about this only too well. In his very first year of trading, he was buying puts on Dell that weren’t going too well so he bought more and more over a period of months, hoping that averaging down would ultimately put the entire position into profit at some point. Unfortunately time decay caught up with him and he lost a cool $250,000 on one trade! Lesson learned!

Now don’t confuse adding to a losing position with building a position over different price levels. That’s fine and lots of professional traders do this. However, they also ensure that their stakes are smaller so they are still within risk limits.

10. Trade like a guerrilla. Fight on the winning side but be willing to switch allegiances if circumstances change.

Too many traders find themselves convinced that a market is going in one direction or another and will keep buying or selling even though price is not going in that direction. Back in 1997 as a novice trader, Charlie bought put options on DELL as he thought the stock was going to fall. It carried on going higher and ultimately that single trade cost him over £200,000.

You have to be able to recognise when a market has changed course and be willing to forget your pre-conceived idea about where it wants to go and be willing to start considering the opposite side.
This is where indicators become very useful because they give you a visual clue as to what’s happening and should help you adjust your thinking towards where the new trend is developing.

11. If you buy breakouts, be aware that professional traders are probably the ones selling the stock to you.

Research on the S&P through the 1990’s told us that if you had bought every breakout on this index during that decade, you would have actually lost money despite it being a great 10 year period.

This is because there are lots of ‘false’ breakouts where price will move past a prior high and then pull back, stopping out many traders who bought the breakout, only to then move higher again later.

Some breakouts can be powerful such as multiple tests of a price area but use an RSI or MACD indicator to ensure there’s no divergence potential after the breakout. If there is a divergence in place, leave the trade alone and wait for a pullback if you like the look of the stock overall….

12. Sell markets that show the greatest weakness and buy those that show the greatest strength.

It seems like a straight forward enough statement, but many people around the world get obsessed with trying to catch tops and bottoms.
Wait for a market to move in the direction you are looking for and then look for an entry in that direction rather than trying to predict the move.
When it comes to looking at relative strength or weakness, if you are looking at stocks, look to those within their sectors which are strongest or weakest.

13. For a trader, understanding mass psychology is more important than understanding economics.

Most traders are short term participants in the markets. By that, we mean day or swing traders who are not going to be in multi month moves.

For this reason, economics is not going to have much impact on the short term nature of price action whereas trying to understand what motivates other traders is going to be very useful.

For example, if you see a stock screaming higher in price in a near vertical movement, leave it alone as thrill seekers will be jumping on board just as its about to peak. Likewise, when a stock is stuck in a sideways trading range, look for where traders will be putting their stops (usually below prior lows/above prior highs) as these levels will often get taken out.

Traders are creatures of habit, if you can understand what the masses are doing, it’s often best to be cautious at that stage.

14. Discipline is not often learned until a trader has lost enough money to feel the pain. Until you’ve felt this pain, you believe big losses can’t happen to you and that can bring about a false sense of confidence.

Many traders will go through a cycle of winning and losing. When they are winning, it’s normally as a result of them following their trading rules and executing well. When they start losing, it is often as a result of over-confidence following a winning streak and stopping to follow their rules.
This type of cycle can happen several times until a trader finally realises they can’t beat the markets without a clear plan of action and maintaining discipline. It’s a bit like driving a Ferrari on a race track, that’s what its built for and it will give you hours of fun. However, try and take that Ferrari off-road and you will soon experience trouble.
Once discipline is learned, trading becomes much easier.

15. Trade the facts in front of you, not what you think is going to happen.

How many times have we heard a trader saying “I bought this because I just knew/thought it was going to go higher….”

This is completely the wrong mindset. Nobody ‘knows’ a market is going to go higher. We can use certain price patterns and indicators to give us a given probability, but we can’t possibly ‘know’.

Any trader who trades based on what they ‘think’ is going to happen will soon realise this is not the correct way to trade when their account balance starts to drop!

Look at what’s in front of you on the screens and trade based on that, not what you are trying to predict with your crystal ball….

16. Never risk more than 1-2% on any single trade.

The name of the game in trading is protecting capital. You don’t do this by risking 10 or 20% on a single trade because you would only need a few losers in a row and you would wipe out most of your account.
Statistically, if you do enough trades, at some point in your trading career you could have a run of 20 losers in a row! Having said that, Kym and Charlie have been trading 16 years and have yet to experience it – but the stats are there at least!

The whole point of only risking a small amount per trade is to ensure that should you have a number of losers in a row, it can’t blow your account. For instance, if you risked 1% per trade, even after having 10 losers in a row (which would be pretty unlucky), your account can easily cope with this.

Many traders only think about how much money they can make but professionals look at the risks and how much they can lose. For this reason, only risking a small amount on each trade means that you protect your capital whilst in a losing period but still make a very good return based on capital at risk when having a string of winners.

17. You cannot predict the future. Always remember anything can happen.

Novice investors and traders often think they know what is going to happen next. More importantly, they believe the experts know what will happen next.

No-one knows 100% what is going to happen next. The experts are simply good at probability but they are certainly not always right.

So if you can’t predict the future 100% then you need to have a contingency plan. This comes in the form of a stop loss. Too many traders have ignored using stop losses over the decades and it has been the ruin of thousands of trading accounts.

Use a stop to ensure that should something happen that you didn’t expect, you are protected and then can re-assess the situation.

18. You don’t need to know what’s going to happen in the future to make money.

Mathematicians have proven that you can actually make money in the stock market by flipping a coin and then using stop losses and trade management.

You don’t need a crystal ball (although of course it would be nice) in order to make money. Take the trade and manage it, that’s all you need.

19. There is a random distribution between wins and losses. You have to understand the probabilities.

Just because you have a strategy that gives you an average of 7 wins for every 10 trades doesn’t mean that in every set of 10 trades you will have 7 wins!

Over a greater number of trades it will average out at 70% but in any one cluster of 10 trades you could see a great disparity of wins and losses.

For example, you could have 10 out of 10 winners or you could only have 2 winners and 8 losers but over the long run it would average itself out.

Again, for this reason its right to only risk a small amount per trade because even if you have a high win rate strategy, it will still have periods where it loses more often than its long term average.

20. All rules are meant to be broken. The trick is knowing when and how infrequently this rule may be invoked!


P.S. If you want to see these rules being acted on every day, check out our live trading room – Click here

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