My Rules

Don’t be an Average Frustrated Chump (AFC)!

In his best-selling book titled The Game, Neil Strauss talks about AFCs: Average Frustrated Chumps. These are the real-life regular guys who chase girls desperately in order to get dates, usually with little success. The spread world is also populated with Average Frustrated Chumps who chase stocks desperately out of fear of ‘missing out’.

With girls (or boys) and stocks a more relaxed attitude often pays off. There’s plenty more fish in the sea so if you love it, let it go. If it’s right for you, it will come back. And they very often do.

So you wanna know what rules I use eh….

Well obviously I am not going to tell you my actual trading strategies of how I work out buy and sell signals, stop or limit order amounts etc, that would not be fair.

What I will do is tell you what general trading guidelines and principles I use.

These are my personal rules, rules that I use and I list them here only for the purpose of giving you some background into how I work. They are not meant to be an instruction guide for you to follow, but what I can say is they have suited me well over the years and they are something that will give you ideas on how to formulate your own guidelines.

Rule 1. – Never Try to Predict or Trade the Top and Bottom of the Market

Probably the biggest mistake of people starting out in spread betting is thinking they need to call the point when a market will turn to get in at the lowest price. This is the sure fire way to losing your bank. I do not care where the top or the bottom of the market is, I do not want to trade at these points, it is far too risky. I want to know that the market is already going in the direction I want to trade before I even consider placing a bet. The biggest misconception is that a share that has hit its lowest point cannot go much lower and is a bargain, well it can go lower and normally does.

Rule 2. –  Trade on Trend only

I never place a trade that has not given me a buy or a sell signal from my trading strategy. Without going into detail of the strategy it basically means that I only trade trends and only once a trend is confirmed. Markets tend to go in the same general direction until something happens. I do not want to be in a trade at the start of a rise or at the end of a rise, I would much prefer to be in the “meat” of the trend, it is much safer and will give more constistent profits.

Rule 3. – Never Trade without a Stop Order.

I place Stop Orders on EVERY position I take. Spread Betting is a risky business and can very quickly run you into large losses without a safety net of the stop order to help you. Check out the Spread Betting Stop Orders post.

Rule 4. – Let Profits Run, Cut Losses

Sounds basic but you would be amazed how many people do not do this. The essence of Spread Betting is building large profit off your winning trades that compensates for your smaller losing trades. Given the choice, due to human nature, most people would rather stop a winning trade for a small profit than stop a losing trade. Something to do with feeling like a winner I suppose. Totally the wrong approach, I would rather stop a losing trade than a winning one.

Rule 5. – Do Not Think you will Win Every Trade.

Following on from rule 4, You do not need to win every trade, in fact you do not need to win 50% of your trades. You simply need is to win more money than you lose irrespective of how many trades that is.

For instance, out of 10 trades I could lose 7 trades at £100 each but if I make £300 on each of the 3 winners I will make a profit. You see, it has nothing to do with the amount of trades I win or lose, only the amount of money profit.

Treat losing trades as an EXPECTED part of the business. As long as you have control over your trading with predefined stop orders and let your winning trades run until a sell signal then you winners will be larger than your losers.

Rule 6. – Take out The Emotion

Once you have a solid performing system stick to it. Only close a trade when the system is telling you to or your stop order has been hit. Ignore the background noise you hear in newspapers, CNBC or other news channels, ignore idiots on forums who tell you the market is collapsing or going through the roof. This will only make you do things that is against your system. If you lose on a trade remember you are supposed to as long as they are small losses against your big winners. Never try and get “Even” with a losing trade by putting more money on it, you will only lose more which is not what we want. Remember the aim, keep the losses smaller than the big winners.

Rule 7. –  Never move a Stop Order Away From the Price Once in a Trade.

If your system tells you that a stop order should be set at a certain price before your trade is placed and the market moves against you once you have started the trade don’t be tempted to move your stop target. You will naturally want to move it away from the current price to stop yourself getting “stopped out” of the trade, DON’T. Remember you placed the stop there for a reason and 9 times out of 10 you will just lose more if you move it. (Obviously this rule is not for trailing stops that move with the price.)

Rule 8. – Trade Big Markets That are Illiquid Only.

Only trade large illiquid markets. I prefer the NYSE stocks that have plenty of buyers and sellers. I never trade penny shares or stocks with small market caps. I also tend to stay away from large point markets (like Copper at 40,000 points) as the swings are huge and will get you stopped out very quickly.

Sebastian