My Trading Rules (will be modified here from time to time).
1. Purely Charts : My core belief - Price is the sum total of all market participants' actions. Price is all that matters, and it is fully represented in charts. Thus, charts are the basis on which all my trading decisions are made. Access to fundamentals and flow information will never be fully complete and timely; and trading on partial facts is often dangerous. The process of interpreting fundamentals can often lead to inertia in difficult market conditions and denial when facts change.
2. Simple Trend Identification : Identify Trends by simple, honest eyeballing of long term price charts. If no clear trend is evident at first glance, there probably isn't one. Do not look for what is not there. Once a trend is identified, trading strategy is formulated based on simple Classical Charting - Trendlines, Continuation and Reversals Patterns, Supports and Resistances. Nothing more complicated. Totally disregard technical indicators as these can often lead to one getting out of trending markets too early and missing huge chunks of trending moves.
3. Trend Following : Trade trending markets only. Positions can only be with the trend or square. Follow the trend, as opposed to trying to anticipate one. Avoid non-trending markets. Buying low and selling high in consolidating markets is NOT what my trading is all about (also hence no need for technical oscillators).
4. Trade Many Markets : At any one time, the number of trending markets are few. To increase chances of success, stalk many markets and be ready to pounce when a new trend develops anywhere.
5. Take All Signals : Enter into a trend following position promptly upon seeing trade signal. Do not bargain for better entry points. Precision of trade entry is NOT critical to my trading success. "Being there regardless" when a trend is in place is paramount. Do not develop a preference for any one market over another. Each will have its turn at glory.
6. Mind Correlation Risks : Exercise common sense when applying Rule 5 "Take All Signals" and avoid over-exposure to common themes in multiple markets. Also, be wary of changing and evolving relationships, and remember that in a crisis all correlations can and often go to 1.
7. Small Positions : My trading success is achieved by riding long term trends with small positions. Proper trade sizing is critical in enabling me to rise above the market noise and staying with underlying trends. Straying above optimal position size WILL lead to emotional responses and lack of objectivity when markets get difficult. Small positions preserve both mental and monetary capital. "Small" is strictly quantified by risk control variables over IMR and account equity, arrived at after long experience and observation of own trading behaviour and performance. "Small" as used here, is not a loose term or vague concept.
8. Limited Pyramiding : Incessant pyramiding is the surest way to turn winners into losers. Avoid temptation to keep adding onto winners.
9. Never Add to Losers : The most important trading rule. If the original trade is not working, the chances are high that it was wrong to begin with. Adding on to it will only deplete your capital at a faster rate. Habitual violators who make money this way are lucky. It is a given that one fine day they will implode.
10. Slow Fuzzy Exits : A contentious rule. Wait for original chart pattern to be invalidated before exiting. Do not bail out at the first sign of trouble. Allow trade plenty of leeway to perform. Accept increased Type 2 errors (bad trade exited late) as trade-off against reduced Type 1 errors (good trades exited prematurely). This is the price of trend trading. Counter-balance is provided by Rule 7 "Small Positions" and Rule 11 "Adverse Spike".
[14Nov12 : Changed to Pre-determine Stop Losses.]
11. Reduce Risks on Sudden Adverse P&L Spike : Circuit Breaker. When a P&L shock occurs, reduce risk by at least half. This is another safeguard against blow up when applying Rule 10 "Fuzzy Exits".
12. Substance Over Style : If a trade performs very quickly beyond optimistic expectations, lock in a significant portion of profits early too. The same applies to YTD P&L relative to annual budget. Temper desire to be elegant and adherence to system with a healthy dose of pragmatism. Money talks loudest. Obsession with aesthetics will not get you very far. Just look at Arsenal.
Keep it Simple and Small (KISS). As Dennis Gartman said, "simplicity breeds elegance, complexity breeds confusion".
