Universal rule for trading
Here are the six universal principles of successful traders:
1). Preparation
Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with a minimum of 30 trades first then determine your risk of ruin. I would advise a larger sample size in multiple market environments a trend following system that looks brilliant in a trending market may result in a 50% draw down in a choppy or range bound market.
2). Enlightenment
Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance levels while trading with the trend on either reversals or break outs. The 10% of winning traders in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into key reversals when a security finds support or resistance and reverses at the end of a monster trend.
3). Developing a trading style
You must choose your own personal style of trading, swing trading, trend trading, etc. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term.
4). Selecting Markets
Ideal markets to trade have high volume, price transparency, liquidity, 24 hour coverage, zero counter party risk, low transaction costs, and are honest and efficient. They also must have the necessary trading attributes of volatility, research, simplicity, ease of short selling, specialization, opportunities, growth, and leverage. These are the markets that afford you the greatest chances of making money trading.
5). The Three pillars of trading.
Money Management: You must make your trades as fixed as possible. Trade with the same risk, capital, units, percentage, and in the same type markets to manage risk most effectively.
Methodology: Choose a method that works for you and your personality from the ones available. (Dow Theory, technical indicators, patterns, price and volume, etc) Once you have a methodology to your trading, test it in the real world in real time either with micro trades or paper trade, you need a sample size to judge its efficacy.
Trader Psychology: Manage your hope, greed, fear, and pain to stay in the game.
6). Putting it all together
Monitor your performance consistently. You need positive reinforcement that your trading is working by the results you are getting in winning and losing trades. Your equity momentum will show you if you are trading too big or if you are on the wrong track, your P&L does not lie.
I have been actively and successfully trading the market for a decade and agree 100% with the authors principles. The author finishes up his book by asking many professional traders and some that are successful private traders what one advice they would give to aspiring traders. This advice alone is worth the price of the book. Here is a summary:
Money Management:
Focus on risk
Trade small
Methodology:
Pick a method that suits your personality
Develop a simple methodology
Avoid the majority, learn to anticipate reversals
Look for alignment in set ups
Good defense wins games
Identify low risk set ups
Know your methodology using software
Psychology:
Deep practice before trading
Expect to lose. Trade to win
Be disciplined. Be patient
Be humble
Be in control
The author keeps it real.
Source: “The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”
-- by Brent Penfold
Here are the six universal principles of successful traders:
1). Preparation
Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with a minimum of 30 trades first then determine your risk of ruin. I would advise a larger sample size in multiple market environments a trend following system that looks brilliant in a trending market may result in a 50% draw down in a choppy or range bound market.
2). Enlightenment
Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance levels while trading with the trend on either reversals or break outs. The 10% of winning traders in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into key reversals when a security finds support or resistance and reverses at the end of a monster trend.
3). Developing a trading style
You must choose your own personal style of trading, swing trading, trend trading, etc. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term.
4). Selecting Markets
Ideal markets to trade have high volume, price transparency, liquidity, 24 hour coverage, zero counter party risk, low transaction costs, and are honest and efficient. They also must have the necessary trading attributes of volatility, research, simplicity, ease of short selling, specialization, opportunities, growth, and leverage. These are the markets that afford you the greatest chances of making money trading.
5). The Three pillars of trading.
Money Management: You must make your trades as fixed as possible. Trade with the same risk, capital, units, percentage, and in the same type markets to manage risk most effectively.
Methodology: Choose a method that works for you and your personality from the ones available. (Dow Theory, technical indicators, patterns, price and volume, etc) Once you have a methodology to your trading, test it in the real world in real time either with micro trades or paper trade, you need a sample size to judge its efficacy.
Trader Psychology: Manage your hope, greed, fear, and pain to stay in the game.
6). Putting it all together
Monitor your performance consistently. You need positive reinforcement that your trading is working by the results you are getting in winning and losing trades. Your equity momentum will show you if you are trading too big or if you are on the wrong track, your P&L does not lie.
I have been actively and successfully trading the market for a decade and agree 100% with the authors principles. The author finishes up his book by asking many professional traders and some that are successful private traders what one advice they would give to aspiring traders. This advice alone is worth the price of the book. Here is a summary:
Money Management:
Focus on risk
Trade small
Methodology:
Pick a method that suits your personality
Develop a simple methodology
Avoid the majority, learn to anticipate reversals
Look for alignment in set ups
Good defense wins games
Identify low risk set ups
Know your methodology using software
Psychology:
Deep practice before trading
Expect to lose. Trade to win
Be disciplined. Be patient
Be humble
Be in control
The author keeps it real.
Source: “The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”
-- by Brent Penfold
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