Continuing our Part series on Trading Psychology, we cover trading rules found in the book by WD Gann “45 Years in Wall Street”. But before we go over to Gann trading rules (some of which are outdated), Capital3x has its own set of trading rules which a new subscriber is often affliated and ingrained with during interactions in our live trade room.
Capital3x has its own set of rules derived in years of trading on bond floors and forex inter bank markets:
- Focus on a few pairs at a time. Forex markets at any point of time is about one currency. For example at any given point of time, markets are primarily focused on selling or buying of one currency. It could be CAD against every other pair and it is the cross currency movement that affect all other pairs.
- Always scale into positions slowly rather than taking one big order at a specific time. If your initial trade is in the right direction, move stops to breakeven and scale in with another equally weighted order in the direction of trend
- Be clear in your mind on how to determine trends. Just cause a pair moves 100 pips in one direction may not constitute a trend
- Once you have decided that the trade is a wrong trade, get out of it. Do not wait to see if it is going to give you some profits. When in doubt, get out.
- Your overall leverage should not be more than 3 to 5 times. If you make abnormal profits in your first few forex trades, rest assured that it is sigma event. You are not the next gifted Soros out there.
- While News don’t matter, it still can whip your positions around to take down your stops. So it does matter for retail traders with tight stops. Make sure you are very aware of the days calendar and bond schedule.
- Forex moves are “fundamentally” driven off bond markets. It is yield spreads that move forex as capital flows from one pair to another pair of higher yield.
- Safety and risk premium determine sovereign bond moves.
- Currencies at various points of time can attach itself to different drivers. This is important to understand. There cannot be a static set of rules which determine forex moves. For example widening spread in Spainish yield to German yields may be the primary mover of euro on a specific day whereas the very next day it may be Irish yields that are determining its moves. So if you do have an algo, make sure it is dynamic.
- Dynamic Stop management is important to understand. The stops have to move to break even once the pair has moved up above key resistance levels. The effort should always be to protect capital and then aim for returns.
- Do not over trade. The definition of overtrade can differ but you should get to know your ability to concentrate via a demo account. Once your stamina limits to concentrate are reached, you must not trade. It is normal to trade 1-3 trades a day. It is considered an achievement to trade more that 10 trades a day and yet be profitable on a monthly basis.
The above are the rules we follow at Capital3x.
In addition we would also like to provide the trading rules by W D Gann. According to W D Gann there are 24 rules that stood by him during his most successful years om Wall Street.
Here are the 24 rules:
- Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.
- Use stop loss orders. Always protect a trade.
- Never overtrade. This would be violating your capital rules.
- Never let a profit run into a loss. After you once have a profit raise your stop loss order so that you will have no loss of capital.
- Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules.
- When in doubt, get out and don’t get in when in doubt.
- Trade only in active markets. Keep out of slow, dead ones.
- Equal distribution of risk. Trade in two or three different commodities if possible. Avoid tying up all your capital in any one commodity.
- Never limit your orders or fix a buying or selling price.
- Don’t close your trades without a good reason. Follow up with a stop loss order to protect your profits.
- Accumulate a surplus. After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in times of panic.
- Never buy or sell just to get a scalping profit.
- Never average a loss. This is one of the worst mistakes a trader can make.
- Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
- Avoid taking small profits and big losses.
- Never cancel a stop loss order after you have placed it at the time you make a trade.
- Avoid getting in and out of the market too often.
- Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.
- Never buy just because the price of a commodity is low or sell short just because the price is high.
- Be careful about pyramiding at the wrong time. Wait until the commodity is very active and has crossed resistance levels before buying more, and until it has broken out of the zone of distribution before selling more.
- Select the commodities that show strong uptrend to pyramid on the buying side and the ones that show definite downtrend to sell short.
- Never hedge. If you are long one commodity and it starts to go down, do not sell another commodity short to hedge it. Get out at the market: Take your loss and wait for another opportunity.
- Never change your position in the market without a good reason. When you make a trade, let it be for some good reason, or according to some definite rule; then do not get out without a definite indication of a change in trend.
- Avoid increasing your trading after a long period of success or a period of profitable trades.
Thank you and see you in our Live Trade Room on monday morning Asia session
Mark – Capital3x.com