How To Build Trading Rules
Goals and System Building
Welcome to the first of many articles pertaining to building Trading Rules. This initial one will provide guidelines for crafting your ruleset and describing your market goals.
Make the Commitment
I’ve asked a few times on Twitter whether people have a written set of Trading Rules:
The results are usually very similar with the significant majority not having them.
However when I ask this question:
The results are overwhelmingly in favor of having a written set of rules. What does this mean? It means that the majority of people know what they need to do to improve as traders but they have not yet made the choice to put in the necessary work.
Building wealth from the market requires time, discipline, and dedication. This ruleset will serve as proof of your commitment to treat trading as a business. If you approach trading the right way, enact & continuously evolve your system, and put in the work, you will become successful over time.
As I’ve mentioned before, I believe that taking a weekend and defining your rules is essential for beginning traders to focus their trading and commit to their system. As you become more experienced, and risk management, entry/exit tactics...etc become ingrained in your mind, a comprehensive rule set becomes slightly less important (Although I think every trader should have one).
This initial set of rules should fully describe your process and should be personal to you. Here are a few topics that I will be covering in this article series.
Rules Guidelines and Goals
Market Conditions
Stock Selection
Entry Conditions & Setups
Position Management & Sell Rules
Risk Management
Position Sizing
Routines
Post Analysis
Regardless of style or timeframe, you will need to make decisions concerning these topics and more!
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Writing Rules
Your ruleset should be personal to you. Everyone’s trading style should be different since we all have different timeframes, risk tolerances, lives, and edges. Do not try to be William O’Neil, David Ryan, or your favorite trader on Twitter. Be you!
You should write this ruleset as if you were trying to describe your system to a close friend. Assume that they have a similar amount of trading knowledge as you but be sure to define the timeframes of setups, describe terminology, and go granular enough so that they could understand and replicate your method without asking you many questions.
This exercise will allow you to fully think through your process and make sure you know how to address anything that can happen in the markets. There will be, without a doubt, things you forgot to discuss, and based on experience things will change over time. That is perfectly okay, your rules set is not a static document, every few months or even just every year revise your ruleset and add or alter anything you wish.
No one’s trading methodology is perfect. It’s an ever-changing process because you yourself will change. Maybe you find your timeframe lengthening and therefore are less reliant on short-term trading tactics or you’ve changed jobs and have less freedom to watch the market. Adapt to your situation and your rules should change accordingly.
Setting Goals & Defining your System.
Setting personal goals should be the first thing in everyone’s ruleset. This is your mission statement which will form the structure for every future section.
Here are a few questions this section should address:
Are you financially ready to allocate capital towards trading/investing?
At this stage would it be best to allocate most of your capital to index funds?
What are your performance goals? Are these Realistic?
What is your timeframe? Day Trader/Swing Trader/Position Trader/Investor?
What types of stocks will you focus on?
How much time on the weekend do you have to dedicate to stocks?
How much time during the weekdays do you have to dedicate to stocks?
What is your current experience level?
What phase of trading are you currently in? Boom & Bust/ Consistency / Performance?
What are your biggest strengths as a trader/investor? Biggest Weaknesses?
Are you ready to commit to a system?
These are all just guidelines, feel free to add/subtract any questions you would like. It’s your trading rules :)
The last question is one of the most important you need to ask yourself. It takes a lot of time, dedication, and discipline to become a successful trader. However, the journey and results can be extremely rewarding
I hope that this article gets you started on the path of becoming more disciplined and crafting your own rules. In the next few posts in this series, I will be sharing the details from my own rule sets.
Make you are subscribed so you don’t miss anything and also feel free to share on Twitter your rules with me for feedback. Start this weekend!
Take care!
-Richard