3 simple rules of trading by Alen Hull
They
look simple but following them is difficult for most of us and these are the
rules which are frequently violated by most of the traders.
1
Buy a rising share - sell a falling share
2
Always use a stop loss that moves up with price activity
3
Never risk more than 2% of total capital on any individual trade
Buy
a rising share - sell a falling share
This
rule is often confused with 'buy low - sell high' which has 85% of share
traders buying shares that are going down in price in the hope that they will
immediately turn around and start going up. This mistake leads to the sad
statistic that 85% of share traders lose money.
'Buy
a rising share - sell a falling share' is all about buying into markets that
are already rising, which is so painfully obvious that the majority of share
traders, ie. 85% of them, don't do it. The reason for this is simple and
psychological; human beings are counter-intuitive by nature. So in order to be
successful we must be prepared to stop thinking like everybody else.
Always
use a stop loss that moves up with price activity
An
initial stop loss is a price level that defines the point at which we are ready
to admit that the market is not behaving as we would expect and we are prepared
to sell. In other words this is the point where we admit that the trade is a
failure. All share traders have losing trades and the only fatal failure in the
marketplace is the failure to execute one's stop losses. When the market moves
in the direction we expect it to then the price at which we are prepared to
sell should move with it, locking in profits. If our stop loss has moved beyond
our entry price (the point at which we bought into the market) and we fail to
sell if it is triggered, then we are being greedy; this will also prove fatal.
Never
risk more than 2% of total capital on any individual trade
The
game of coin toss is a fair game of chance where no participant should expect
to win or lose over the long term. As global equity markets have risen by an
average of 9% per annum for the past 100 years, all share traders should expect
to profit by an average of 9% per annum. So why do only 15% of share traders
make money? Answer…the ability to survive.If a participant wishes to remain in
a game of coin toss for the long term then they would have to be able to
sustain a string of up to 8 consecutive losses. This is because a string of 8 consecutive
losses is likely to occur in a game where there are 2 equally possible
outcomes. The same logic applies to the Stock market where the majority of
share traders in the U.S. in the 1990s had an average life expectancy of only 8
trades. So in order to survive in the marketplace long enough to enjoy the
average return of 9% per annum over the long term, it is essential that share
traders can sustain an extended string of losses. By only risking 2% of total
capital on any individual trade, a share trader can sustain up to 194
consecutive losses.
