Trading Rules- Your Life Savior in the Ocean of Trading

For most of your reading this, the conception of rules and its importance to your trading life may be a no brainer and I certainly wish that is the case. But, some of you have some serious issues with following the trading rules that you have established. And you are not alone. Every day, thousands of traders are breaking rule after rule; and in a lot of these cases, they feel completely baffled as to why they keep doing things that a moment ago they were adamant that they would not do, like moving hard stop-loss as the price action is moving toward it. Or on the other hand, failing to do something that they promised that they would; for instance, finishing the “trade plan.”

Some traders are treating their rules as indicators of what they could follow rather than what they must follow. Some traders think that rules are non-compulsory and sometimes they follow them and sometimes they don’t; this type of thinking demolish trading results and wipe out your account. Trading with a weak dedication to your rules is serious.  To really support your trading, rules must be approached with an uncompromising commitment. Rules are your capital protectors and can be considered a life jacket in a turbulent sea because they are designed to inform your decision making when you are in the shark-infested ocean of trading. For that reason, rules are essential to trading. According to one of the world’s investor superstar “There are two rules for trading. Rule no. 1) Don’t lose money. Rule no. 2) Don’t forget rule number one.

Discipline and good habits are built the same way, one trade at a time. Well planned out rules that are followed precisely make the difference between being successful and blowing up your account.

Let’s take a look at the trade taken in FEDERALBNK Feb Futures contract on February 18.

equity futures trade plan

The price reached our pre-determined BUY level in the early trading hours. We bought the contract hoping to reverse this to our pre-determined SELL level which is at 90. We also set up our Stop Loss near the lower portion of the yellow lined box. However, the broader market index like Nifty, Bank Nifty and other sectoral indices had huge selling pressure due to which our trade could not make a move to a higher level as anticipated and we were stopped-out for losses.

If you see in the next chart, the price of the contract we traded moved much lower. Had we not set-up a stop-loss order, we would have incurred much bigger loss than what we’d imagined. This is the reason we must always follow the trading rules. Your rules are there to assist you in keeping-up focus on what matters most in your trade plan and follow-through. As you continue to respect your rules consistently you will develop robust habits surrounding your ability to follow-through and keep commitments. Below the outcome of the trade.

equity futures trading rules
Tough we had incurred loss in this particular trade; we are still profitable because we had some successful trades in the past which had met our Risk to Reward ratio. The key here is not to lose too much money out of your trading capital on a single trade. We can still look for some other trading opportunity another day. And also note that we will likely have more losers than winners. That means the only way you can only become better in this trading world is by learning how to minimize your losses, which we did in the above example.

Remember, whether you are an Intraday or Delivery trader, trading from your highest and best self is all that matters to your trading results. And your trading rules are your true protectors, dedicate yourself to them.