Problem with the 4 Cardinal Rules of Trading?

[kuokam 10]

Hello,

 

We are taught that there are 4 cardinal rules that should be observed at all times, if one wants to succeed at trading. None of the rules is certainly easy to follow, but actually, there is one that I so far failed to abide by, despite all efforts.

 

From my own knowledge, here are the 4 rules:

 

1 - Follow the trend

2 - Cut your losses short

3 - Let your profits run

4 - Manage your risk

 

I am sure every body has his most difficult one. Please share your experience.

Best wishes and a profitable 2013 to all TL'ers !

Edited December 23, 2012 by kuokam

[edgararakelyan 10]

Hello,

 

We are taught that there are 4 cardinal rules that should be observed at all times, if one wants to succeed at trading. None of the rules is certainly easy to follow, but actually, there is one that I so far failed to abide by, despite all efforts.

 

From my own knowledge, here are the 4 rules:

 

1 - Follow the trend

2 - Cut your losses short

3 - Let your profits run

4 - Manage your risk

 

I am sure every body has his most difficult one. Please share your experience.

Best wishes and a profitable 2013 to all TL'ers !

 

Letting my profits run is probably my worst, as in today with aapl, i went short at 520 and covered at 516. It doesn't look to good for aapl and there's a chance aapl could gap down a few more points tomorrow but I'd rather not risk it as there's a resistance too close for me at 515.

[pushpacares007 10]

I find Let your profits run to be most difficult as there is always a fear somewhere back of my mind which says that market might fall tomorrow hence don't hold the position...So always book out early.

 

One more thing which i have learnt from my experience is having a discplined approach along with trailing stop loss always helps you in getting higher profits.

[kuokam 10]

Exactly! That is my main problem too. I recently took a FX trade that quickly proved profitable, and I exited, believing the pair was due for a turn around. It never happened, and I lost around 1.000 pips.

I think this is what Livermore meant by "people who can both be right and sit tight are uncommon".

 

 

 

Letting my profits run is probably my worst, as in today with aapl, i went short at 520 and covered at 516. It doesn't look to good for aapl and there's a chance aapl could gap down a few more points tomorrow but I'd rather not risk it as there's a resistance too close for me at 515.

[SIUYA 11]

http://www.traderslaboratory.com/forums/trading-psychology/15148-getting-out-my-own-way-3.html

 

same problem here........

 

maybe it is the instant gratification / short sightedness of man....who knows.

[MightyMouse 12]

Exactly! That is my main problem too. I recently took a FX trade that quickly proved profitable, and I exited, believing the pair was due for a turn around. It never happened, and I lost around 1.000 pips.

I think this is what Livermore meant by "people who can both be right and sit tight are uncommon".

 

You need to develop a methodology to remain in a trade that provides you with objective "lines in the sand" that you can properly execute each time you take a trade.

 

What you are describing is going to happen no matter what you try to do. You can try to minimize the times that it happens, but the fact is that it is going to happen. The best thing to do is salvage your mind, knowing that you did everything you could have done to stay in, given the information that you had at that time.

 

Things you want to consider in your methodology are:

 

What do you want to see happen in order to get into a trade.

What do you want to see happen to stay in a trade.

What do you need to see happen to get out of a trade. There are more system specific questions that you need to answer, but these are the basic building blocks.

 

Jesse Livermore traded on inside information and by the seat of his pants and played Monday morning quarterback. You are not learning what he did; instead, you are learning what he should have done. There are really no records of his claims. A great deal of it sounds like bullshit to me, especially the part about cleaning out the bucket shops because he was so good. Give me a friggin break.

[DbPhoenix 42]

http://www.traderslaboratory.com/forums/trading-psychology/15148-getting-out-my-own-way-3.html

 

same problem here........

 

maybe it is the instant gratification / short sightedness of man....who knows.

 

Or the lack of a trading plan . . .

[SIUYA 11]

Or the lack of a trading plan . . .

 

might be.....but if he has a plan, and a good winning track record of getting into trades, but cant let them run - ie; cant follow his plan from the letting it run part - is that different?

On reading his post it seems 'not sticking to the plan' is the issue - not the plan.....or maybe as i thought he might not really want to follow the plan he has devised.

 

Case in point - i just got stopped out on a long EURUSD trade at 1.3107 (and have just missed the explosion up)

 

Why - because I have a couple of chores (house hunting) i have to do and moved my stop up to a level that was a little random. :doh::crap::doh::crap::doh::crap::spam::spam::spam:

 

No excuses - idiot i am ....classic mistake - distraction - blame the wife, the dog, the kindergarten next door, the donut i ate for breakfast, and this is MY mistake that while it did not cost me a PL loss - where it really costs me is because I never see the PL gains.:doh:

 

Point is - it shows the importance of letting it breathe as per my plan - I could have spent a week trying to capture 10pips a day to have 80 handed to me in 20mins.

 

I am f...n fuming at myself - breath in and out, relax.

[DbPhoenix 42]

might be.....but if he has a plan, and a good winning track record of getting into trades, but cant let them run - ie; cant follow his plan from the letting it run part - is that different?

 

In a word, no.

 

Not everyone who trades wants to make money, much less make a living at it. Most would be better off going to the track. At least they'd get some sun.

[MightyMouse 12]

might be.....but if he has a plan, and a good winning track record of getting into trades, but cant let them run - ie; cant follow his plan from the letting it run part - is that different?

On reading his post it seems 'not sticking to the plan' is the issue - not the plan.....or maybe as i thought he might not really want to follow the plan he has devised.

 

Case in point - i just got stopped out on a long EURUSD trade at 1.3107 (and have just missed the explosion up)

 

Why - because I have a couple of chores (house hunting) i have to do and moved my stop up to a level that was a little random. :doh::crap::doh::crap::doh::crap::spam::spam::spam:

 

No excuses - idiot i am ....classic mistake - distraction - blame the wife, the dog, the kindergarten next door, the donut i ate for breakfast, and this is MY mistake that while it did not cost me a PL loss - where it really costs me is because I never see the PL gains.:doh:

 

Point is - it shows the importance of letting it breathe as per my plan - I could have spent a week trying to capture 10pips a day to have 80 handed to me in 20mins.

 

I am f...n fuming at myself - breath in and out, relax.

 

If I speak to my wife at any point during execution of a trade. I exit. My win rate is low. It costs me less in the long run to exit any trade I am in rather than to be puzzled by my selection of a mate.

[DbPhoenix 42]

Case in point - i just got stopped out on a long EURUSD trade at 1.3107 (and have just missed the explosion up)

 

Why - because I have a couple of chores (house hunting) i have to do and moved my stop up to a level that was a little random.

 

No excuses - idiot i am ....classic mistake - distraction - blame the wife, the dog, the kindergarten next door, the donut i ate for breakfast, and this is MY mistake that while it did not cost me a PL loss - where it really costs me is because I never see the PL gains.:doh:

 

Point is - it shows the importance of letting it breathe as per my plan - I could have spent a week trying to capture 10pips a day to have 80 handed to me in 20mins.

 

I am f...n fuming at myself - breath in and out, relax.

 

Before moving on from this, I don't want to leave the impression that I'm including Siuya in my remarks above.

 

Even the best of traders do careless things. Sometimes even stupid things. This does not make them careless, stupid traders. One might argue here that Siuya should not have taken the trade in the first place if he knew that he could not monitor it. But then one might argue that Siuya should not trade at all unless he is willing to go without sleep. After all, there is always a trade somewhere that is being missed.

 

None of which has anything to do with having -- or not having -- a thoroughly-tested, consistently-profitable trading plan. Without one, all the rules in the world will not provide rescue.

[kuokam 10]

Let's assume one has a plan that he tries to follow . But when you are in a trade that yield 4 or 5 times what you hoped at the start, you start to feel some sort of incomfort that can make you trail your stop too close. You then exit the trade and feel some release, but in the coming hours/days the trade resumes even more fiercely in your direction, without you.

It might also help to be able to distinguish between a change in direction and a mere retracement.

 

You need to develop a methodology to remain in a trade that provides you with objective "lines in the sand" that you can properly execute each time you take a trade.

 

What you are describing is going to happen no matter what you try to do. You can try to minimize the times that it happens, but the fact is that it is going to happen. The best thing to do is salvage your mind, knowing that you did everything you could have done to stay in, given the information that you had at that time.

 

Things you want to consider in your methodology are:

 

What do you want to see happen in order to get into a trade.

What do you want to see happen to stay in a trade.

What do you need to see happen to get out of a trade. There are more system specific questions that you need to answer, but these are the basic building blocks.

 

Jesse Livermore traded on inside information and by the seat of his pants and played Monday morning quarterback. You are not learning what he did; instead, you are learning what he should have done. There are really no records of his claims. A great deal of it sounds like bullshit to me, especially the part about cleaning out the bucket shops because he was so good. Give me a friggin break.

[DbPhoenix 42]

Let's assume one has a plan that he tries to follow . But when you are in a trade that yield 4 or 5 times what you hoped at the start, you start to feel some sort of incomfort that can make you trail your stop too close. You then exit the trade and feel some release, but in the coming hours/days the trade resumes even more fiercely in your direction, without you.

 

It might also help to be able to distinguish between a change in direction and a mere retracement.

 

Making that distinction is part of what creating a plan is all about. If your plan doesn't address that, then it's inadequate, which is one reason why you don't follow it.

 

Stop placement and management must also be part of the plan. If they aren't, then the plan is even more inadequate. You can't follow a plan that doesn't exist.

[SIUYA 11]

MM - good point about the wife. In this case it was purely me, even though the shores (sic- shoe chores) are for the wife. The donut did taste good and we have no dog or kindergarten.

 

''''''''''''

DB - your remarks may well include me - sometimes i do wonder why i am doing things- its my nature , and in this case the random move of the stop implies i was getting what i wanted out of the trade - less distraction.

In this case it was simple carelessness as to where i placed it. A few extra points difference would have made a lot of difference - famous last words.

 

I simply carelessly placed it in the wrong swing point - and I am being careful not saying this with hindsight.

Part of the plan was to leave with a stop so that part was perfectly executed.

 

'''''''''''''''

Kuokam -

There is nothing wrong with taking profits.....but if you have planned, tested this and implemented it so as to let the profits run, why deviate?

If you have not planned, got lucky, let it ride. In your example you are already 4-5 times OVER what you expected....

 

http://www.traderslaboratory.com/forums/psychology/15095-green-bathrobe-story.html

 

Acceptance of what you want out of the trade is important. On a few PMs to MM i have mentioned my bullishness on the EURUSD - but all my predicitve powers, astute entry and sitting on my hands can not help when i mess up and may as well have had a punt.

 

my plan was good, my execution was good, one dumb thing can ruin it for me.....part of the plan is not to chase....in this case i should have. oh well.

The timing was just dumb bad luck...sometimes you have dumb good luck. If it had not just raced away, then i might have re-entered. (exited at 13.33hrs - 80 ticks higher 20 mins later) . ... plan was to take some off at signs of consolidation (happened around 1.3180) and let the rest run. I know from history if i dont get the enrties that work for me - then dont try forcing it.

 

The other part of the plan is to realise tomorrow is another day and while i watch it tick up further there is no point getting angry at myself or others or the market.

Dont try and short it, dont chase it, dont think 'i should a could a would a' - on saying that i had to rectify so many spelling mistakes in this post i clearly need to walk away. (and i am rather pissed off at myself, and feel the urge to impulse trade - my biggest weakness IMHO) There will be other opportunities.

[erom43 10]

I think letting profits run is a clear choice, with following the trend a distant second....for me. Cutting losses and risk management are essentially the same thing for me, and should be a part of any traders philosophy, regardless of trading style. I mention following the trend because there are many countertrend trading plans our there, that would contradict that rule, and make it moot.

When to enter a trade, and where to place your stop are integral to almost every trading plan I have ever seen, and clearly receive the most attention by both gurus and students. When to take your profits, on the other hand, is a much more controversial, and more difficult skill to master. If you are an investor, letting profits run with some sort of trailing stop would seem appropriate. If you are a short term trader however, having a definitive profit target is often a better move.

[YertleTurtle 10]

If I plan my trade and take profits where my plan indicates and the market goes another 1000 pips - I could care less. I got my piece and followed my plan. What the market does after I exit is the same to me as what the market does while I'm sleeping - its just part of the next setup.

 

Too often traders become obsessed with what they missed but like DbP pointed out - you can't trade 24/7 and you rarely will capture 100% of a move. There is always another setup.

 

Breaking one's plan is much more criminal that missing profit or missing a trade. If you are consistently missing a ton of profit then its time to re-evaluate the plan.

[wsam29 10]

You need to develop a methodology to remain in a trade that provides you with objective "lines in the sand" that you can properly execute each time you take a trade.

 

What you are describing is going to happen no matter what you try to do. You can try to minimize the times that it happens, but the fact is that it is going to happen. The best thing to do is salvage your mind, knowing that you did everything you could have done to stay in, given the information that you had at that time.

 

Things you want to consider in your methodology are:

 

What do you want to see happen in order to get into a trade.

What do you want to see happen to stay in a trade.

What do you need to see happen to get out of a trade. There are more system specific questions that you need to answer, but these are the basic building blocks.

 

 

What he said, its as simple as following a plan. Its up to you to decide when its time to let it run or cut it lose based on what you see or don't see the market do.

 

The trick to trading is really as simple as following a plan. If you can stick to following any plan, be it with good results or poor results. You've proved to yourself you CAN follow a plan, then its on to finding a set of rules that will give you an edge over time.

[Gekko78 10]

Hello,

 

We are taught that there are 4 cardinal rules that should be observed at all times, if one wants to succeed at trading. None of the rules is certainly easy to follow, but actually, there is one that I so far failed to abide by, despite all efforts.

 

From my own knowledge, here are the 4 rules:

 

1 - Follow the trend

2 - Cut your losses short

3 - Let your profits run

4 - Manage your risk

 

I am sure every body has his most difficult one. Please share your experience.

Best wishes and a profitable 2013 to all TL'ers !

 

Number 3 is probably the hardest to do. In fact , I read a study a few weeks ago that stated that out of the accounts of their clients that they audited it showed that the trades that their clients took were actually right about 75% of the time yet the lost money over all. The credit this to traders not letting profits run. Since most always let their full stops hit and exit early before their targets are hit. Also once their targets are hit they exact 100% instead of taking money off the table and letting more go or all of it run. I will see if I can locate that study.....it ws quite interesting.

 

What I gathered from it is that most of us have good strategies for trading but we do not execute it properly and we also do not have a good trade management strategy. We just have enter and exit .

[Gooner70 10]

Great discussion. Which I would love to contribute to. I work with traders as a coach, following a 25 year career as a trader. This is a common problem I have seen with virtually every trader, though in different degrees, and naturally as you would expect the smaller the degree, the more successful they are.

 

I believe, and this is merely a theory or mine so please do not take it as gospel, that the root of the problem lies in our need to be right, btw something more far more prevalant in men than women. We almost seem to have an inate need to be right, with anything less being a bruise of our ego. - Think of how much you hate your wife or girlfriend telling you that you are lost, you'll probably deny it even though you are blatantly lost. The market is your worst girlfriend (or wife), its there every day, and almost of every minute of every day, reminding you you are an idiot. Hence when we find ourselves in profit, we have a hunger to book it and at that moment in time tell us how great we are, before we lose it and become an indiot again. - Whilst when we are down, its like being lost, but we won't admit, so we hang on hoping we'll find our way back, and are thus not an idiot. - However, ironically no one else knows what you are doing, only you, yet you often feel like someone else knows. Those feeling are your ego, you are caught in a near oermanant battle with your ego.

 

BTW. I still fall for this, even though I know all the rules. - Though I do try my hardest to overcome this, putting little practices into play to try and offset this. - One recent case was a great trade I put in which went very well, if you don't mind me blowing my own trumpet here. - I went long USDJPY in low 80s in Nov. Just before Christmas, sitting on a nearly 5 big figure profit, I decided to book the profit, the suspense of being long, and the fear of giving it back was starting to nag away at me. However, I also happen to provide Technical Analysis on a number of currencies for a TA service provider, when I did my weekly analysis, I wrote to stay long usdjpy, no sign of a top in sight. I then thought I must be mad cutting, and reinstated fortunately, I eventualy cut in the low 89s. It felt good at the time as the market seemed to be stalling, but even now as it oushes 92, there is a little voice in my head calling me an idiot.

 

However, just as a bit of postulation. I wonder if I had not reinstated the lone, whether i may have been tempted to go short as it rallied, in a revenge trade to prove myself right. - Who has ever doen that?

[Mikhoul 10]

Trend is my Friend on both side.. but "TRAILING STOP" ( VTSO ) help me a lot to remove emotion out of the trade. !

 

I Start with a VTSO that I'm comfortable with to loos and if the trade goes on my sidethe more it reach my target, the more I narrow my VTSO to keep my profit.

 

Let's say the other 2 weeks ago was trading AAPL on the short side, it was a friday and I wana to go out for the week-end so I just tighten my stop 10 minute before 4pm, in the last 2 minutes a "Flash Dump" happen and it goes from 443 to 435 in less than one minute...

 

My Trailing Stop (VTSO) triggered @ 436. Having to put a stop myself (Manually) has been something impossible at this speed.

 

But even on slow move, the VTSO order keep me than thinking to move my stop against my first beliefs.. they protect me... and of course if a sudden move happen like AAPL I will have a maximum gain !!!

[SpearPointTrader 10]

I ignore all of these rules.

 

I enter when I have a set up, and exit when it evaporates...that is all I do. Those are the only rules I follow.

[Roger Felton 10]

Hello,

 

We are taught that there are 4 cardinal rules that should be observed at all times, if one wants to succeed at trading. None of the rules is certainly easy to follow, but actually, there is one that I so far failed to abide by, despite all efforts.

 

From my own knowledge, here are the 4 rules:

 

1 - Follow the trend

2 - Cut your losses short

3 - Let your profits run

4 - Manage your risk

 

I am sure every body has his most difficult one. Please share your experience.

Best wishes and a profitable 2013 to all TL'ers !

 

 

I was a trend trader for several years and I hated every minute of it. Day after day, year after year I could see that if I had just put my greed to catch a trend aside and take the "hit and run" trades, I would have been light years ahead in the game. If the market is going to trend strongly, I'll get numerous opportunities to get back in.

 

Follow the Trend - What trend? A short term trend can easily be a long term pullback. I love trading pullbacks. They are generally quick and very accurate.

 

Cut Your Losses Short - Nobody's been able to define that. Use a 2 tick stop? Good luck. You have to pull the ripcord on a losing trade based on a number of factors including the current market condition. Choke your stops and you won't be trading long.

 

Let Your Profits Run - I do. They run right to my profit target and it's generally not too far away. If I have an 80% chance of bagging 10 ticks (about $200) in 5 minutes and a 30% chance of 50 ticks in 2 hours, sorry guys, I'm out in 5 and off to the next trade.

 

Manage Your Risk - That's pretty much my "cardinal rule" but it needs a lot of work on definition. Basically, I never get emotionally attached to a trade by spending too much time finding it or getting so deep in a hole I can't let go. I never get even close to that point.

 

My stops aren't placed on the traditional 2 or 3:1 formula. That doesn't work. For example, you enter a trade long for 30 ticks and you place a 10 tick stop. The market stagnates and 4 hours later, the trade has wandered all over the place but now is 10 ticks above BE but coming down steady. All your indicators say the market is tanking and will drop another 50 ticks before finding support.

 

But you can't exit now or you'd be breaking a cardinal rule! It's 30 ticks or bust. That's nuts! Determine the odds of a trade's success and stay on it. They can change dramatically during a single trade. I built an indicator that does that for me because the algorythm is pretty complex. If they stay above 50% on a 3:1 trade, stay in. If they drop below, get out fast. But you'll rarely enjoy the high percentages going for the big targets.

 

The problem with these "Cardinal Rules" is they're all too vague. Define them for your specific system and don't be afraid to toss the ones that flat don't work for you. Just because they're cardinal rules for someone else doesn't mean they have to be for you. Your rules are what works for you...and that's all that matters.

[SpearPointTrader 10]

I was a trend trader for several years and I hated every minute of it. Day after day, year after year I could see that if I had just put my greed to catch a trend aside and take the "hit and run" trades, I would have been light years ahead in the game. If the market is going to trend strongly, I'll get numerous opportunities to get back in.

 

Follow the Trend - What trend? A short term trend can easily be a long term pullback. I love trading pullbacks. They are generally quick and very accurate.

 

Cut Your Losses Short - Nobody's been able to define that. Use a 2 tick stop? Good luck. You have to pull the ripcord on a losing trade based on a number of factors including the current market condition. Choke your stops and you won't be trading long.

 

Let Your Profits Run - I do. They run right to my profit target and it's generally not too far away. If I have an 80% chance of bagging 10 ticks (about $200) in 5 minutes and a 30% chance of 50 ticks in 2 hours, sorry guys, I'm out in 5 and off to the next trade.

 

Manage Your Risk - That's pretty much my "cardinal rule" but it needs a lot of work on definition. Basically, I never get emotionally attached to a trade by spending too much time finding it or getting so deep in a hole I can't let go. I never get even close to that point.

 

My stops aren't placed on the traditional 2 or 3:1 formula. That doesn't work. For example, you enter a trade long for 30 ticks and you place a 10 tick stop. The market stagnates and 4 hours later, the trade has wandered all over the place but now is 10 ticks above BE but coming down steady. All your indicators say the market is tanking and will drop another 50 ticks before finding support.

 

But you can't exit now or you'd be breaking a cardinal rule! It's 30 ticks or bust. That's nuts! Determine the odds of a trade's success and stay on it. They can change dramatically during a single trade. I built an indicator that does that for me because the algorythm is pretty complex. If they stay above 50% on a 3:1 trade, stay in. If they drop below, get out fast. But you'll rarely enjoy the high percentages going for the big targets.

 

The problem with these "Cardinal Rules" is they're all too vague. Define them for your specific system and don't be afraid to toss the ones that flat don't work for you. Just because they're cardinal rules for someone else doesn't mean they have to be for you. Your rules are what works for you...and that's all that matters.

 

Although you and I probably use different tools, it sounds like we have a very similar philosophy when it comes to trading.

 

 

My stops are generally put just past a major support and resistance level. I see them as "Emergency Exits" only. Say I have a heart attack, or I lose my internet connection and can't see whats going on, my stop is there to save my account in emergencies like that. It's not there for trade management at all. I get in, and get out manually. If I ever actually hit a stop, something is very wrong.

 

Have set up, enter. Lose set up, exit.

 

It's shockingly simple.

[rplust 10]

What he said, its as simple as following a plan. Its up to you to decide when its time to let it run or cut it lose based on what you see or don't see the market do.

 

The trick to trading is really as simple as following a plan. If you can stick to following any plan, be it with good results or poor results. You've proved to yourself you CAN follow a plan, then its on to finding a set of rules that will give you an edge over time.

Can't agree more to that. That's what it is all about. Nothing magic, nothing secret, nothing sophisticated. Keep it simple. A thousand indicators will not give you an edge. I trade off supply and demand levels (which every trader should be able to define) with a 34 MA to follow the trade. We would be all rich "if..." But "If I had..." is hindsight. If you cut off a trade, it's done. Period! The magic word is "next". From history you learn about your trades but not about "profit". Happy trading! Stay away from bad trades and bad traders.....:doh:

[Roger Felton 10]

Although you and I probably use different tools, it sounds like we have a very similar philosophy when it comes to trading.

 

 

My stops are generally put just past a major support and resistance level. I see them as "Emergency Exits" only. Say I have a heart attack, or I lose my internet connection and can't see whats going on, my stop is there to save my account in emergencies like that. It's not there for trade management at all. I get in, and get out manually. If I ever actually hit a stop, something is very wrong.

 

Have set up, enter. Lose set up, exit.

 

It's shockingly simple.

 

You are absolutely spot on. You call them emergency and I call them catastrophic stops. They're only there to prevent any major damage but they are also rarely ever needed. If a trade is a loser, I'm almost always out long beforehand.

 

I commend you for not only understanding this concept, but for actually using it. Let the market (not your stop) tell you when it's time to pull the plug. Excellent!