đź“•
A Trader Life Blog
  • Journey of a trader
  • Financial Markets
    • Financial Markets
      • Definition
      • Bonds
      • Crypto
      • Commodities
      • Futures
      • Forex
      • Stock market
    • Players
    • Tools
      • Overview
      • Technical analysis
      • Fundamental Analysis
  • TRADING STRATEGIES
    • Description
    • Binary options trading
      • Overview
      • Types of binary options trades
      • More details
      • Binary options trading strategies
        • Multiple bars High or low Binary Options Strategy
      • Glossary
    • Candlesticks
      • Candlesticks description
    • Chart patterns
      • Chart patterns description
    • Forex Scalping
      • Scalping description
    • Support and resistence
      • Support and Resistence description
    • Trend Following
      • Trend following description
  • Ideas
    • Options ideas
    • Commodities ideas
    • Crypto ideas
      • Sells Walls: You know know what these are and how to spot them.
      • New to crypto? Check this top 10 Crypto pairs list PRO and CON before you get in
      • How to consistently make returns with DCA
      • Three simple tools that can help you know the state of the bullrun
      • ATTENTION NEW TO CRYPTO PEOPLE
      • Stable coins
      • Practical Guide to Making and Taking Profits in Crypto
      • 50 Crypto Trading and Investing lessons
      • Red flags of crypto
      • TOP 50 crypto coins
    • Forex ideas
      • New to Forex? Then read this
      • Currencies PRO and CON
    • Stock market ideas
  • Education
  • Books
    • Technical analysis books
    • Stock market and finance
    • Psychology books
  • Extras
    • Page 1
    • THIS IS EXACTLY WHAT IT MEANS when someone says TO DO YOUR OWN RESEARCH (DYOR)
    • A one sentence summary of all the most popular scams so you know what to look out for.
    • Rules for success
    • 5 fundamental truths for trading
    • How to create a trading strategy
    • Components of an efficient strategy
    • Types of trading orders
    • Crypto slangs
    • Correlation of Cryptocurrencies
    • Central Bank Digital Currencies
  • Psychology of trading
    • Skill vs Luck
    • A list of dont's
    • How to know you are good trader
    • ZEN Trading
    • Types of traders
    • First steps
    • Pay yourself first
    • 90-90-90 Rule
    • 10 more things to know
    • Emotional states of a trader
    • Golden rule of trading
    • When can I become a full time trader?
    • How to lose your money with 10 simple steps :)
    • Old Rules...but Very Good Rules
  • Risk management
    • Overview
    • Risk to reward calculation
    • Gains needed to recover from loss
    • Practical example
    • Money management
    • Money management v2
  • Fundamental analysis
    • How to do properly a crypto research
    • APR vs APY
    • Major fundamental news
    • Value investing
    • Interest rates
    • Essential features of ETF's
    • Fundamentals Chart
  • Technical Analysis
    • Types of market days
    • First steps
    • Advanced candlestick Patterns
    • Price channels
    • Key patterns of price action
    • Elliott wave cheat sheet
    • Trading patterns cheat sheet
    • The topics to study to become an expert in technical analysis
    • How to use Volume & Open Interest data as secondary indicators
  • Courses
    • Untitled
Powered by GitBook
On this page

Was this helpful?

  1. Psychology of trading

Golden rule of trading

One of the fundamentals that every trader must know is how to evaluate the effectiveness of his trading methodology. In this article, we will explore core trading fundamentals that you must follow in order to survive and thrive in this business. 1. Never open a position without knowing the initial risk that you are willing to take. The initial risk is the point at which you will get out of the position to preserve your capital. Very few people have the psychological makeup to keep a mental stop loss and respect it 100%, that’s why for the rest of us, there is the stop-loss that will automatically close our trade for us at a certain level. 2. Define your profit and loss in your trades as multiples of your initial risk. These are the R multiples. If your risk is $1000 and you make $3000, you have a 3R win. If your risk is $1000 and you lose $1200, then you have a 1.2R loss. You must start to think in terms of risk/reward. 3. Limit your losses to 1R or less. If you don’t respect the stop loss that you have set and let a losing trade run then you are in real trouble. This mechanism produces 4R losses or larger and can turn your great system into a losing system very easily. 4. Make sure that your profits, on average, are larger than 1R. Let’s say you have one 5R profit and four 1R losses. If you add those up you have 5R in profit and 4R in losses, a net gain of 1R. Even though you lost money 80% of your trades, you still made money overall because your average gain was big. This is the power of having an average gain larger than 1R. What is typically known as the golden rule of trading is a summary of these 4 rules: “Cut your losses short and let your profits run.” Here we are talking about doing your best to make sure your losses are 1R or less and that your profits are much bigger than 1R. In 2002, the Nobel prize for Economics was awarded to Daniel Kahneman, a psychologist and economist Amos Tversky for their development of “prospect theory”. This theory when applied to trading/investing showed that people have a natural bias to cut profit short and let their losses run, exactly opposite to the golden rule. 5. Understand your trading system in terms of mean (the average R) and the standard deviation (variability in the results) of your R multiples. Your system, when you trade it, will generate a number of trades. The result of those trades can be expressed as a multiple of your initial risk or a set of R-multiples. You should know the properties of that distribution for any system that you plan to trade. And the majority of the people who trade the markets never know this. If you spend some time and calculate the mean and the standard deviation of your R multiples, you’ll know a lot about your system and what can you expect from it in the long run.

PreviousEmotional states of a traderNextWhen can I become a full time trader?

Last updated 3 years ago

Was this helpful?