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Trading Rules That Have Stood the Test of Time

Trading Rules That Have Stood the Test of Time

Tyler Yell, CMT, Currency Strategist


If I have seen further it is by standing on the shoulders of giants.

-Isaac Newton, Letter to Robert Hooke, February 5, 1675

Talking Points

  • When Profitable Traders Share Their Lessons, It Often Pays To Listen
  • A few key trading rules
  • FX Application To Those Trading Rules

When a new trader approaches any market they understandably look for those who have over time proven themselves successful. This often comes by building a library and reading through the trading greats. However, like most things in life, the true value of the lesson often lacks the ability to be put into practice until the pain of avoiding that lesson comes front and center so that you take notice of the lesson’s value.

While this is not an exhaustive list of the wise sayings from traders over the years it does give you a gathering of collective wisdom that has benefited my trading. Naturally, when approaching a new book or line of thought in regards to trading I’m really only interested in seeing if it will heighten my ability to manage the risk inherent of every trade or to better approach trading as a whole to make me sharper. Sadly, as mentioned earlier, the rules or guidelines often don’t carry the weight they deserve until a loss is taken which illuminates the wisdom that laid under the rock of wisdom.

Trading Rules That Have Guided Me

“If you are going to place a stop, put it at a logical, not convenient place.” – Martin Pring, Investor Psychology Explained

Learn Forex: Determine Stop Location & Then Trade Size

Many traders are rightly concerned with the risk to reward about their trade. However, it can be a mistake to have a fixed position size in mind and then force a stop based on what is convenient so you don’t lose too much. As you can imagine, the market will likely remain bound by prior price action as opposed to your stops so it is best to think about your trade size like a pro and set your stop level first and then adjust your trade size.

"Every day I assume every position I have is wrong" & "At the end of the day, the most important thing is how good you are at risk control." – Paul Tudor Jones

Many traders look to Paul Tudor Jones as a hero of trading and money managers. Paul Tudor Jones busted onto the scene by shorting stock indices through the Black Monday of 1987 to reportedly net north of $100 Million as the US30 dropped 22% However, his attention to keeping risk under control is what has kept him atop the game is his ability to limit downside. As my years in the business increase, I become much more attuned to how pros have approached the psychology of risk management then to which indicator they’ve fallen for because risk management will lead itself to longevity.

Never average losses.” & “Markets are never wrong – opinions often are.” – Jesse Livermore

Jesse Livermore is a headline trader who roughly called and more importantly profited through the 1907 & 1929 stock market crash and was rumored to have made the modern day equivalent of $1.2 billion in today’s dollar. The main lesson from the prior two quotes is that it’s best not to try and outsmart the market. Traders often try and outsmart the market by trading against a trend or adding to a losing position when the market and their account equity is proving them wrong. I prefer to wait for price action to show early signals that are confirming my idea before I risk my own capital.

To view our Price Action Primer, please click here to register for a free 20 minute course that will start when you’re ready.

Learn Forex: Wait for Price Action to Confirm Your Opinion

“Don’t try to buy at the bottom or sell at the top. This can’t be done – except by liars” – Bernard Baruch, Baruch: My Own Story

This valuable piece of advice has kept me level headed when I see a top forming in the market. By all account, it may very well be a top forming but I’d rather wait until a lower low and lower high are in place before looking to sell the move. Another way this piece of advice has been put is that the first 1/8 of a move is often the most expensive part because everyone wants in on the ground floor however by the time the move has been confirmed many traders have depleted their capital.

Equal distribution of risk. Trade in 2 or 3 different commodities, if possible. Avoid tying up all your capital in any one [trade].” – W.D. Gann

Limiting your trade ideas to one trade can easily amplify your risk. We often recommend that if you have a strong argument for one currency’s strength or weakness that you consider a currency basket. The benefit of a currency basket is that if you want to sell the US Dollar, you can do so by limiting the purchase of one specific counter currency and spread out your risk by buying other currencies in a smaller lot size against the US dollar.

Closing Thoughts

The value in the prior statements has come from years of trading and recognizing how markets work to give you an edge. As discussed in one of my DailyFX Plus webinars, your success lies less and less in the indicator you use and more and more in your ability to control risk and consistently exploit an edge that you’ve identified. I hope these sayings help you as they’ve helped me over the years and please feel free to share wise words that have helped you in your trading.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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