Basic trading rules: the 5 you shouldn't skip

Any investment is high risk. He gives a simple example: you buy shares in a company, the company goes bankrupt and you’ve lost your money. Futures trading, with leverage, is even riskier.

That’s why you have to consider the money you put into trading lost from the start. Losing $1,000 always hurts, but losing $1,000 you didn’t need is not the same as losing the $1,000 you were counting on to get to the end of the month, or the money you had set aside in case the boiler broke down.

No bank loans and no credit cards, not even when the price looks like a bargain. In his words, “I think it’s the most important rule,” and he explains it from his own experience.

Early on he had a very good streak that grew a small account a lot. Then, by not following the other rules, he lost all of it. He put more money in to win back what he’d lost, trading more and more aggressively. When that ran out, he used his credit card, and he carried that debt for five months in which he could barely make ends meet. Without recovering anything.

What he describes is a very common psychological mechanism. After a big loss you don’t want to start from scratch, you want to win it back, and that leads you to risk more right when you’re trading at your worst. His conclusion about trading with borrowed money: “it never ends well.”

Your first goal isn’t to multiply your account. It’s to keep your $1,000 from turning into zero. Only once your bad trades no longer empty your account does it make sense to think about growing it.

• Nobody gets every trade or every analysis right. “Anyone who tells you they do is lying to you.”
• The math works against you: if you have $100 and make 200%, you have $300. If you then lose 100%, you’re left with zero. As he puts it: “you can win infinitely, but you can only lose 100%.”

That’s why he thinks learning to limit losses matters more than learning to maximize gains.

Before opening a trade you need to know three things:

1. Where you’ll take profit.
2. Where you’ll take the loss, that is, at what price your analysis is invalidated.
3. How much time you give it before deciding the idea hasn’t worked.

His example: you buy bitcoin at $20,000 because you think it will rise to $30,000. If it falls below $18,000, that rise is no longer the most likely outcome, so you take the loss and move on to the next trade.

And you stick to the plan. If you set your stop at $18,000, you can’t move it lower when the price gets close to $18,500. You put it there for a reason. If you move it, you end up taking a bigger loss than you had planned.

It happens to a lot of people: they have a trade in profit, the price doesn’t reach their target, it turns around and the trade ends up at a loss.

His solution: when the trade is well in profit and, if your analysis is right, the price shouldn’t come back to your entry, move the stop to your entry point. In the worst case you don’t win, but you don’t lose either.

“I can sleep peacefully at night.”

Rules 3 and 4 can be turned into a number before you open the trade. Enter your capital, how much you’re willing to lose, your entry and the stop from your plan into the position size calculator. It will tell you what size to open so that, if the plan fails, you lose that amount and no more. If that loss would keep you up at night, lower it.

No calculator fixes rule 1: if the money in your account is what you need to live on, the problem is already there before you trade.

• Trading with the money for your monthly expenses or the money you had set aside for emergencies.
• Taking out a loan or using your credit card because the price looks cheap.
• Trying to win back a big loss with bigger trades. It’s the path he says led him into debt.
• Entering a trade without knowing where you’ll exit, either in profit or at a loss.
• Moving the stop further away when the price gets close to it.
• Letting a trade with a good profit turn back into a loss without having moved the stop to your entry.