VIII. PUTTING SURVIVAL INTO
PRACTICE
This rule is commonly overlooked and almost always causes financial pain.
Don’t cost average in trading. Never add to a losing trade. Think of it in terms of math. If the average size of your winner is going to be $1,000,000 and the average size of your loser is going to be $2,000,000, then you will need a seriously high win ratio to become profitable. A losing trade is proving to you that it is not working out, so why would you continue to add more to the same position. You should wait for a better option to put your capital to work.
There are two exceptions to this rule. Cost averaging may be a sound fiscal strategy when it comes to investing, but not trading. And, if you are scalping 100+ trades in a day, you may take new scalps before you have exited your last scalp which could me misconstrued as adding to a loser.
Don’t sell against new highs. If the market is continually making new highs, then do not go short. Simply put, there are more buyers than sellers and why do you think that you can guess when this overwhelming paradigm will shift. The same is true in converse. Don’t go long against new lows.
If you are an active, full time trader, then don’t take overnights until you are a successful trader, you must feel each trade. If your strategy is being in and out during the same day and disseminating information on a minute to minute basis, then don’t take trades that you are not going to be able to gauge on a consistent basis. Conversely, the same is true, if you are a swing trader (trades lasting 2-5 days), don’t sit down and take a few scalp trades just because you are bored or you have time. Understand the requirements of your strategy and employ it consistently.
New traders need all the help they can get when they are learning how to execute the rules. This includes being on the side of the market that is currently winning. If the market you are trading is making new highs every day, then you want to trade from the long side. Many books and pseudo-experts pitch counter trend strategies, but the only traders who can make counter trend strategies work are experienced, successful traders. This is a fact. No counter-trend trading until you are a successful trader.
No harm in reinforcing good habits imo
