Trading Rules of Thumb

We traders are a weird bunch, aren’t we…come on admit it.

Not many ‘normal’ people like to stare at price on a screen and try and guess where it’s going next!

Anyway…

Rituals, superstitions, mantras, rules of thumb.

We all have them, often these are totally meaningless, but somehow or another they keep us on the right path.

Here are a few that I stand by:

#1 Buy on red, sell on green

No that doesn’t mean stepping in front of a freight train, but it does mean being smart, there aren’t very many circumstances when you need to chase the market.

And if you do they are very specific breakout plays under the right conditions.

If you are scalping or trading off a lower timeframe it’s nearly always better to wait for price to come to you. (And yes that may only be a small move.)

#2 Don’t fade late moves

Go with the flow… late-day moves on the indices that stand out from the days price action should not be faded.

It’s likely institutions squaring up the books.

And by a late-day move, I don’t mean a drift or noise…I mean a multi-candle drive in one direction.

#3 Trend days: The next day often revisits extremes

If day 1 is a trend day, closing at extremes.
The day 2 is likely to restest that extreme.

Eg: Day 1 was a strong trend day to the upside, then day 2 is likely to trade at the day 1 high (at some point)

#4 The rule of 3

• 3 losing trades – stop
• 3 day moves – be careful looking for more
• 3 bites of the same cherry max

For some reason 3 is important in the markets.

Who am I to argue?

#5 Trust your trader’s instinct

No, I don’t mean “I think this is going higher, BUY”

I mean “Hmm, something doesn’t feel right about today, or this trade, I’ll pass for now”

Sure you will get it wrong sometimes, but I prefer to trust my judgement, and when that little voice tells me to watch out, I appreciate it and listen carefully.

Talking about listening carefully, (see what I did there?) you can listen to my latest podcast episode discussing these rules of thumb here.