This book may overwhelm new traders at first. If you feel like you’ve lost the forest for the trees, I hope these lists help you focus on what’s most important.
6 Commandments for New Traders
- Only trade Stocks in Play with the highest volume and volatility and a fundamental reason for the recent volatility.
- New traders should define a trade playbook and risk management plan before trading in simulator.
- Trade playbook and risk management plan must remain unaltered for the entire trading block, except when the Losing Streak Circuit Breaker is triggered.
- Everything related to simulator trading – from daily routine to risk management plan – should be the same as it will be in live trading.
- New traders should trade in simulator until at least three successful trading blocks have been achieved.
- New traders should join a trading community. Having daily discussions with other traders is crucial to your development as a trader.
The RST Way – Principles of Risk Management
- The risk/reward ratio should be the same for all trades*.
- Share size should be automated to ensure identical win/loss amounts across trades*.
- Trade exits (profit and loss) should be defined when entering the trade*.
- Never risk more than 1-2% of account equity on any trade.
- Maximize win rate by giving trades the right amount of room to breathe (i.e. properly “clawing the trade”).
- Analyze trade performance on blocks of at least 100 trades. Adjust stop loss placement and risk/reward ratio as needed to improve profitability for the next block.
- Use whatever risk/reward ratio works best for you.
* Key components of binomial process trading.
The RST Way – Trading Philosophy
- Keep trading as simple as possible. Remove all unnecessary variables and rules from the trading process.
- Trade only stocks with volume, volatility, and clean price action that match your playbook.
- Large variation in daily/weekly/monthly results is natural and mathematically unavoidable and should not trigger changes to the risk management plan or trade playbook.
- Make a plan and follow it. “Trading psychology” is irrelevant.