Alaric Securities celebrates at Nasdaq MarketSite
July 12, 2023 | Issue 33

Top 6 Trading Rules Every Trader Must Follow

Nikolay Stoykov
Managing Partner at Alaric Securities
Road signs symbolizing the importance of adhering to trading rules for successful investing

Trading foundations: basic principles that will guide you to success

Trading rules are fundamental stepping stones on our journey towards achieving trading success. We often wrestle with this pivotal question, “What are these essential guidelines?”

We’ve tackled this question time and again, refining our responses with each iteration. Every time we improve our answer, we feel like we nailed it, only to ultimately get disappointed that this is just a superficial answer. An answer that would help people slightly improve their destiny.

However, if they are standing on a shaky foundation our suggestions would only slightly alleviate their struggles only to eventually arrive at a dead end.

So, we shifted our focus. Instead of asking what practical steps someone should take to become a successful trader, we began exploring the essential foundations a trader must establish before trying to fine-tune their trading strategies.

We present these foundations as rules – self-evident truths that require no proof!

Trading Rule #1: Find your tribe and surround yourself with a supportive community

The first  of all trading rules is that you need to find a tribe, a group or an environment.

People are social beings, there has practically never been a success story that has occurred outside of a support network. The scenario where a boy goes into a mountain, meets an old kung-fu master and becomes a master himself is a popular movie plot that quite possibly had never occurred in real life.

A fighter needs a variety of sparring partners to master his style – one needs to see personally different styles of trading over and over before one can even get a chance to find his own style.

Trading from home? Or even worse learning to trade alone or with just a few remote connections?

The odds of you coming up on top are close to winning the lottery.  If that is you, we will be of little help to you. You need to find your tribe.

Trading Rule #2: Deepen your trading knowledge through mentoring others

The saying that those that can’t do something, teach it, is incorrect. Yes, there are plenty of teachers that are not very competent but if you want to be a successful trader and keep being successful – you need to mentor.

People are invariably reluctant to mentor for good reason – they might not be experts in the fields. That reservation is misguided. Most people do not adopt outside advice that easily.

By attempting to explain a concept you will be consciously trying to find evidence for your own beliefs. That is really the best way to find holes or errors with what you believe to be true. There is very little danger of teaching somebody wrong and all the benefits of finding ways to explain something you believe to be true.

Teaching is the only way to truly verify if your beliefs, including your understanding of trading rules, stand on solid ground.  People that “concentrate” on their trading without mentoring others are a lot more likely to go out of business than to succeed in the long run.

Trading Rule #3: Write down and update your trading plans regularly

Traders do a lot of research but that research tends to be mental. There is very little evidence of what is discovered. Even if the research is done in terms of coding or back testing, the tendency is for traders to never write down all their findings in a consistent and visually appealing manner.

This is where the trading rules come in.

You should review and grade those writings periodically, perhaps every 3-6 months, but not at the time of writing. A very bad result would be to find out you were totally wrong, with no unexpected news like a war or an earthquake. That means your thinking was incorrect and it is probably incorrect right now.

A very good review would be when you find out that what you predicted did occur just maybe in a different timeframe. Whatever the result of the grading process, rewrite or edit the writing to reflect what you think you should have been looking at.

This is incredibly important!

Little progress would be made unless you seriously start putting effort into correcting old errors! Tendency is for people to move on and concentrate on the winners – that is incredibly childish! All the learning is done from examining errors. Errors are to embraced and learned from, not buried.

Trading Rule #4: Strive to rise in the hierarchy of your trading group

Look to improve the well-being of your tribe members. Volunteer, support and offer advice when appropriate. If an opportunity to become an officer within the group presents itself consider applying.

Traders are considered by outsiders to be lonely wolves. Lonely wolves usually die from starvation. Do not go overboard but do not shirk from responsibilities either!

People that do the bare minimum for a group usually end up leaving the group and eventually the business. I know this sounds counterintuitive but my 25-year experience tells me this is a very significant indicator for your career success.

Trading Rule #5: Stay loyal to the group

Many people might be surprised that loyalty is a crucial element of the trading rules for success. It is surprising but incredibly true.

Staying loyal to the people that helped you enter the business is very important to your subconscious mind. Leaving your tribe or group is like abandoning your family. A tree that is once uprooted tend to have difficulty getting adjusted anywhere else.

The best example here is divorce rates. The chance of getting divorced if this is your first marriage is 40%. If you remarry, the chance of divorce is 60%. If you remarry a second time – 75%!

Changing tribes should be a very serious decision and done only if necessary.

Your trading career is dependent on being able to trust the people around you. Once people start moving, tendency is to keep moving!

Trading Rule #6: Be kind and humble (as much as realistically possible)

Another counterintuitive principle in the trading rules positions traders as society’s mavericks and even the kings of conspicuous consumption.

However, the desire to impress others causes people to overreach, to overleverage and to overtrade. The win or go home mentality traders usually end up going home.

Moreover, people that are unkind rarely listen to the opinion of others. At any given time, the market is full of seemingly contradictory opinions. An unkind trader will not seriously consider opinions that differ from his own because he is 100% sure he is right.

The reality is everybody makes mistakes but people that are unkind tend to avoid taking responsibility for their own mistakes, hence they tend to repeat the same mistakes over and over.

The best personality for a trader is that of Warren Buffett. Isn’t that obvious by the very fact that he has made the most money in the financial markets?

Key Takeaway

It is important to keep in mind that a human being would almost certainly struggle with some of those rules.

At the very least it appears to us that it is not in human nature to be kind and humble or at least not be consistently kind and humble so Rule 6, most likely, will never be fully embraced by anybody.  That is why we left it as a last rule – something to strive for but be realistic that a perfection might be impossible.

Rule 1 holds the top spot for a reason – being part of a good tribe can mitigate many of the flaws that arise from not perfectly following the rule.

It is very much in human nature to want to be accepted as a member of a group – it is practically the only reason that can cause human beings to change their behavior.

Proof of that is the existence of Alcoholics Anonymous – the only way for addicts to stop drinking is by joining a group of people that experience the same disorder. Not only join it but stay active in it. If an alcoholic should ever stop being active in AA, relapse is usually just a matter of time.

Human being are social beings – without strong sense of belonging to a group people usually self-destruct.