Tuesday, May 20, 2008

My trading rules

My trading system suits my personality and my desire to catch potentially large losses, offset with keeping losses small.

My rules are fairly simple in that long positions are taken when breakout above an 20 day high is made, while the position is closed when a 10 day low is reached. For short positions, the process is reversed. I use a multiple of the Average True Range measurement to help calculate where to place my initial stops. Once the position moves into profit, I use a trailing stop based on the low of the last 10 days.

I also use a moving average filter to assist me in choosing positions where I am trading with the current trend, or, as Jesse Livermore puts it, "trading in the direction of least resistance".

Apart from the use of the moving average filter, my the only thing I need to keep track of is price. I do not use indicators such as RSI, stochastics or fibonacci lines and the like.

My 'technical' rules are simple - more important as far as my trading is concerned is the risk management. Even though I have tried many basic systems, my trading has only become consistently profitable once I used more conservative levels of risk per trade in relation to my trading equity. Paradoxically, the smaller my positions, the larger my profits! Partly this is because I was able to stick to my rules and not override them, which cut down on my profits.

The basic rules and parameters are the combination of two well-known systems adapted for trading stocks -the Turtle traders from the 1980's and the Donchian '4 week' system.

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