3 categories for Strategy RulesToday we’re going to be looking at three categories for strategy rules .
This is very critical because the most important concept before we enter into a trade is to have it already pre-set in our mind where we’re going to enter and how we’re going to exit. It’s all got to be totally predetermined and you have to visualise your whole trade set-up, your trade management and your trade exit. All these three things must be very clear within you and you must already have spelled it out with clear rules so that’s its very clear in your mind. Clarity leads to conviction. Finally that gives you courage to pull through any kind of loss cluster or drawdowns.
Let’s take a look at these three categories for strategy rules. The first one is about entry rules . These tie in with what your trade set-up should look like. So when should you enter a trade? The last thing you want to do Traders is to enter a trade just out of emotional impulse. Once you’ve entered a trade by emotional impulse, when you come out of it you’ll think ‘Oh no, why did I do that?’ and that hurts so many traders. Many of the over 20,000 traders that we’ve coached so far and talked to at seminars have told us that they’ve made this mistake. One of the ways to stop that and nip that mistake in the bud is by making the rules really clear and so straight forward that you know how to follow them and can repeat them again and again.
The entry rules can be sub-categorised into pre-entry rules and post-entry rules. Pre-entry rules basically means before you enter the trade what are the criteria for you that must set-up for you to enter and then to trade that price or that instrument? If you do get stopped out, what are the rules for you to then re-enter back into that trade. Some tools that you can use to formulate your entry rules are:
Price action – be very clear on how the price action should be before you enter into a trade. For example, if you want to buy into a position has there got to be two seller bars and one buyer bar or has there got to be some kind of momentum decline which you also need to quantify so that emotional trading doesn’t come in. That’s all to do with price action.
Time frame correlation – as I have explained in other videos, if you’re an end of day trader you’ve got to correlate with a higher time frame. We usually recommend three time frames.
Indicators – there are thousands of them and you’d know about them.
Cycles and phases – you can incorporate rules about cycles and phases into your strategy.
Support and resistance rules – where you can enter into the market based on supply and demand.
News – think about how long before news comes out do you want to enter? For example, if news comes out in the next 30 minutes, do you want to enter a trade even before, say 30 or 40 minutes before news comes out?
All these things you need to include in your entry rules and as good criteria you need to at least include three or four of them. We call it degrees of freedom and you need to have at least three to four of them, ideally four, minimum three in your strategy. Of course as I’ve mentioned before in other talks, you need to choose and mix and match these rules according to the concept and objective of your strategy.
The second thing, after the entry rules, we’re looking at stop loss rules . Stop loss can be further sub-categorised into initial stop loss rules and trailing stop loss rules. Before you even enter the trade you should know where the stop loss is going to go which is the initial stop loss. Once you enter into the trade you need to then know how you’re going to manage your trade and then to trail that stop loss progressively. This is critical. You need to know this before you enter the trade.
Finally, our target rules . Where are we going to get out, what is our target? In terms of target rules we’re looking at pre-target, that is, before we enter the trade we should already know where we’re going to get out. And the intra-target as well, for example, you might be familiar with the USD and Swiss Franc – it was crazy, a price shock as we call it, a price adverse move of 5000 pips in just one day. When price adverse shocks like that happen suddenly in the market, you must have plans to get out. That’s what we call intra-target rules.
Those are the three categories that you definitely must have in your strategy rules so as to consistently execute and also to remove doubt and emotion you need to quantify those rules. That will really help towards your consistent execution.
In summary, they are entry rules, stop loss rules and target rules. The objective of writing all those rules, Traders, is so that you really get clear in your mind how the trade should look. You should have predetermined everything and you should be able to visualise how everything should be before you get into the trade, while you are in the trade and how you should get out of the trade – trade entry, trade management and trade exit.
I believe this has been very useful. Do some research on your strategies and you’ll clearly see how much clarity and conviction you’ll have in your strategy and how it will help you with your execution and strategy forms. Until the next time, as we always say, stay disciplined, follow your trading plan and keep Trading Like a Master.
