Long term trading profitability rules

The safest way to lose your money is not to think long term. You can even double your account in a very short period of time if you use a strategy designed only for a certain kind of market, but when the market changes, be prepared to suffer the consequences. One of big disadvantages of automated trading is to ignore the news. No Expert Advisor (EA) can read and interpret the news, only a human can. And usually, a trend or a retracement is a result of high impact news. But what’s that has to do with long term profitability rules? Well, depending on the chosen strategy (mechanical or manual) the following statements should never be ignored:

1. Usually, an EA is coded to be profitable only for a certain market aspect (trending, ranging, flat). when the market changes, the EA must survive until the bad period passes. The market changes all the time, it can’t range or trend forever. The quality of the EA is given by the amount of losses during a dry period. (less losses = high quality)

2. If you are a manual trader, never miss the important news! Never ever. Especially the high impact ones like FOMC statements, Unemployment claims, Home Sales, Manufacturing PMI,  etc.

The following rules is my own set of rules, it applies for manual and automated trading. Please note that this is my personal set of rules, it’s my own point of view, there must be other profitable ways of trading, but these rules are suited for my trading style:

1. Trade price action only. All indicators can fail and usually repaint.  I trade only what I see on the chart, I don’t really care if the moving average has been crossed from above or bellow by the previous candle. Just do the following experiment: draw a line anywhere on the chart, and I mean anywhere. Just by looking at the price crossing that line you realize that you can do a lot of money by opening a trade when the price crosses that line. Of course, this is not true, but short term thinking is faulty by definition.

line trading

line trading

By looking at the following setup, which consists of a random line, it may seem like the holy grail, but of course it is not. There is no difference between this random line and let’s say EMA(20). Fibonacci levels, pivot points, support and resistance levels have only psychological value.  All I need to know is higher high and lower low for many timeframes/bars so I can perform a proper analysis.

2. Never trade without stop loss.  This is the most important rule. It’s obvious why 🙂

3. Never use large stops and short take profit levels. Cut your losses short and let your profits flow, this is another basic rule of long term successful trading.

4. Always use money management, never risk more than 2% of your account for a single trade. Risk/Reward ratio must also be at least 1:1, risking 100 pips just to get 10 pips is a faulty strategy, that’s why I don’t like scalping. It was a good method before 2007, but not the market is more volatile and scalping doesn’t work anymore on the long run.

5. Don’t get emotional and don’t change your trading style during a drawdown period. Drawdown can’t be avoided.

6. Use the same strategy for both longs and shorts. Even if EURUSD is going down right now (just an example) there is no guarantee it will continue like this so there is no reason to give more weights to short trades. Please remember that the market is subject to change anytime and you have to be able to survive.

7. Always trade at the beginning of a new candle, this way the price has enough time to consolidate. Highs and lows are just noise if we trade middle term timeframes like M15 and M30.

8. Stop loss and Take profit levels has to be adapted to existing market conditions. For example if a trade is running in profit and a high impact news is announced, I will definitely move the stop loss level closer to the target.

9. In order to be able to tell if a strategy is profitable or not, you need at least 1000 trades and consistent profits. This confirms the robustness of the strategy.

10. Never use high risk strategies like grid and martingale. This will always blow your account, it’s not a matter of if, it’s a matter of when. Please read my articles about these strategies, everything is explained with colors and images. 🙂

Thank you for your time! If you like it, please leave feedback, I like to hear from my readers 🙂