The 10 Commandments of Profitable Trading—The Rules You Must Follow to Win in the Markets

First thing is you've got to learn the language, right? If you want to become.

If you want to go into a foreign country and function effectively, you need to know the language or you need to be able to translate. And most people come into the markets thinking, I'm a smart person, I'll figure it out. But then they realize they get confused. They start reading and they hit a term or a.

A piece of information, they don't understand it, and then they get a little bit confused and a little bit of your attention gets stuck on that, and then they keep reading or keep trying to learn, and then something else comes up that they don't understand what this word means, and a little bit of their attention gets stuck on that and they keep reading. And eventually you sort of. All of your attention is stuck on the things that you didn't understand and you have no more capacity to learn. So the first thing is actually learn the language. You know, you've got to understand what drawdown is. You've got to understand what compound annual growth rate is. You've got to understand what a pullback is. You've got to, you know, there's lots of things. And so I put together a document of trading terminology, and if someone just reads that once, then all of a sudden they sort of know the language. And then you can go and read a book or listen to a YouTube video from a trading mentor or something and take the messages in rather than struggle with the language. So I think that's number one. If you want to learn effectively, you have to know the language of the topic that you're learning in. Just like property, just like everything else in investing, you have to learn the lingo. Number two is use a system. Most people approach the markets the way they approach everything else. I'm pretty smart, you know, I've got some experience. I'll bring that experience to bear and I'll make some sensible decisions and then I'll make some money and then I'll be rich.

But unfortunately, when it comes to trading in the market, what you learn from everything else in life doesn't apply. In fact, it's almost the opposite. So in school, we're taught to be right. You've got to get the right answer. You've got to get 100% on your test, you've got to do well, you've got to study hard, you've got to remember the facts so that when the teacher calls on you, you get the right answer so you don't get embarrassed. And that carries through university and Even when you get to the workforce, you've got to be correct in your recommendations, and you're going to give the boss the right material. And, you know, there's just no tolerance for loss or being wrong or not knowing or uncertainty. But unfortunately, in the. In the financial markets, you have to have a high tolerance for loss and for uncertainty. And let me give you a quick example.

I'm wrong on my trades about 70% of the time.

70% of the time. Adrian, you must be a terrible trader. How does that work? But if I'm wrong on. So I got 10 trades. If I'm wrong on seven of them and I lose $1 each time, I'm wrong. But then on the three times that I'm right, I make $5 each on those 10 trades. Overall, I make a lot of money.

But if I want to be right, when I buy this stock, I need that stock to go up so I can sell it higher than I bought it for, so that I can be right, so that I can make money on that trade.

But thinking about that one stock, if it goes down, it's like, oh, okay, I better. I'll just wait till it gets up to even so I can sell it so I can be right. I don't want to sell it down here because that would be a loss. That would mean I was wrong. It's bad for the ego. That's hard for me to take. I've been trained to be right. This is just temporary. It'll go back up because I bought it, and I know it's a good investment, so it'll go back up, but it doesn't. It keeps going down, and it keeps going down and keeps going down. And so what happens to the size of your losses when you give up? It's too much pain, right? You give up when there's too much pain to bear. It's like, that's it. I can't take it anymore. I'm out, right? And you sell. But that's exactly the time where everyone else sells, too. And that's the. That's the bottom. But you don't know that in advance. You just know that you're overcome with emotion.

So the reason we use a system is because the system tells us when to get in and when to get out. It bypasses the emotion. It bypasses the need to be right on each individual trade. Because we have a. The system is like a process we follow. You know, Toyota, when they manufacture cars, they don't micromanage every single little car and, like, try and maximize the profit on that car, forgetting about everything else. What they do is they have a process that builds cars consistently, right? They build the car the same way every single time. Now, everything in that car might not be perfect from the customer's perspective, but overall it's a viable product and it makes money. Our trading system, our trading rules are the same. You know, if we run the rules over and over again, they should make money. And we can, we can test by putting those rules into our trading software and looking over the past 20 or 30 years of history and making sure that if we'd have followed those rules over time, we would have made money. So use the system. It bypasses the emotion, it eliminates the need to be right on this trade. Because we've got a process that works and we're being right by following the process, not by making smart individual trades. Does that make sense? That's the second. One third, one third commandment is use an approach that suits you. If you're a very patient, long term considered sort of person, you want a long term strategy, a trading strategy that you know where you buy and you wait through the big major trend and the stock keeps going up and then when it's obviously stopped going up and it starts going down, you sell and you make profit out of the big chunk of the trend. But if you were a really.

Less patient sort of person, someone who wants a lot of activity and action, that's going to bore you to tears and you're going to sabotage it. So you need a more frequent trading strategy, okay? So you've got to match it to you and this, there's six, I talk about six different dimensions on your trader profile of what you have to understand and match. In my, in my programs, I won't go into them here, but basically you have to be comfortable with the strategy. It's got to fit you so you can follow it.

Fourth one is, is you've got to be, you gotta have a positive edge, a positive expectancy, we call it in trading. So if you apply your strategy over and over many times, do you get a positive expectation of making profit? And I want to know that if I test my strategy over the last 20 years, do I get like a thousand trades and overall, on average of those trades, profitable, there's going to be many losses and many, many profitable trades. But overall, on average, it needs to be profitable. Most people don't even have a profitable approach. Most people wouldn't have a clue because they've never tested it. And this is why systematic Trading is a huge advantage because it's systemized, it's objective, you can actually test, and then you know, hey, this is a profitable strategy, then the biggest mistake people make is they, they think about making money. And I know that sounds counterintuitive, but if you think about how much money you're going to make as opposed to how much money you could lose if you're wrong.

You get two very different outcomes. Because if you start by thinking about how much money you can make, you're all optimistic and you're thinking about, wow, this could go to the moon, and how much can I justify putting into this investment so that I make the most possible, which is exactly the wrong way to do it. You want to think about if this trade is a loser, how much will I lose? And therefore how much should I put into this trade such that it won't hurt me?

So you've got to start the opposite to what most people do, because we want to make sure that we can keep trading no matter what happens. None of our trades should be able to hurt us.

If I don't, like, if one of my trades goes incredibly wrong, it shouldn't hurt me. I should live to trade another day, no problem at all. And, and most people don't really understand the impact of losing money. But if you've got $100 and you're investing it and you lose 50% of it, you now have $50, you have to make 100% return on your $50 to get back to where you were. So you lost 50%, but now you've got to make 100% to get back to break even. And making 100% is not easy. And if you lose more than 50%, like, let's say you lose 90% of your money now you've got to make 1,000% to get back.

Right? I mean, the math is like, mind blowing. And as soon as you understand the math, you've got to, you then start to actually, it's 900%. Sorry, not 1,000%, 100 down to 10, and then from 10, you've got to get back to 100. But in any case, you know, it's a lot harder to recover. And so as soon as you realize that, you become much more focused on managing the risk. And the sad reality is most traders blow up several accounts, like as it loses the entire account before they even learn how to trade. But staying in the game is the most important thing, because if you make 100% this year, but you lose 100% next year, you still end up with nothing. And so staying in the game is most of the battle. But most people can't even do that because they risk too much. So preserve capital by risking a lot less.

And a lot less means if you're wrong on a trade, you should lose less than 1% of your account on that trade. That was number five, preserve precious capital. So don't, don't blow up your account. Stay in the game. Number six is reduce your risk. So if you think you should be risking this much, you probably should be risking that much.

The ideal amount to risk on a trade is usually far less than you think because unforeseen events happen, right thing crazy things happen in the stock market. Markets crash and stocks have bad announcements and bad earnings and you know, sometimes there's bankruptcies and all sorts of things. You've got to trade with very low risk so that none of those crazy things help you so you can survive and stay in the game so that you can make money long term. So reduce your risk even less than, even less than you think it should be. Number seven is write your plan.

Now, would you go headlong into a business without any plan at all?

Cost not right. You would have to have some sort of business plan about what you were going to do, how you were going to make money, what your processes were going to be, what your backup plans were, all of those things. Most people go into the markets with no plan at all, no rules, no risk management, no kind of, if this happens, then I'll do that. And the trouble is the market is about money and money is emotional. And if your emotion goes up, what happens to your intelligence.

Goes down fast and a lot, right? So people make really dumb financial decisions when they're stressed. And so if you make your decisions in advance.

When the market is closed and you've got it written down as a plan, and then you just follow your plan, the emotions don't get in the way.

So if your plan was, okay, I'm following this set of rules, this system, and I'm going to add money to my account on this date every month, and I'm going to keep adding money to my account until I've got this much in my account. And, and I'm not going to withdraw any money to live on until I've got that much in my account. And then I'll only withdraw a certain percentage. And if there's any death in the family or any, any emotional, emotionally compromising situation, I'm not going to open any new trades. And every day at this time I'm going to check my trades and so on and so on and so on. It's like a plan. You know what you're going to do in advance if you know what you're going to do in advance. When something stressful is happening in life, it doesn't compromise your trading decisions because you already made the trading decisions.

That make sense. See how that could reduce the stress levels and reduce the emotional impact. So write your plan. That's number seven. Number eight, we're almost done. Number eight is diversify multiple ways. Now most people think I've got five stocks, I'm diversified. No, you're not at all. Nowhere near it, right? You want to make, you want to have different strategies, different markets, different timeframes. So I taught in my, in my trade success system I talk about three different ways of diversification. Strategies, markets and timeframes. Strategies means okay, I want to be able to make money when the market goes up. I want to make money when the market goes down. I want to make money from dips in the market. You know, there's different ways of trading to make money markets means don't just trade Australian stocks or US Stocks. Trade multiple different markets because they all move a little bit differently. Don't just trade stocks, also trade crypto, also trade commodities. Different markets because different markets brings better diversification. If you've just got five stocks or 10 stocks in your home market, you're very subject to the whims of. And timeframes means have some long term strategies and have some short term strategies because sometimes you get great long term trends and sometimes you don't. Sometimes you just get noise in the market kind of like now a little bit. So having strategies over different timeframes also helps.

Service. Number eight, you've got to diversify far more than you think. Does that make sense? Number nine is eliminate mistakes. And the trouble is most people don't know they're making mistakes. I actually wrote a document, I think it's got something like 97 trading common trading mistakes that people have trading mistakes cheat sheet. And what you got to do is as you're doing your trading, you journal say, okay, what did I do wrong today? What went wrong? What could have done better? And just identify what could be improved or what mistake you made and then fix it. You've got to be conscious about it because even if you've got the best system in the world, if you start making a few mistakes, those mistakes compound on each other but in the wrong direction. And so you've got to consciously eliminate them so that you can get close to the expected profit of your strategy. So eliminating mistakes, you've got to put effort into that. It takes effort to trade perfectly. So we're going to do that. And then number 10, this is the most interesting. Most people look for the Holy Grail. What is the best strategy, the best set of rules, the best stock to buy? The best, the one that's going to make me rich. But in fact that, that, that, that search is a fool errand because you spend so much time searching for perfection that you don't make money from good. And if you've got a good trading strategy and you follow it consistently with discipline, you'll make money immediately. But if you spend three or five years searching for perfection, you make nothing in the process. But you could have made quite a lot of money and really built your wealth with the good strategy. So you just need a good profitable strategy and to follow the other commandments and you'll do well, any profitable strategy. And you don't, once you find a strategy, you don't want to keep tinkering with it and fine tuning in and optimizing it and trying to make it perfect because it'll never be perfect. There is no perfect because the markets are very uncertain. And this is something that.

You know, coming from a non trading world, like coming from the corporate world or coming from education or from university or school, it's very hard to accept that there's not a right answer. You know, should I, should I buy when the stock moves to this level or that level? Should I sell or should I set a stop loss at 10% or 15% or 20% below the entry price? Well, there's not one right answer for that. It's all just trade offs and probabilities.