19 Minute Read

The Traders Code

April 4, 2017

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There are more rules to trading and investing than anyone truly cares to admit.  Some of these rules are cliché and some are mundane while others are confusing.  However, these rules, although cliché are cliché for a reason.  They work and they keep us active in the game of trading for the long haul.  If you desire to be a successful trader for the next 20 years and not the next 20 days then there is only one rule…don’t break the rules!!!

The Traders Code

  1. Protect all capital: Warren Buffett famously stated that rule #1 and 2 is to not lose money. While this is true, it can be misleading as The Oracle has certainly lost money off investments.  You cannot make money unless some money is at risk.  The rule has evolved to protect investments.  Learn how to apply the protective put.
  2. Trade with your eyes: Our heart and mind can lie to us…the eye tells the truth.
  3. Never invest in mutual funds. When these types of funds were created, there was a need for Wall Street.  There is no longer a need for Mutual Funds or advisors.  Not when you can kick out the middle man, keep all of your money and invest in the same vehicle called Exchange Traded Funds (ETFs)
  4. Trade money for knowledge. The first trade is currency for knowledge.  It is not about creating system, it is about acquiring and perfecting a trading system.
  5. Do not allocate more than 4% of portfolio in a leveraged trade. This rule is to protect you from getting too greedy.  Trading is about controlling risk and probability.  If you allocated too much capital in trading options, forex, or futures then you run counter to controlling risk and you decrease probability.  Less capital allocated per trade and more trades increases probability.  Behave like the casino and not the gambler.
  6. Don’t fight the FED, they have more money.
  7. Treat investing like kids, treat them all the same: Position size is vital to probability.
  8. Never fall in love ❤️ with a stock, it’s a one-sided affair which means you are a stalker
  9. Control risk with stop losses. Using stop orders to control risk reduces emotion in trading.
  10. Use contingent orders on option trades. This allows people that do not have access to the markets during the market hours to control entry on trading options.
  11. Always go through your daily routine. A simple daily routine allows investors to stay on top of their accounts and not miss opportunity.
  12. Never hold short term delta trades through earnings. Earnings can be highly uncertain and throws off probability.
  13. Never save money 💰 in currency 💴 save it in commodities and assets. Fiat currency devalues over time, save money in assets that don’t go to zero.
  14. Never assume price and value are the same thing. $1000 can be cheaper than $10. Use a PE and PEG ratio to determine fair value.
  15. During a winning streak, it is appropriate to increase position.
  16. During a losing streak, it is not appropriate to increase position.
  17. Always have more than six months in reserve before spending money on things you don’t need to live. This can be in liquid assets other than currency.
  18. Max contributions to IRA each year for tax and retirement purposes
  19. Cash flow is better than growth, rent out your stocks. The covered call is an amazing way to monetize stock holdings.  The average stock gain is close to 8% yearly vs a covered call which is between 2-3% monthly.
  20. Money craves velocity. Compound all gains before cash 💰 hits savings. The velocity of money is how investors create long term wealth.
  21. Treat trading and investing like a business. Trading is one of the oldest and professional industries.  It’s the perfect business where you can sell whatever you want to anyone in the world with a click of a button with no marketing.
  22. Use protective puts in bearish conditions instead of dumping quality stocks. The protective put is a great way to insure stock positions.
  23. Sell puts to enter into long term investment. This allows the investor to cash flow and buy stock at a price they prefer rather than the current price.  Get paid to buy a stock at a discount.
  24. Sell calls to get out of a long term investment. This allows the investor to cash flow to get out of a stock.
  25. Never assume you know anything, the market always knows more. The efficient market theory states everything that is known is embedded in the price of a stock.  Wall street always knows more than the retail investor.
  26. Never argue with the tape. Focus on the trend rather than talking heads or the opinions of others.  The trend is your friend.
  27. Buy into strength and sell into weakness.
  28. Volatility is like the hot crazy scale…the premiums might look nice but the swings are not. Use the beta of a stock to determine if the volatility to too much.
  29. Be a student for life!!! Markets evolve as technology evolves, every six months.
  30. Price action > Indicators. Indicators are good for confirmation of trend and pattern but they are secondary confirmation
  31. Moving averages are not support, they are a catalyst for support.
  32. Keep your charts like your home…clean. Too often traders will put 4 or 5 indicators on a chart.  Keep it clean and limit yourself to 2 indicators.
  33. Never swim in a field of sharks. This rule goes to getting involved in the live market before you are ready.  Paper trade to learn your trading software and keep position size low until you feel ready to jump in 100%.
  34. Aim high, let the winners run and cut the loss short. Use trailing stop losses to allow growth to happen and stop orders to cut the loss if the trade goes against you.
  35. Never risk anything you cannot afford to lose. This rule goes to leveraged tradable instruments.  Position size according to personal risk rules.
  36. Develop a trading plan and portfolio design before diving into the markets
  37. It is appropriate to use alerts at price targets and strike prices on credits. Alerts are a valuable tool in managing credit spreads.  Place an alert ½ ATR above or below any strike sold in credit trades.
  38. Issue .40 delta calls on the covered calls with 30 days of time to capture time decay. There are different rules for different systems but as a new trader focus on hard rules based on delta and theta.
  39. Issue less than .20 deltas on naked puts with 30 days of time. The naked put is a great way to cash flow with high probability of success.
  40. Issue closest to .10 deltas with 60 days of time in Cash Flow Condors on the RUT, NDX, or SPX, reissue every 30 days. This allows the trader to sell outside historical price movements and thus have over 90% probability of success.
  41. Mastering a few strategies is better than being average at all of them. Focus on 3 or 4 strategies at first before getting into advanced option strategies.
  42. Do not catch a falling knife, only enter a trade after confirmation of a pivot. Confirmation is an upward movement in price that moves and closes above the previous high.
  43. The markets can remain bullish or bearish longer than you can remain irrational…keep your emotion out of it. Trading is a zero-emotion game.  Wall street does not care what you think or care and has more money than you do.
  44. Stock are never too high and never too low…trade with eyes
  45. Your trading system must be repeatable and must evolve. Never get stagnant.  The markets evolve as technology evolves and thus trading systems
  46. Don’t be cheap, buy options with more than 2 months of time frame when swing or position trading.
  47. Don’t be cheap, place stop losses at levels where you are proven wrong, place them under support and above resistance
  48. Only take trades that have a 2-1 reward to risk ratio when delta trading. Risk is defined as entry to stop and reward is entry to target.  Target needs to be based on proven forecasting systems such as average price movements, Fibonacci extensions, volatility amongst others but it cannot be based on want, wish or hope.
  49. Portfolio design is paramount to successful trading and investing
  50. Use less capital in speculation trades and more in cash flow systems. Speculation systems are aggressive whereas the market is not.  Cash flow systems have higher probability of success.
  51. Use futures as a hedge against globalization. If you only know a market that is only open for 6.5 hours a day in a global economy simply accept that eventually you will get whacked and whacked hard
  52. When trading the go to bed trade, adjust stop loss to break even before turning off the light
  53. Don’t be cheap, never trade penny stocks
  54. Don’t be cheap, never trade binary options
  55. Never invest in bonds with low interest rates…please buy my debt but I promise to pay you nothing to carry my risk of default…lacks all logic
  56. Use a stop limit order to enter into a stock trade as a way to control unwanted price movement
  57. Never trade on hot tips, trade your system
  58. Bulls make money, Bears make money, pigs get slaughtered. If you don’t know which one you are, you need more education
  59. Do your homework, before investing in a company, evaluate the historical performance for a technical and fundamental perspective
  60. Never buy anything you cannot protect. If you cannot trade options then you cannot protect the investment.
  61. Hope is not a strategy, it is great in life and at Disney films but has no place in the financial world
  62. Sell 1.5 times at a minimum the MMM on a short strangle or Iron Condor before earnings to minimize the risk.
  63. Probability works the more you trade, it is better to place 10 trades with a $1000 position size than 1 trade with a $10000 position size
  64. Patience is a virtue, if the stock is over extended, don’t chase, kick your feet up and let it come back to you
  65. Patience is a virtue, once that trade is on, give it space and time to grow…trust your process.
  66. When trading the Iron Condor ensure that you have a minimum of a 3 ATR range and a 140 ROID…ROI / Delta is an indicator I create to evaluate credit spreads
  67. When trading credit spreads, ensure you have a minimum of a 2 ATR buffer and a 70 ROID
  68. Dollar cost averaging is simply compounding a loser. Use covered calls to reduce costs and compound
  69. #91 When trading economic reports in the forex market, it is better to wait for the secondary move than the initial primary move
  70. Opportunity exists in all things every day, if you missed a breakout, its okay, wait for the retracement
  71. KISS Method: Big candles are momentum candles, it does not matter the name
  72. KISS Method: Small candles are a loss of momentum candle and can signal a pivot at a catalyst for support or resistance, it does not matter the name
  73. Sell Perception and Buy Reality. The truth is the market does not move that much every day, week, month, or year.  However, there are people that believe it does, sell them earthquake insurance
  74. Treat trading like negotiations…it is very valuable to understand the opposite end of the transaction
  75. Never play politics in the financial world.

One Reply to “The Traders Code”

  1. KalaivaniArun KalaivaniArun says:

    This is an amazing list, Matt! I see all the points that you taught me in our mentoring here… use it, fellows!

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