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Trading Rules

Making above average returns over the long term is not easy. To attempt to do so while breaking the well established rules will make it even less likely. Please regularly review the rules below to ensure you are not making your life more difficult than it needs to be.

Table of Contents

Rule 1: Be aware of unrealistic expectations

Warren Buffet is considered to be the greatest investor of all time. His average annual returns over the past 50 years are “only” around 20% a year, compounded. If you are targeting to make more than 20% a year for the next few years, then you are planning your financial future on the basis that you are better at investing than the greatest investor of all time. Spoiler alert, you are not.You can still target greater than 20% a year returns, but this naturally comes with greater risk of greater losses.

As part of a wider portfolio strategy targeting returns of 20% or more in a trading account can make sense, but you have to have an understanding of what you are taking on. The failure to follow this one rule explains why some 80% of active retail traders lose money.

Rule 2: Always Be Aware Of The Herd

Sentiment drives the markets more than investors would like to admit, as is being increasingly discovered by the new science of Behavioural Economics. Whenever you open a position ALWAYS think of what the herd is doing, even if no clear herd mentality is in place, CREATE ONE in your mind. Then ask yourself, are you trading with the herd or acting contrarian to it? It can be profitable to be either, trend follower or contrarian, but you must be self-aware of both your psychology, and the wider market sentiment, on every position.

Rule 3: Keep Score

At the end of any time period, monthly, yearly, your greatest loss must never be greater than your greatest gain. At year end you must have a sense of your win/loss ratio, average trade size, average gain/loss. You do not play golf and then wonder what your score was at the end of the game, it is tracked through the game and kept as a record to be analysed afterwards, you must do the same with your positions.

Rule 4: Correct Position Sizing

Ask most amateur traders what the net result in their account would be if they placed all their funds into one position and it made 50%, then closed the position. Then they placed all their funds into another single position and it lost 50%, position closed, that they would be back where they started. But of course this is wrong, they would be down 25%. It makes no difference if the order is reversed.

Trade 1: £100,000 X 1.5 = £150,000: Trade 2: £150,000 X 0.5 = End Result £75,000

Trade 1: £100,000 x 0.5 = £50,000: Trade 2: £50,000 x 1.5 = End Result £75,000

The power of percentages and positions sizing means that placing positions that are too large for your account makes your account highly susceptible to loss of capital over time. Institutional investors traditionally consider positions of over 10% of capital to be aggressive, while many even consider sizing over 1% to be too high. So a £100,000 account should not have any individual position of £10,000, and ideally £1,000. 

The short version of this rule is: If you think about this position in your day to day life, or worry about it last thing at night, it is too big.

Rule 5: Run Profits, Cut Losses

This rule may seem as fatuous as writing “eat less and exercise more if you would like to lose weight”. In that it is spectacularly simple to put in writing. The difficulty is in the doing. This is why the majority of the western population is now overweight, they know the reason, the problem is in the doing not the knowing. “Run profits and cut losses” is another equally simple thing to state in writing, but difficult to do in practise. Be self-aware when you break this rule, as you will at some point. Be wary of the “this time is different because….” logic that you will attempt to use to give yourself the excuse to break this “simple” rule.

One technique to help counter this is to decide, when you place the position, when you will be wrong. Either a price point or a change in fundamental position. Decide this on the outset, and then stick to it.

Rule 6: Be "Critically" Aware Of The News

The active investor must be aware of the news flow that moves their market, however the successful trader looks behind the simple headlines and realises that once the news is in the public domain it is old news. There is a strategy to “News Surf” headlines, to buy Tesla when Goldman upgrades EV stocks for example, but active traders are aware that the “real” buying has already taken place before announcements like this are made. All news like this creates is a second wave of “headline based” trading, traders can profitably jump in ride the wave of this news flow, as long as they are fully aware that the wave they are surfing will often have a trough behind it and it runs the risk of a wipeout.

Rule 7: Be Aware Of Your Place

Too many traders act  as if the market is in a relationship with them, it is not. Never attempt a revenge trade, never attempt to get back in at a level because it “should have worked last time”, never feel like the market is spooking you out of your stop level. Unless you have millions, and frankly tens of millions or even hundreds of millions in the market, what you get up to is irrelevant to the wider market, think appropriately. Warren Buffet is in a relationship with the markets, you are not.

Each trade you place is just like a toss of a coin, in that it is completely independent from any coin tosses you previously made and completely independent from everyone else’s coin flips, both historic and current. It is easy to think that the market “knows” your stop or target level and “always” seems to mess  you about at these points. The market does not know or care about you. You will be more successful in the markets the quicker you come to terms with this point.

Rule 8: Focus Your Attention

Particularly for those coming to the markets for the first time, focus on one market, and one general trading approach. Most traders seem to focus on Equities and Technical Analysis. If that describes you as well then focus on that as much as possible, while having an open mind to opportunities outside of this. There will always be something somewhere vying for your attention, which could result in you being the jack of all trades and master of none. The Zulu Principle outlined by Jim Slater remains solid advice today. Pick an area, potentially quite a small area, and study that. Then quite quickly you can become an expert in it. Then from this core knowledge you can expand into other areas.

Appendix 1: General Trading Methodology

One technique that those new to trading can find very helpful is splitting up the trade entry points. So that if you have followed the rules above and have decided that a position size of say £10,000 suits your portfolio, then you DO NOT enter a position of £10,000 at opening. Instead you look to build to that position over time. Buying say £5,000 twice, or £2,500 four times etc. There is an extremely positive psychological benefit to this approach.

If the price moves lower from the original entry level, you are quite happy as now you can build to your required amount at a lower average price.

If the price moves up you can still be happy as what you have bought has gone up in value. This way psychologically it is a win/win. Mathematically of course these outcomes are different, but you do not trade based on statistics and math anywhere near as much as you may like to think you do. So this technique provides some very useful psychological support, that both new and experienced traders find very useful.

!!! WARNING !!!

Never average prices like this if it was not your explicit intention from the outset. This can run the risk of you attempting to double down on losing positions, and can create huge losses. This strategy should only employed when you have followed the 8 Trading rules, and calculated correct position sizing, and then split that ‘correct’ position size into various bullets from the outset. 

Appendix 2: Guide To Closing Positions

Another useful technique is to be used when closing positions. When it is time to close a position, but you feel a psychological reason/excuse to hang on to it, (particularly if it is out of the money), then at the very least just close some of it there and then.

If you find yourself holding back on closing the whole position, fine, but at least close some there and then. The psychological advantage to this technique is that you do take action, then you are likely to find that you will then find it easier to close the whole position in the future. 

This technique alone can allow traders to avoid the trap of running losses.


By following these rules we cannot guarantee you will make strong returns, but what we can guarantee is that if you DON’T follow these rules you are virtually certain to fail. Take the opportunity to learn from other people’s mistakes and trust us when we say, “this is the way”.

If you prefer to make your own path, then great we wish you all the very best in your endeavours, as you are going to need as much luck as you can get!

So either way, all the very best in your trading,

From everyone in the Research2 team


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