Behold: The Trading Ten Commandments

Last updated April 30, 2024

There's nothing religious about this article. But I will smote thee down if you don't follow these commandments, ya hear?

I guess trading and religion do have some things in common...

-Your friends who aren't a part of it probably won't understand what you're talking about. 

-It requires the level of dedication most commonly seen in nuns and monks.

-Traders who don't heed the ten commandments end up in the bad place.

So, without further ado, those commandments.

Illustration of a man sitting at a trading computer, from behind, while some divine phenomenon comes from the sky in front of him

1. Thou Shalt Follow Thine Own Rules

Trading is about mastering yourself, not mastering the markets. You have rules because you've tracked and analyzed your trading and you know where your leaks are.

You know what you need to do to become profitable and remain profitable. If you don't have rules, you're not working hard enough, and that's another can of worms.

But, assuming you have rules that save you money, what are they worth if you don't follow them? Or if you break one and just keep going like it was nothing.

We're human, we screw up. But if you consistently fail to follow your own rules, you're in for a bad time. You'll either blow all your money, or blow countless prop firm accounts.

2. Thou Shalt Enter Where Others Will Get Stopped Out

This is probably the closest thing to a trading secret that exists in retail trading. But it's not secret; it's right out there in the open. The traders who have the discipline to take it to heart often feel like they've unlocked some mystery, but it's just basic market psychology.

Your entry is the most important part of a trade. Fight me if you disagree, but you'll be wrong 🙂

If you're a trader with a low win rate, there's a great chance your entries suck. And there's a good chance you're doing the opposite of this.

You're placing your stops where everyone else places their stops, and getting stopped right along with them - right before price goes in your direction. If this is you, there's an easy fix.

Most traders place their stops at "support" or "resistance". Institutional traders, whether automated or human, know this and exploit it. They run stops and take advantage of that liquidity to accumulate.

Place your entries at (or even slightly outside) these levels where you expect price to be supported/resisted, and your stop well outside that.

This doesn't mean you'll win every time. If you're on the wrong side, you're just on the wrong side. Or it just didn't work that time.

Whatever the reason, you take your loss, and you move on.

Instead, this gives you better entries, with better prices, which increases your potential win rate and your risk/reward or R. 

At the very least, it will increase the percentage of trades that start out profitably, which is a step in the right direction and can help you diagnose weaknesses in your trading.

3. Thou Shalt Monitor and Manage Thine Own Emotions

Trading without emotion is impossible, but so many traders have this false ideal in their head. Up on a pedestal, the trader with ice running through his veins, who never feels joy or anger, greed or fear.

That trader exists, but is a rare anomaly, and you don't need to be that trader to win.

Instead, you need to recognize your emotions and what triggers them, and constantly monitor both. By monitoring your emotional triggers, you can manage your emotions as the trading day tugs at them, and before you act on those emotions.

This will mean doing what you know you should do when you recognize a trigger, so it takes constant discipline.

But managing your emotions and preventing them from causing bad decisions and mistakes is essential to allowing your trading plans to work the long term. Which brings us to...

4. Thou Shalt Take the Setup Every Time

What's the point of having setups if you don't take them?

Presumably, your setups are yours because of some logical statistical measure that plays out in your favor over time. 

Skipping a setup when it comes along invalidates that statistic.

It doesn't really matter why you skip it, but it's usually a fear response. You find some reason to skip the trade or sit it out this time because x, y, or z, which is usually bullshit. If you weren't measuring against that variable in your research for the setup, it's not a part of the setup.

In other words, unless your setup avoids entries that have X factor, avoiding a setup because X factor exists is wrong. It's scared trading, greed or some other irrational impulse. 

And as I've seen to many times, the trade setup you skip will almost always be one that would have worked. We don't need to get into why that is here, but it's a real phenomenon for a reason.

Got a setup? Take it every time, or never at all.

5. Thou Shalt Stick to Thine Trade Plan

"Everyone has a plan until they get punched in the mouth." ~ Mike Tyson

With traders, it seems to be, "Everyone has a plan until they watch the market." Strive to buck that trend, please.

day trader watching the market on computer monitors with his chin resting on his hand

Your trade plan should include at least 4 basic pieces:


  1. Observing the market and setting alerts for the conditions that might lead to a setup.
  2. Determining the setup and placing orders
  3. Managing the trade
  4. Journaling or "debriefing" the trade

A lot of people screw up before they even get to #1, by jumping into impulsive trades like a teenager at their first kegger.

Some screw up #1, and end up missing their trade.

Others get that right but let themselves be swayed by blinking lights, twitter feeds, discord members, or anything else that can talk them out of their trades. #2

Some get there but then rush to take profits early, or get scared when price goes through their entry. #3.

Number 4 is pretty simple. Learn from your own trading, and make notes to help you recognize patterns later. Use a free trading journal template or one of these online trading journals.

These are just some of the mistakes, but you get the point.

You have a plan for a reason - assuming you have valid setups. Stick to it!

6. Though Shalt Not Let Big Winners Become Losers

You might think this contradicts trade commandment #5, but bear with me, because you'll see it doesn't. And there's a good reason this should be one of your rules.

First, that reason. In my history as a trader and observing other traders, this phenomenon has kicked off more negative spirals than any other I've witnessed.

Illustration of a man sitting at a trading computer, from behind, while some terrible divine phenomenon comes from the sky in front of him

Letting a trade go nearly to your target, then all the way back to your stop, is demoralizing as all get out. Of course, you need to manage your emotions and come back from that. But, why bother letting it happen in the first place?

Most "coaches" would tell you that you need to stick to your plan here and let it get stopped out. Here's why that's wrong...

The trade is already over. You got your entry. You got the move you wanted. That was it.

And now price is back to your entry.

It's over, and you're now evaluating at a new trade. For a second move. At a later time of day.

The fact that it hasn't reached your target yet, doesn't matter anymore. And it doesn't matter why it didn't reach it.

Now, to get back up to your target, you'd need a second (and larger!) move.

Instead, take your breakeven or even a small profit, and start evaluating whether you want a new trade with a new entry and a new target.

7. Thou Shalt Focus on Thine Own Trading, Not Thy Neighbor's Trading

Trading requires focus. On your plan, your execution, and your emotions. It does not require you to know what other traders think of your trade, or what they think about the market or this stock or that stock.

This is especially true with the excessive noise traders face today, from discord/slack rooms, twitter, and more. 

Knowing other people's trades, or what others think about your trades is rarely constructive.

There may be some instances when it's beneficial to discuss your trade with someone who 1) Understands your setup and 2) Has a similar trading style, and 3) Has more long-term profitable experience with that style than you do. 

But..

You can't be sure of any of those things when you're speaking with someone you met online; I don't care what they say. And even if they do meet all those criteria, they can still lead you astray and do you more harm than good.

The only place you're likely to get this kind of discussion is on an actual trading desk, which is a rare experience in prop trading. And even then, it might still hurt more than it helps. 

Focus on your game, don't let anyone throw you off it.

8. Though Shalt Accept a Loss, Not Make it Bigger

Do you want to be right, or do you want to make money? Every trader must answer this question and look at their trading in that context.

Most traders would prefer to make money. And you can only choose one. Be right, or be profitable.

Traders who insist on being right end up making all the wrong decisions.

Traders who get upset when they were wrong self-destruct.

Traders who can't accept being wrong will struggle. They may add to a losing trade hoping to eventually be right. They usually just end up losing twice as much on that trade, or worse, blowing up their account.

close-up head shot of day trader watching the market on computer with his chin resting on his fists

Learn to appreciate your losses as a regular part of trading. Analyze them along with your winners and see what you may learn.

Never turn a losing trade into a bigger position. Note, this isn't the same as planning to scale into a trade at set levels.

9. Though Shalt Live to Trade Another Day

To succeed in trading, you have to survive. No single trade, day, week, month, or year should take you out of the game.

You should never let a day get so bad that it takes more than a couple winning days to offset the loss. Yeah, this will vary based on your R and your win ratio. But the basic rule is still the same.

I'm not big on setting daily/weekly/monthly profit targets. That can cause me to pass on good setups, and it sets expectations which then trigger emotions if they aren't met. Take the setups, stick to the plan, the money will follow.

However, I put a limit on what I'm willing to lose in a day, and every trader should. It's ok if it's a range instead of a hard number. 

The point is to manage your loss limit in relation to your account size so that you don't put yourself in a hole.

devastated trader staring closely at computer monitors, leaning forward, biting his fist

And, if you're hitting that limit often and it's causing you to miss setups, you might need to size down your trades so that you can take all your setups, as discussed above.

Even high probability trades will have periods of variance that go against you. What's do I mean by that?

Simply put, a specific setup that works 3/4 of the time over 1000 instances can experience losing streaks of 2, 3, or more trades. The chance of two losing trades in a row is 18.75%.

Finding the probabilities involves calculations of distribution and frequency, but you don't need to be a math whiz to understand this and apply it. 

All we need to know is that we could sustain consecutive losses that go well outside our expected loss rate.

Successful traders know this and size their trade and daily loss limits accordingly.

They know the key to winning is staying in the game, and they live to trade another day.

10. Thou Shalt Recognize Thine Edge or Lack of Edge

You have to be brutally honest with yourself about whether you have any trading edge, and where it lies. 

Most retail traders will not have an edge, ever. Even fewer will maintain an edge over a long period of time. 

Those who find an edge don't usually share it. They exploit it until it either ceases to exist, or until they're too rich to care - Usually the former. That's right, edge disappears all the time.

Most traders who find edge don't find it through statistical analysis, or technical analysis, or fundamental analysis.

Retail traders are severely outgunned in these departments (if/when any edge can be gained from them). You are up against armies of the smartest mathematicians in the world, with way more computing power, better larger data sets, and faster connections.

Ironically, the first step to finding an edge is admitting you don't actually have one.

Even more ironically, most traders would find an edge by doing the opposite of what they currently do, when they do it. That's not a fundamental or quantitative edge, it's a psychological one.

See what I mean?

Traders can find edge in a variety of ways. One simple method starts with doing the opposite of what losing traders do - Even if that losing trader is you!

Whether you're a losing trader, breakeven, or winning trader...have an honest talk with yourself about this. It may just be the secret to finding your trading edge.

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Daniel Larsen

Daniel created epicctrader.com to help new and experienced traders level up. He began trading in 2002, and has spent over a decade trading professionally, for prop firms and clients. When he's not at a computer, you can find him on the ocean, in a canyon, or in the mountains.

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