Let's start with the Rules ...........

To be a successful trader you must remove emotions, as much as possible, from the trading process. You do this by developing very clear and specific trading rules, backtest them to ensure they are profitable and then systematically execute them.

Rule #1 - What Markets to Trade

The first step is to build a diversified portfolio of approximately 30 markets that you will trade. By trading diversified, uncorrelated markets it will help smooth out your equity curve by targeting your trades within the strongest trending markets. To get started it is recommended that you build your market portfolio using Exchange Traded Funds (ETF's) within the 4 main financial markets including:

  • Equities
  • Bonds
  • Commodities
  • Currencies

Rule #2 - How to Identify Trending Markets

Once you have built your market portfolio you will need to identify and trade the strongest markets in your market portfolio. This goes against the conventional investing advice of buy low, sell high.  When trend following trading, you want to buy high and sell higher.  The majority of trend following traders will buy on a breakout from some defined level.  This defined level could be a channel breakout, a 52-week high, a new all-time high, or some other level that allows you to catch the momentum of the trend. 

Rule #3 - How to Enter the Trade

To be a successful systematic trader you must have a clear trigger that allows you to enter the trade without second guessing the decision. In this module you will define your entry trigger. If you are using a breakout system, the trigger could be close above the breakout level.  Each day you will review your watchlist to see if any markets meet your entry trigger criteria; and if they do, you place a buy stop order at or above the high of the close with presumption that the trend will continue on the next trading day. Your buy stop would be hit, and you would be in the trade.

Rule #4 - How to Exit the Trade if you are Wrong

You need to accept the reality that with trend following trading you will be wrong more often than you are right.   Before you enter any trade, you need to define the price in which you will get out if the trade does not go as originally planned. In this module you will formulate your stop loss exit. There are many ways to determine your stop loss exit.  Like the rest of your trading system, it must be something you are comfortable with and clearly understand the logic behind it.  You can consider using a percentage stop loss (i.e., sell if stock price drops x% below purchase price) or a stop slightly below the breakout price, a specific moving average, or some multiple of the Average True Range (ATR).

Rule #5 - How to Protect your Capital

Money management is the most important component of your trading strategy. In defining this trading rule you will determine how much money you are willing to lose if you are wrong. Many studies have been undertaken that prove that you should not risk more than 2% of your portfolio on any one trade. In the previous trading rules you determined your entry price and stop loss exit. You can then apply your defined risk % per trade to calculate how many shares you can buy.

Rule #6 - How to Exit a Profitable Trade

Finally we will move onto the fun stuff. Your Trading Strategy has followed the successful traders mantra of"Cut you losses short and let your profits run."  As such a number of your positions have continued to follow the prevailing trend, and you are making money on these positions.  With a trend following trading strategy, you need to resist the urge to sell your profitable positions and let the trade continue so you can capture as much of the trend as possible. You should, however, have a trailing stop that follows your trade up and is always active; so that when the trend eventually ends, you will automatically be stopped out, so you can capture as much profit as possible.

Do these Rules really work?.....

The following data is from an actual backtest of a trading strategy developed using the Rules listed above and detailed in our Trading Course. The backtest traded approximately 30 diversified markets over a 10 year period and resulted in a 16.25% compound annual growth rate.

  • Backtest Info

    • Backtest Period: Jan 2014 to Dec 2024 (10 years)
    • $100,000 Initial Investment
    • Risk (R) per trade= 1% of capital
    • Channel Breakout Entry

    (Past Performance is not an indication of future results. Background, education, and experience all play factors. Your results will vary.)

  • Trading Results

    • Compound Annual Growth Rate = 16.25%
    • Maximum Drawdown = 17.34%
    • Total number of trades= 338
    • Winning trades= 145
    • Losing trades= 193
    • Win %= 42%
    • R multiple on winning trades= 2.97
    • Total profits =. $350,769

  • Amazing Course!

    "I have a very limited knowledge about trading. I have been too scared to try trading as I did not understand trading. This course has given me some really great rules, strategies, and information to help me become a successful trader. I am looking forward to backtesting my choices and then start trading! I would highly recommend this course to help you learn more trading strategies and give you the best chance of being a successful trader by consistently applying the rules." - Denise B.

  • Trend Following Course

    "This is an excellent course for people to learn a simple yet an effective way to make money via trend following and not having to be glued to the screen all day long. It takes you step by step to build a simple method to trade/invest in the stock market by following mechanical rules whereby emotion can be removed from it. I recommend this course." - Sergio A.

Access my FREE Trading Course "How to Build a Systematic, Rules-Based, Trading Strategy"

"In my FREE Trading Course I will walk you through the development of a trading strategy that fits your personality. We will work together to design each of the six trading rules that a systematic trading strategy must include. By the end of the course you will have a complete trading strategy that you can backtest and then trade live."- Bruce G.