Zalesky - 25 Rules Of Trading - Winners Bigger Than Losers

Great article.

Rule that stands out for me is "Winners Bigger Than Losers".

Otherwise..................You are liekly to fall badly. It took a while for me to understand the significance of this. Basic money management / maths.

Take a look at your last 50 trades and see what your losing scores are compared to your winners. U might be suprised.

Extraordinary read. I specially think that the "don't play macho with the market and realize soon when the trade's going sour and close it inmediately. You can take a minor loss here and there, but a full hit might ruin your entire day/week performance" is particulary valuable.

Sorry to warm up such an old thread, but I find the information in this PDF so very useful that I encourage everybody to read this document each and every day before the start of their trading session.

I even printed the whole document and will from now on read it every day. There is really (nearly) nothing more to say about how to become a successful trader, than simply following this 25 rules.

Beside that, I have found a great resource which has many quotes from different books - Jack Schwager's "Market Wizards" & "New Market Wizards", as well as "Trading for a living" by Alexander Elder and "Trade your way to financial freedom" by Dr. Van K. Tharp.

Those insights, tips and rules is a really great compilation and, again, I advice everyone to read every single quote:

http://members.aon.at/tips/citation.html


Here is the source for those of you, who cannot open the attached PDF of post #1 or prefer reading it on a website:

http://www.sfomag.com/article.aspx?ID=141

#1. The market pays you to be disciplined.
Agreed. This assumes you also have a method with a winning edge.

#2. Be disciplined every day, in every trade. But don't claim to be disciplined if you're not 100% of the time.
Agreed.

#3. Always lower your trade size when you're trading poorly.
Wrong! Position size should be consistent unless you have statistical evidence that one setup is higher/lower probability than another. Otherwise you run the risk that, as soon as you lower your trade size, some highly favorable market moves come along, and you only take partial advantage. End result = bigger losses, smaller wins.

#4. Never let a winner turn into a loser.
Not necessarily right. A trader should be focused on overall bottom line as much as each individual trade. Rushing stoploss to breakeven too quickly will truncate many profitable trades, which means that win rate must be higher to compensate. Gauge the optimum breakeven time from your testing.

#5. Your biggest loser can't exceed your biggest winner.
Agreed – if you're taking low risk entries, this shouldn't be an issue.

#6. Develop a methodology and stick with it. Don't change methodologies from day to day.
Agree 100%.

#7. Be yourself. Don't try to be someone else.
Focus on executing your plan accurately and consistently.

#8. You always want to be able to come back and play the next day.
Of course! That's why you keep your position sizes small and consistent.

#9. Earn the right to trade bigger.
Agreed. Don't over-leverage yourself.

#10. Get out of your losers.
Agree 100%.

#11. The first loss is the best loss.
Have a proven exit plan, and follow it.

#12. Don't hope and pray.
Have a proven plan, and follow it.

#13. Don't worry about news. It's history.
If your plan is 100% technically based, then news is irrelevant. However, depending on your timeframe, it might be wise to have special exit conditions to cope with potentially high impact news announcements.

#14. Don't speculate.
Follow your plan.

#15. Love to lose money.
I think it's better to simply say "take low risk entries" (i.e. keep losses small).

#16. If your trade isn't going anywhere in a given timeframe, it's time to exit.
Not necessarily. Frequently a consolidation or lull in a price move is nothing more than a 'breather' before the next big wave in a trend. Exit too soon and you'll miss that wave. Your exit plan should take this into account.

#17. Never take a big loss. Only a big loss can hurt you.
Agreed.

#18. Make a little bit every day. Dig your ditches. Don't fill them in.
I don't entirely disagree, but I also don't believe in setting goals and targets, either. Why? Because if one falls behind the target, the only way to catch up is to overtrade, or take larger position sizes, breaking one's rules. Trading gurus sell systems on the basis of their making X pips every day, but in reality trading doesn't work that way; you have winning days and losing days.

#19. Hit singles, not home runs.
Depends on your exit strategy. If you want a high win rate, but smaller average win size, take profit early. But you'll catch some great moves by letting profit run to the fullest (i.e. using a 'wide-ish' trailing stop).

#20. Consistency builds confidence and control.
Agree 100%.

#21. Learn to sweat out (scale out) your winners.
Agree to some extent. But if you scale out too heavily/too early, your win size is compromised, while your full position will always be subject to being stopped out.

#22. Make the same trades over and over again. Be a bricklayer.
Agree. Have a proven plan, and follow it consistently.

#23. Don't over-analyze, procrastinate, or hesitate.
Agree. Have a proven plan, and follow it consistently.

#24. All traders are created equal in the eyes of the market.
Agreed. The market is uncompromising and takes no prisoners.

#25. It's the market itself that wields the ultimate scale of justice.
Agree 100%. The market moves as it pleases, and is always right.

I know what you mean, and you're right. But... when I have a few losses in a row, I am afraid of pulling the trigger next time. I don't want to be wrong another time, so I don't trade at all and maybe miss a trade.

But by lowering my position size, I enter the next trade, though, because I know that I am not risking much in this trade. And if that trade goes well, then I get more confidence for my next trades. Beside that, I have made at least some profit instead of watching how the market moves on without me beeing in a position.


Again, I agree with you. Most of my trades are not profitable from the beginning on. Often the price reverses immidiately or a few minutes later (I am daytrading) before it goes into the right direction.

I think what this rule wants to teach us, is to not be greedy. How often did I have a nice 50 pips profit but wanted more? Price reversed and I didn't want to earn only 15 pips profit now, when I knew I could have made 50 already. I wait until price goes up again, but instead price falls further and hits my stop loss. Instead of beeing satisfied with a 50 pips profit, I took a loss due to me greed for more profits.
Agree!

Right. But just today, I have had this situation, where I was going long and the market went up 3 ticks. But it fell off again and again, it seemed as if it didn't want to go above those 3 ticks and so I closed the trade with only 3 ticks profit. I just didn't feel comfortable watching it try to break this level for a while so I closed the trade. And a few minutes later, price reversed and fell 8 ticks - which would have triggered my stop loss (I was scalping Euro Bund Future, that's why I had such a tight stop loss).

You're right. I think this applies more to an daytrading approach than to a mid- or long term trading method - and those rules were especially made for daytraders, so I agree with it.

Many thanks for your reply. My post was intended primarily to provoke discussion.

I totally agree that Mr Zalesky's points are a great read, and judging from his bio, he's a significantly more experienced trader than I am.

However - for better or worse - I try to encourage people to also think for themselves. All too often I've read the first chapter(s) of a best-selling trading book and thought 'wow, this guy really knows what he's talking about'. So then I mindlessly lap up the rest of the book as gospel, without applying any kind of commonsense filtering. Sometimes that can be unwise.

While there are obviously some sound maxims for trading, I don't believe that there's necessarily a universally optimum approach. Firstly, much depends on personality, timeframe, objectives, approach (e.g. mechanical vs discretionary) etc. Secondly, there will always be endless debate over methodologies whose effectiveness varies depending on market conditions. As an example, taking profits earlier ('hitting singles') works better when prices are ranging, while letting profits run ('home runs') will pay off when there's a strong trend. On Monday I took a 25 pip entry-to-SL risk on AUDJPY and, by trailing a fairly wide ATR-based stop, ended up banking 282 pips some 42 hours later, an 11% return for 1% risk. Had I scaled out a large part of the position out early, I might have averaged only 2:1 or 3:1. Of course this kind of move is rare, and this approach will see many (maybe 30-50) pips forfeited on other trades due to the wide SL. The same kind of compromises apply to timing of entries, whether you go earlier for lower win% and higher avg win size, or later for vice versa.

Anyway, I digress somewhat. Thanks again for your reply.