There are literally thousands of different rules that gurus or educators might suggest for your trading…
Whether it’s a certain percentage risk rule, or “don’t trade during news” (hate that rule) or check a certain indicator, etc.
The idea of rules-based trading is to build a systematic approach to your trading, and it makes sense.
An ideal trading system is a set of rules you can follow and have confidence that, at the end of the day, the approach will yield a net profit and build your account.
So, rules are good.
But what’s the most important rule?
This is, of course, up for debate. But, in my opinion, the most important rule of trading is never chase a trade.
Yet, it’s probably the most common rule I see broken.
I think most traders break this rule because when the market is moving fast and intensive, traders get excited and emotional…
They jump into a trade because they don’t want to miss an opportunity, or are bored and need some action or maybe just greedy and think they can take advantage of the fast-moving markets even if a trade doesn’t meet their criteria.
But when you think about it, this is a horrible decision.
Chasing the market inevitably means you’re getting in too late…
Getting in too late is a compounding mistake. I’ll show you why.
Every tick or point or pip you are late into a trade means more risk and less profit.
Here’s an example…
Let’s say you want to get in at 50.00 because you think the price is going to 60.00 and you have a stop loss at 40.00
That’s a 1:1 risk to reward ratio. And probably a reasonable trade.
But what so often happens is you’re watching the market and the price spikes before you are ready to 53.00. YES! It is running in the direction you expected!
So you jump in and, after spread/commission, your entry is 53.50.
And most traders justify it by saying it is only a few points higher than they wanted and still a good trade.
But let’s analyze what really happened.
Since your Stop Loss should have been based on market structure, the stop should still be in the same place even with a higher entry (another mistake many traders make), so that means your stop is at 40.00 as originally planned.
Now, your stop is 13.50 (53.50 – 40.00) points from entry and your target is 6.50 points (60.00 – 53.50) away from entry.
Your Risk to Reward just went from 1:1 to WORSE than 2:1!
It seemed like the trade was just a bit late, but in fact you have exponentially affected your Risk to Reward in a negative way. And now you have to win a WAY higher rate of trades to be profitable just because you’re a bit late.
It’s a devastating effect that most traders are never able to recover from when they do this on a regular basis.
And THAT is why I think “NEVER CHASE A TRADE” should be your number 1 rule.