All traders use rules. Some program it into their systems. Others use guidelines that relate to their profit goals and risk levels and implement them with each new position. While many investors see the danger in futures, the best traders use the market features to their advantage. One thing they all share is a healthy respect for how quickly things can turn. Here is a brief list of “rules” we commonly see across our industry:

  1. The trend is your friend.
    Going against the market can provide some great opportunities, but momentum is a strong force. Fighting it for an extended period is a dangerous game.
  2. Using stop losses and other exit strategies is a non-negotiable before investing with a trader.
    The saying, “The market can stay wrong longer than you can stay solvent,” is a truism many find out the hard way. Each position needs an exit strategy, even if you hate to use it.
  3.  Sitting flat is a trade.
    A key element for good traders is not forcing it.
  4. The risk-reward needs to make sense.
    Never risk a dollar to make 50 cents. 
  5. Stick to what you know.
    I once met with a cattle trader who knew his market inside and out through his 30+ years on the floor. I asked what caused an outlier drawdown on his fact sheet. He replied, “I traded gold that month, and it went against me.” I asked if he would do that again, and he said he would. That meeting ended quickly without ever introducing a customer.
  6. Competing with other traders in the same strategy is extremely difficult.
    While trend following works for many, differentiating yourself by doing the same thing will be tough. Adjusting time frames, markets, or adding a proprietary angle that others do not use is key.
  7. Not all times can be optimal for trading.
    Sometimes trading is hard, and other times it can be easy. Controlling your downside risk in the bad times helps you recover quickly in the good.
  8. If you wait for the perfect time to trade, you will miss it.
  9. It is rare to be good at building profitable strategies, selling them, and running a business at the same time.
    Efforts should align with where the skillset is strongest, and the others should be outsourced or delegated to someone else internally.
  10. Margin should be used wisely.
    A CTA could be wrong hundreds of times in a row. They should anticipate this and plan to have capital left to trade even in this worst-case scenario. It should not be used just to try to hit home runs.
  11. Choose trade levels corresponding to unit size, risk level, and a target return. It is misleading to choose one that is too high and does not utilize the money set aside for it, nor one that is too low that swings wildly because it is using too much margin.
  12. Expect the unexpected and prepare for the “impossible.”
    Just because something has not happened before does not mean it can’t. Negative interest rates, oil going below zero, and a myriad of stock market moves that never occurred before happen with more frequency than expected. So-called “Black Swan Events” can be devastating if a plan is missing when they occur.
  13. Control the variables you can before trouble happens.
    These include power outages, data corruption, inability to access systems, an unexpected sickness or injury that prevents being in front of a trading terminal, and more.   
  14. Back testing should only be used as a guide.
    It is easy to make money when the data is in the past, but it is more important that the returns going forward match the projections. This means avoiding curve fitting, forward testing where possible, and questioning the assumptions built into your model.
  15. You MUST know WHY and HOW your program makes money.
    It is not enough to identify an unexplained pattern that yields positive results most of the time. This insight is not actionable if you cannot explain where it comes from because it might go away. If it did, it is likely you would not know until it was too late.   

Like any guide, this is just a short primer on things to consider. Working with experienced firms like IASG to learn about considerations when launching your programs saves time and money. Mistakes can be costly and difficult, if not impossible, to recover from with your customers. In a zero-sum game, winning is tough. We hope these high-level tips can help you build your company successfully.

Photo by S. Tsuchiya on Unsplash