Just Another Jim: The 4 Cardinal Virtues of Trading, pt 2

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The Four Cardinal Virtues of Trading, pt 2 of 5

Prudence: The Virtue of Common Sense

Trading Rules

There are a grocery sack full of common sense ideas that should guide the futures trader and speculator. Some of the key principles that guide my trading are:

Don't bet the farm. Because of the inherent risk involved, only risk capital should be used in futures trading.
Do not risk too much capital on any one trade. I use a 3% rule. I never risk more than 3% of my trading capital on any one trade. This allows me a fairly long series of trades that go against me without undue capital draw downs.
Don't trade thinly traded markets unless you know exactly what you're doing. Thinly traded markets are subject to large and unexpected price swings. Furthermore, it can be difficult to exit a position in thinly traded markets. These are not markets in which to practice new trading strategies.
Know your exit strategy before you get into a trade.
Don't trade on other's advice. Use a trading system in which you are confident. Take all the buy signals. Follow the trading system to the letter.

There are many more trading rules that I could list. Every trader has their own set. But the virtue of common sense is not about a list of trading rules. Common sense is an attitude a trader has toward the markets and the array of rules you use.

The Problem of Greed

One of the common pieces of wisdom that float among traders is that markets are driven by fear and greed. Greed is one of the seven vices. Fear is an emotional by-product of that vice. Common sense should be every trader's antidote to greed.

Every trader is subject to greed. How does the trader overcome this? It is not simply by saying no. One cannot simply remove the bad. Instead one has to crowd out the bad with the good. One has to undermine the vice by practicing the virtue. This brings us back to the trading rules. The five rules listed above are my biggest trading rules, and yet they seem so ordinary. In this lies one of the most important, and yet, most illusive realities of virtue. We don't overcome vices through superhuman effort. Instead the vices are defeated through very ordinary, every-day means.

The Risk of Being Boring

This takes the glory out of being virtuous. Following the rules is far too ordinary to be interesting. Common sense has no sense of daring and gusto. Yes, there is a lack of flare following the rules. The question is, do you want the excitement and interest of life that you seek to come from living on the edge or from being successful? Living on the edge brings short term thrills, but leads to ruin. Success may seem boring but it brings the potential for a new and unique sort of thrills which cannot be imagined by those who have not committed to the path of virtue.

Next: Temperance, the Virtue of Moderation