World’s Most Powerful Trading Principles

A book review for Brent Penfold’s book ‘ The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”

This book is excellent for traders that are ready for it. You need a foundation in trading to understand its importance and take the principles seriously. Once you are through the rainbow and butterfly phase of trading and realize that you will not be a millionaire in a year, this book will help you get focused and get serious about your trading and what really works.

Here are the six universal principles of successful traders:

1). Preparation

Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with 30 trades first then determine your risk of ruin.

2). Enlightenment

Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance while trading with the trend on either retracements of break outs. The 10% of winners in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into the abyss when a security finds support or resistance and reverses at the end of a monster trend.

3). Developing a trading style

You must choose your own personal style of trading, swing trading or trend trading. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term.

4). Selecting Markets

Ideal markets to trade have volume and price transparency, liquidity, 24 hour coverage, zero counter party risk, low transaction costs, and are honest and efficient. They also must  have the necessary trading attributes of volatility, research, simplicity, ease of short selling, specialization, opportunities, growth, and leverage. These are the markets that afford you the greatest chances of money trading.

5). The Three pillars of trading.

Money Management: You must make your trades as fixed as possible. Trade with the same risk, capital, units, percentage, and in the same type markets to manage risk most effectively.

Methodology: Choose a method that works for you and your personality from the ones available. (Dow Theory, technical indicators, patterns, price and volume, etc) Once you have a methodology to your trading, test it 30 times by e-mailing a trading partner for accountability to verify it works in the real world.

Trader Psychology: Manage your hope, greed, fear, and pain to stay in the game.

6). Putting it all together

Monitor performance consistently. Positive reinforcement. Equity momentum.

I have been actively and successfully trading the market for a decade and agree 100% with the authors principles.  The author finishes up his book by asking many professional traders and some that are successful private traders what one advice they would give to aspiring traders. This advice alone is worth the price of the book. Here is a summary:

Money Management:

Focus on risk

Trade small

Methodology: 

Pick a method that suits your personality

Develop a simple methodology

Avoid the majority, learn to anticipate reversals

Look for alignment in set ups

Good defense wins games

Identify low risk set ups

Know your methodology using software

Psychology: 

Deep practice before trading

Expect to lose. Trade to win

Be disciplined. Be patient

Be humble

Be in control