Trading Rules

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Trading in the stock market without first developing set of trading rules will fulfill the saying; "if you don't know where you're going, you will probably end up somewhere else" and that place might not be of your liking. Although the next set of rules unfortunately came to me after a lot of pain and heartache, I am glad that I have them. They are the corner stone of my trading style. They served me well and I rarely if never fail to follow them. I composed them from my own experience, others' good advice, and from Mr. Market's wisdom - the greatest teacher of all. 

Before I tell you what my trading rules are, I want to bring something to your attention. Trading and investing encompasses a multitude of styles and it is arrogant to think one style is superior to the next. Rather, there are always people at the top of their style who are consistently performing exceptionally well. One of the biggest issues facing many people who desire to venture down the trading path, is not correlating the style they desire to learn with their personality. So venture slowly, take your time; give it a fair trial while paying attention to your character.

Let's go. Here they are:

1. Believe it! Want it! Want it more! Keep your energy positive. Have fun. Winning begins within.

2. Remain humble or the market will do it for you. Know what you know and make sure to know what you don't. Check your pride at the door. You’re only as good as your last trade

3. Capital preservation is the first step towards prolonged profitability.

4. The ability not to trade is as important as trading ability. When in doubt, sit it out. Opportunities are made up easier than losses. Don’t let the fear of missing trigger emotional financial decisions. It's not necessary to play every day; it's only necessary to have a high winning percentage on the trades you choose to make. Your risk profile should always be an extension of your thought process. When unsure, wait till you identify your comfort zone.

5. Emotion is the enemy. Emotional decisions always have a way of coming back to haunt you and deplete your most valuable asset, your emotional capital. Logic Wins, impulse Kills. Objective and critical thinking, planning, and firm execution are your best allies.

6. Do your homework before every transaction. Never fear but always take a deep breath before risking your hard earned coin. Maximize your reward relative to your risk. If you're patient and pick your spots, edges will emerge that provide an advantageous risk/reward. Proactive patience is a virtue.

7. Don’t let big picture thoughts cloud short-term trades and don’t let near-term noise interfere with the macro bent. Respect the price action but never defer to it.

8. Discipline trumps conviction. The mechanics of the swing outweigh the results of the at-bat. If you're personally attached to a position, thesis or a game plan you developed, your decision making process will be flawed and the outcome will be unsatisfactory.

No matter how strongly you feel on a given position, when trading you must be disciplined:

A. Never fight the market. Adapt your style to the tape. Identify your time horizon and employ a risk profile that allows the market to work for you. Never believe that you're smarter than the market. Let the chart be your guide. Do not impose your believes on the charts. Sooner or later, everyone sits down to their own banquet of consequences. Always define your risk. The market can remain irrational longer than you can remain solvent. Perception is reality in the marketplace. Identifying the prevalent psychology is a necessary process when trading. It's not "what is," it's what's perceived to be that dictates supply and demand. Applying the right methodology is only half the battle.

B. Don't let your bad trades turn into investments. Allow for a margin of error. No approach is failsafe and any trader worth his or her salt has endured periods of pain. When trading, you may trip, but never fall. Ride the winners, try the losers and weed out the laggards. Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off—win, lose or draw. Good traders know how to make money but great traders know how to take a loss. Hope is not a viable strategy. Hanging on laggards drains precious emotional capital along the way, as well as the unlimited amount of lost opportunity cost associated with tied up funds. Accepting the fact that you will be wrong is crucial. The key to successful trading is not avoiding being wrong but how quickly you can identify you are wrong so you can make a change and reposition yourself.

C. Act when you can and not when you have to. Never let a profit turn to a loss. Always put a stop to every position you take and move your stop according to your game plan.

D. Taking some chips off the table is never a bad idea. Nobody went broke taking a profit but only take profits when it matches your plan.

E. When the market is open, it’s game time. Stick to your game plan and avoid new ideas. During the game, it is hard to learn a new play. Wait until the market is closed to learn and perfect a new play rather than trying to learn it on the fly?

F. If you get hit after a poor decision, which result in a loss of capital, you will be zapped of your confidence. Even if you got F for results, you still get A for efforts. It ain't about how hard you get hit, it's about how hard you can get hit and keep moving forward. Take a deep breath, pick yourself up, dust yourself off and start all over again. Dark days happen to the best of us, the more enjoyable your journey will be as you find your way to better tomorrows. Stick to the principles above and you will minimize the number of such moments.

9. Zig When Others Zag. Sell hope; buy despair and take the other side of emotional disconnects (in the context of controlled risk). If you can't find the sheep in the herd, chances are that you're it.

10. Don't Compare Yourself With Others. Keep your expectations in line. You must crawl before you walk and walk before you run. Slow and steady wins the race. Trading is a marathon, not a sprint.

11. Trading takes dedication and hard work. It takes time for these lessons to sink in but if you desire a change, commit yourself to excellence today and start making a difference, you will succeed. Keep learning and honing a style that works for your personality, time frame, and risk profile. Once you perfect your skill set, you will be able to successfully trade even the worst stocks. Without your skill set in place, you may end up losing money even if you're trading some of the best stocks.

Until next post, I wish you as much as you wish for yourselves and even more. Be happy, do good, and the rest will be taken care of.

PS. Please rate this article at the top of the page. Thanks!

GoodVibe
Mr. Lucky

Comments

[Mary]

GoodVibe,
You have only improved the organization of my favorite blog of all time on the CAPS blog space. They have thousands and this is the one that I come back to.

BUT WHERE TO I CLICK TO ADD A REC???

[RussWild]

Hey GV,
Well done Brother. I think this is a much better forum for you to express your thoughts @ information than Caps and thanks for the plug as well.

[Mastiff]

Hey GV! Great looking website! I'll be checking in regularly to see what you've added to your site!

Mastiff

[GoodVibe]

Hi Guys - Thanks again for your kind words. Mary, there's nothing like CAPS' rec engine. Only the star system on the top of an article. It tells you how many people voted and their average rating to the article with 5 is excellent and 1 is awful sort of. :) Actually, I believe it's better than CAPS in that matter.

Also you asked me for how to follow me. It's easy. On the left side bar, there is a link that says "follow my activity". Once you click it, go ahead and click "sign in" to follow [next to followers]. It will take you to a page where you can "sign in" with many IDs from the drop down menu such as Google, yahoo, blogger, open id and many others if you don't have typepad id. You can also "sign up" for free typepad id if you want but it's not necessary. This way you will be able to track all my blogs AND comments wherever I post them. You also can use "Google Friend Connect" bar at the bottom of each page to be a member and follow my activities, comment, check other members, etc. Talk to you later.