Some food for thought on trading rules. Theses are my personal trading rules that aid you on your trading. If you spend some time to understand the concept behind each trading rule this will improve your trading skills and take you to the next level.
1. MUST have protective stop losses - Having no stop loss is suicidal, the way I see it is if you are trading on margin, the positions that go against you are magnified. You are pretty much exposing your account to destruction. At least having a stop loss your losses are capped, and you are not subjected to your emotions in closing losing trades. Protective stop loss is also very effective in protecting your profits when the market moves in your favor.
Digital Heat Gun
2. NEVER move protective stop loss against you - Moving your pre-determined protective stop loss to allow breathing space is dangerous. Once you have pre-determined your protective stop loss you should stick to your guns. The reason is in the heat of the moment when emotions run ramped you are more likely making your thoughts not with your head but your emotions. By giving your trade more breathing room, (which you should have better planned your protective stop loss) you run the risk of losing more then what you had projected.
3. Detaching emotions from trading - Trading is a business, there is no time to fall in love with your position. Emotions can be very crippling to your trading as rational thinking is clouded my fear and greed. As humans we are emotional beings, there is no way to completely remove emotions we are not robots. But making a conscious effort by using protective stop loss, pre-determined entry points, having a game plan and trading at a peak state will help detach your emotions from trading.
4. NEVER take revenge on the market - From my past experience I have noticed taking revenge on the market I'm guaranteed to lose money. The reason for this is when I place a trade it's already planned with predetermined entries and stops. I have no emotions on my pre-determined prices I have calculated how much I'm willing to lose, I'm applying discipline and I'm following my trading methodology. Placing trades at random levels just to get back at or in the trade is sure thing to lose money; you are applying the opposite of a professional trader. I believe emotions are your greatest enemy in trading. Emotions such as fear and greed, clouds your rational thinking. Sub-consciously this has a detrimental affects especially on your trading methodology as you are not in control of the situation and your emotions, you are pretty much giving your money away to the professional traders that have the discipline to follow their trading plan.
5. NEVER trade when you are not in state - Emotions cloud good judgments, Emotions such greed, fear, frustration the list goes on can have significant affects to your trading account. Money has strong connections to people's emotions.
"Playing with my money is like playing with my emotions" - quote Big Worm from Friday
Even having positive emotions such as optimism has detrimental affects to your trading performance if the market is in a bear market or the market is at a topping phase with euphoria is running ramped.
6. NEVER trade more than 2 instruments in the same sector - Very simple idea, not too expose too much in one sector.
7. Determine and Follow the trend - I have learnt going against the trend is like swimming against a rip. You are bound to go bust! Moving averages 50, 100, 200 are good guides in determining the market trend. Majority of your trades should be based in favor of the market trend, i.e. If the prices are above the 50, 100, 200 MA this would indicate a bullish trend; therefore majority of your trades would be more on the buy side. There will be occasions when the price will retrace, the market trend never moves in a straight line but generally will move in alignment with the moving averages.
8. Cut Losses short and let profits run - Cut losses short is so true! I have experienced in my past when you let a loss get out of hand, and it grows you emotionally become paralyzed to act and you are start hoping to break even to get your money back. As an elite trader, protective stop loss is a MUST! My first aim once I'm in the trade is to get my protective stop loss to my initial entry price to break even. I now have a risk free trade. The next objective is to let my profits run while trailing the price with the protective stop loss to secure profit.
9. Having a balance lifestyle with trading - Trading can be an extremely taxing on your health, mindset, spiritual and relationship. I have felt within myself when I over trade, or have too many trades on or my trades are going against me and I feel like I'm losing control of my trades, it can emotionally spiral out of hand causing negative emotions to your mindset. Once your mindset is tainted it affects pretty much all the important aspects of your life in a negative way. A balance lifestyle is critical for a healthy mindset.
What I do to alleviate the stress is to have an outlet like surfing. I know after surfing I'm at peace with myself and I have a clear head to comeback stronger.
10. Must Log Trades - Keeping a journal of your trades is critical, it helps track your past performance and helps identify aspects on your trading that might need tweaking.
11. Patience - There will always be an opportunity - "One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people - not that I'm better than most people - always have to be playing; they always have to be doing something. They make a big play and say, "Boy I am smart, I tripled my money." Then they rush out and have to do something else with that money. They can't just sit there and wait for something new to develop."
"Don't do anything until you know what you are doing. If you make 50 percent two years in a row and then lose 50 percent in the third year, you would actually be worse off than if you just out your money in a money market fund. Wait for something to come along that you know is right. Then take your profit, put it back in the money market fund, and just wait again. You will come out way ahead of everybody else."
- Jim Rogers
Enough said! Knowing there is always an opportunity around the corner will help you alleviate the pressure on trying to catch the tail end of an opportunity that has pass through your hands.
12. Remember don't go for one hit wonders - I have in the past gone in large in lot size thinking this is the trade that is going to make me a fortune, only to be faked out or stopped out incurring a large loss. I have found what works well is not to expect for one hit wonders but to trade smaller lots and continuously capture profit using protective stop loss.
13. Stick to your routine - Read up on all the successful traders and you will realize that they have a set routine. Routine is important as it instill discipline and allows you to get your task done the most efficient way by the end of the day. It helps you stay focus on the today to today task and creates balance in your life.
To learn more about the stock market, I invite you to visit http://www.gambitrader.com there is a ton of educational information that will help you in your quest for knowledge.