1. KNOW THYSELFWhat kind of trading style fits your personality…Trend following? Day Trading? Buy and hold (please NO)? Next, what do you want to accomplish with your trading…Monthly Income? Long-Term Growth? Risk Aversion? And finally, you must have a grip on your emotions, because you will experience failure and success in trading and you need to know how you will react to both.
2. KEEP IT SIMPLE
You should be able to describe each trading strategy in your war chest on a 3×5 index card. There are so many different trading tools and indicators out there that it is easy to make trading and investing harder than it is. Find a few technical and/or fundamental indicators that you can apply to your trading, and master them.
3. DIVERSIFY
Specialize in a few different trading strategies and then spread your risk out across multiple asset classes using those trading strategies. Make sure all of your trades are not dependent on the same sector, commodity, industry, or idea.
4. LOSERS AVERAGE LOSERS
Only losers add to losing positions. If a trade is going against you, move on and find another trade. It’s not about pride, it’s about profits.
5. NEVER STOP LEARNING
You must constantly make an investment in your trading education. Read books, go to seminars, or talk to other traders, because over time the traders that make a commitment to never stop learning will be the traders that stay in the game and are able to adjust their trading style to any market environment.
6. CREATE A TRADING PLAN
Having a trading plan creates discipline. Why are you making this trade? What’s your risk? What’s your reward? How much margin is required? What will you do if things get bad, or really good? These are questions you should be able to answer on every trade you execute.
7. BAD TRADE MOVE ON
I don’t care who you are, you are going to have bad trades. When you have a bad trade, take a break from trading, go to a movie, or kick the dog (once), but don’t sit around and pout. It’s important that you move on and start planning how you are going to get it back.
8. TRADE WITH CONFIDENCE
Trust your research, feel confident in the time and energy you have put into your trading strategy and know that no matter what the market does in the short term, you have the ability to make money in the long term.
9. THE MARKET IS GOING…????
Nobody knows where the market is going and you don’t either. So pick trading strategies that allow a little wiggle room in case you wake up one morning and the market doesn’t do exactly what you told it to. (See trade schools)
10. DICSIPLINE
This word sums up a long term trader. You must have the discipline to follow your systems and manage your emotions hour after hour, day after day, year after year. If you are undisciplined in other areas of your life, don’t be surprised if one day you break your trading rules. You must practice discipline 24 hours a day.
11. BE WELL INFORMED
You don’t have to be a technical trader or fundamental trader, but you must be an informed trader. What this means is that no matter what you trade, or the tools you use to trade it, you need to understand the underlying security that you are trading. Take 5 minutes and makes sure there is nothing special happening that might affect your trading for that day.
12. BANK IT
Never let a winning trade turn into a losing trade. No one ever went broke taking profits.
13. PATIENCE
Take a deep breath and allow trades to come to you. If you miss a trade, so what, there’s another trade just around the corner.
14. LOVE YOUR WINNERS & KILL YOUR LOSERS
Don’t be scared to be right. If a trade is winning let it run to your profit target, however if a trade is a loser, especially early on, kill the trade and move on.
15. SOMETIMES THE HARD TRADE IS THE RIGHT TRADE
The best trades are the hardest to put on, because you are going against what everyone else thinks. When everyone else is panicking and looking for a sharp object, that’s when a real trader starts shopping for inventory.
16. SET YOURSELF UP FOR SUCCESS
Trading is a life long journey and you must treat it like one. Trade an amount you are comfortable with. If you’re just getting started, don’t expect your trading to make your mortgage payment. Approach it long term with the idea that it should improve your quality of life, not make it more complicated.
17. SIZE MATTERS
No one trade should ever take you out of the game. Size the positions in your portfolio appropriately so that if the worst case scenario should happen, then you will live to trade another day.
18. TEST, TRACK, RE-TEST…REPEAT
If you find a new trading strategy, back test that strategy in multiple markets. Did it work in 2008? Did it work in 2009? If so, that’s a good start. Then when it’s time to trade it, start out with a small amount to test it in the current market. Trade 1 bushel, 1 contract, or 10 shares, but whatever the system, put some skin in the game. Paper trading is great, but it doesn’t account for one thing…the emotions and adrenaline that flow through your body when hard earned money is on the line.
19. TREAT TRADING LIKE A BUSINESS
Manage your trading like you would manage a business, know your competitors (risk), manage your expenses (commissions), control your inventory (stocks), and never stop looking for ways to make your business better.
20. RULES CHANGE
Markets change and so do trading rules; however, you should apply your rules far more often than you should change them.
So there you have it! Those are the 20 rules that we apply to our trading each and every day. It’s not important that you follow our rules to a tee, but it is important that you establish trading rules to help navigate yourself through the never ending journey of trading the markets.